Melbourne Intermodal System Study Report for the Department Of

Melbourne Intermodal System Study Report

for the

Department of Transport, Victoria

June 2008

Melbourne Sydney Suite 604 51 Rawson Street EPPING NSW 2121 www.strategicdesign.com.au

Melbourne Intermodal System Study Department of Transport - Victoria FINAL REPORT

DISCLAIMER The information contained in this report is solely for the use of the clients identified on the cover for the purpose it has been prepared and no representation is made or to be implied as being made for any third party.

CONTACT For further information, please contact:

Neil Matthews

Managing Director, Sd+D

HEAD OFFICE Suite 604, 51 Rawson Street Epping NSW 2121

PO Box 1075

Epping NSW 1710

Australia

Telephone +61 2 9868 2590 www.strategicdesign.com.au

MELBOURNE Level 8, Collins Street Business Centre

350 Collins Street

Melbourne VIC 3000

Australia

Telephone +61 3 8605 4831

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CONTENTS

1. EXECUTIVE SUMMARY AND RECOMMENDATIONS...... 8

2. INTRODUCTION...... 17 2.1 Purpose and objectives of the study ...... 17 2.2 The structure of the report...... 18 2.3 Preface ...... 19 2.4 Key assumptions adopted within this study...... 20

3. POLICY FRAMEWORK AND OBJECTIVES...... 21

4. INTERMODAL SYSTEMS; AN OVERVIEW...... 24 4.1 Intermodal logistics; a definition ...... 24 4.2 Metropolitan differentiating urban freight markets ...... 25 4.3 Intermodal chain structures for international containers...... 28 4.4 The need to consider new perspectives...... 32

5. PAST AND PRESENT DEVELOPMENTS...... 34 5.1 Other intermodal systems in Australia...... 34 5.2 Melbourne intermodal developments ...... 38 5.3 Lessons from the growth of intermodal systems in Australia ...... 39 5.4 Summary ...... 42

6. THE MELBOURNE URBAN FREIGHT TASK...... 43 6.1 Task dimensions ...... 43 6.2 Market attractiveness for intermodal networks...... 44 6.3 Summary ...... 45

7. ANALYSING THE URBAN INTERNATIONAL CONTAINER TASK ...... 46 7.1 Confirming headline demand ...... 46 7.2 Segmenting spatial demand...... 47 7.3 Scope of rail networks and terminals ...... 49 7.4 Segmenting modal choice ...... 50 7.5 Distribution of demand and modal share...... 60 7.6 Summary ...... 61

8. STRATEGIC ELEMENTS ...... 62 8.1 Intermodal implementation strategies ...... 63 8.2 Strategic Issues...... 68

9. PHYSICAL AND OPERATIONAL DESIGN...... 70 9.1 Equipment assumptions ...... 70 9.2 Movement outcomes ...... 71 9.3 Overview of system demand ...... 74 9.4 Operating Summary ...... 74

10. STAGING THE SYSTEM DEVELOPMENT...... 75 10.1 Staging ...... 75

11. ECONOMIC ANALYSIS...... 77 11.1 Approach and methodology overview ...... 77 11.2 Financial outcomes for rail and terminal operators ...... 77 11.3 Economic Analysis ...... 78 11.4 Overview of comparative cost results...... 79 11.5 Timing and Viability ...... 85

12. SYSTEM GOVERNANCE ...... 88 12.1 Background and observations...... 88 12.2 Wider perspectives required...... 88 12.3 Objectives...... 88

12.4 Models...... 89 12.5 Discussion ...... 91 12.6 Summary ...... 92

13. CONCLUSIONS...... 93

14. APPENDIX 1 - MODELLING ...... 94

15. APPENDIX 2 - WORKING PAPER ON EXTERNALITIES AND CONGESTION...... 100 15.1 Introduction...... 100 15.2 Externality Cost Estimates ...... 101 15.3 The Australian Context...... 101 15.4 Traffic congestion in Melbourne ...... 103 15.5 What number will we use in our model?...... 104 15.6 Statement of Assumptions ...... 106

16. APPENDIX 3 - DISCUSSION PAPER: INPUT COST PROJECTIONS (FUEL AND LABOUR) ...... 109 16.1 Introduction...... 109 16.2 Future Outlook on Fuel Costs ...... 110 16.3 Labour Shortages in the Trucking Industry ...... 113

17. BIBLIOGRAPHY...... 116

TABLES Table 1 - Alignment of intermodal strategy objectives within VFNS objectives ...... 22 Table 2 - Summary of freight types, drivers and influences for an intermodal system...... 27 Table 3 – Comparative analysis of linehaul and PUD travel distances...... 30 Table 4 - Timetable of strategic events in development of Sydney's metro intermodal system...... 35 Table 5 - Segmentation of intra-Melbourne freight task (indicative only)...... 44 Table 6 - Forecast demand for Melbourne international containers ...... 46 Table 7 - Distribution of freight demand – 2010 ...... 47 Table 8 – Modelled Cycle Times by Mode ...... 52 Table 9 - Intermodal System Cost Advantage over road direct (for 2006)...... 52 Table 10 - Modelled results and mode choice...... 56 Table 11 – Results of total intermodal system demand...... 58 Table 12 – Metropolitan intermodal strategy components...... 63 Table 13 - TEU Movements 2010, 2020 and 2035...... 70 Table 14 - Physical movements for metro rail shuttles ...... 71 Table 15 - Physical movements for road shuttle and PUD vehicles ...... 72 Table 16 – Aggregated rail terminal throughput volumes and nominal footprint areas...... 72 Table 17 - Aggregated road terminal throughput volumes ...... 73 Table 18 - Immediate and long term planning and delivery activities ...... 76 Table 19 - Summary of relative cost outcomes by mode excluding externalities - 2010 ...... 79 Table 20 - Externality costs considered in analysis...... 80 Table 21 - Cost of Externalities ($ per net tonne kilometre) ...... 81 Table 22 - Modelled Capital Expenditure Requirements ...... 82 Table 23 - Classification of potential governance models ...... 90 Table 24 - Modelled Rail Unit Costs...... 94 Table 25 - Modelled Road Unit Costs...... 95 Table 26 - Site footprints for rail-based intermodal terminals ...... 96 Table 27- Discounted Cash Flow - North Intermodal System...... 97 Table 28- Discounted Cash Flow – South East Intermodal System ...... 98 Table 29- Discounted Cash Flow – Western Intermodal System ...... 99 Table 30: Summary of the externality cost estimates derived from various sources ...... 102 Table 31: Traffic congestion cost in Australian cities (BTE 1996a) ...... 104 Table 32: Summary of numbers to use in model...... 105 Table 33: Assumptions and descriptions underlying each externality (ATC 2006)...... 106

FIGURES Figure 1 - A working model of an intermodal system...... 24 Figure 2 - Market segmentation of a freight task ...... 25 Figure 3 – Generic supply chain structures within and to/from Melbourne ...... 26 Figure 4 - Spatial relationships in intermodal chains ...... 30 Figure 5 - Generic supply chain scenarios for port-related metropolitan traffic ...... 31 Figure 6 - Sydney Ports’ volumes by rail ...... 36 Figure 7 - Schematic layout of Fremantle Inner Harbour port and rail terminals ...... 37 Figure 8 - Victorian and Melbourne freight task 2004 (million tonnes per annum) (DOI 2004)...... 43 Figure 9 - Forecast international container volumes through the Port of Melbourne ...... 47 Figure 10 - Current and projected industrial employment...... 48 Figure 11 - Scope of Melbourne rail network and terminals served by rail ...... 49 Figure 12 - Freight Network Model Results – Road Travel Times to/from Port 2006 ...... 51 Figure 13 - Intermodal System Modelled Cost Advantage ...... 53 Figure 14 – Modal choice pathways based on economic cost by mode and SLA ...... 54 Figure 15 - Modal Share Logit Function ...... 54 Figure 16 - Rail Based Intermodal System Demand 2010 and 2035...... 59 Figure 17 - Distribution of demand by LGA and mode type for 2010...... 60 Figure 18 - Distribution of demand by LGA and mode type for 2035...... 61 Figure 19 - Strategic elements of current port linked transport networks ...... 62 Figure 20 - Future strategic elements for port and interstate networks ...... 62 Figure 21 - Transport equipment configurations and capacities...... 70 Figure 22 - Indicative throughput and footprint relationship for rail terminals ...... 73 Figure 23 - Integrated system-wide activity for 2010 and 2035 ...... 74 Figure 24 - Rolling Stock Capacity and Volume ...... 79 Figure 25 - Summary of indicative cost elements for an import TEU under supply chain alternatives ...... 80 Figure 26 – Resource costs ...... 83 Figure 27 – Resource costs (capital excluded) ...... 84 Figure 28 Resource Costs (capital excluded, externalities increased) ...... 85 Figure 29: Comparison of externality costs composition between Austroads and ATC data sets ...... 103 Figure 30: Framework to estimate projected growth in input costs...... 109 Figure 31: Australia’s oil production and consumption (ASPO)...... 110 Figure 32: Projected average Australian capital city diesel prices based on US fuel prices (EIA)...... 110 Figure 33: Past oil production and forecasts ...... 111 Figure 34: Producer Price Indexes for Australian ‘petroleum products’ and ‘road freight rates (ABS)...... 112

GLOSSARY

BG Broad Gauge Track

DOT Department of Transport, Victorian Government

FNM Freight Network Model (managed by DPI)

Ha Hectares

HML Higher mass limited vehicle

IMT Intermodal terminal

LGA Local Government Area

M TEU’s Million TEU’s

NPV Net present value

PN Pacific National

PoMC Port of Melbourne Corporation

Port@L Melbourne Port@L Strategy associated with Dynon and Markets precincts

PUD Pick up and delivery (customer distribution to/from IMTs by road vehicle)

QR QR National (formerly Queensland Rail)

SG Standard Gauge Track

SLA Statistical Local Area

TEU Twenty foot equivalent

VFNS Victorian Freight Network Strategy

Victrack Victorian Rail Track Corporation

1. EXECUTIVE SUMMARY AND RECOMMENDATIONS

The task of this study is to (a) assess whether an intermodal system for Melbourne is warranted and viable, and if so, (b) to determine an implementation strategy and appropriate staging of activities towards the development of such a system. The study has been undertaken concurrently with the development of the Victorian Freight Network Strategy (VFNS) and consequently as this overarching Freight Strategy is reviewed and refined, it may be necessary to refine some of the findings in this report.

The key messages from this Report are that:

1. An intermodal system for Melbourne, utilising a combination of high capacity rail and road transport, is warranted and can be viable for port-related road freight

2 An efficient and sustainable intermodal system can only be achieved through a holistic co- ordinated effort involving public sector agencies and private sector businesses

The freight task most immediately suited to a Melbourne urban intermodal network is international container freight through Swanson Dock. Once the system reaches maturity this task might be augmented with interstate intermodal freight and/or general urban freight distribution.

Message 1 – An intermodal system can be viable and is warranted

A hybrid Intermodal System

The Port of Melbourne is forecast to handle 2.06 million international TEU containers in 2010. Approximately 1.6M of these will be to/from the urban Melbourne area. Container throughput is projected to increase at an annualised rate of 5.7% initially, slowing to 4.7% by 2035. The urban container task is projected to be over 5.5 million TEU’s by 2035.

A broad geographic breakdown of the metropolitan container task shows that 46% of the volume is based in the Southeast, 19% in the North, 22% in the West and 13% in the inner port area.

A hybrid network of road and rail intermodal terminals, serving separate urban industrial zones is the most appropriate for this geographical freight profile. Rail Intermodal Terminals (IMTs) would serve the existing industrial areas in the Somerton, Altona and Dandenong areas, and future expanded zones along the outer rail corridors. Road hubs/terminals would service other industrial areas distant from current and future rail corridors.

Both rail and road IMTs would depend on local road pick up and delivery (PUD) services for customer distribution. Rail IMTs might also use high performance road vehicles for port linehaul work where seasonal demand exceeded core rail capacity etc.

IMTs would operate in a generally competitive market, competing with each other and with independent road carriers servicing the docks directly. However, any funding support offered by government to establish the intermodal network would aim to avoid stimulating road IMTs in zones that could be readily serviced by rail.

Some IMTs could be initially established for road operation, but then migrated to rail when future demand warranted. Early identification of sites for such terminals adjacent to rail corridors (even lines without current rail freight services) would therefore be a priority for planners.

Based on modelled cost relativities of each transport option, the estimated 2010 task available to the rail IMTs would be approximately 392,000 TEU’s per annum. Road hubs could handle 483,000 TEU’s, via high performance road vehicle services. The residual 2010 demand to be carried by direct port-customer trucking is estimated at 730,000 TEU’s per annum, giving the hybrid intermodal system a 54.5% share of the total market.

Total modelled rail demand in 2035 is estimated at 1.5 million TEU’s per annum, an annual growth rate of 5.6%. Road delivered volumes are projected to increase at an annual rate of 4.6%.

With an intermodal system, about 6,000 truck trips per day (as semis and B-Doubles) would be generated by 2035 to and from the port, a reduction from the estimated 12,000 daily trips that would occur otherwise.

The analysis shows that rail could attract a share of 25-30% of metropolitan port-related container freight in the medium term, based on the adoption of a hybrid model. This outcome would increase in the event that externality cost differentials were to be reflected in future service pricing, i.e. through a carbon trading scheme, or if major increases occurred in factors such as liquid fuel or emissions tradable permit costs.

Economic analysis of the intermodal system

Comprehensive operational cost modelling of the rail and road intermodal system in comparison to the current road-direct model shows that the intermodal system can be competitive with road where haulage distance from port is sufficiently high.

The figure below demonstrates the basic advantage of the rail intermodal system over the existing road direct system at a purely operational level, using modelled values for the Dandenong area as an example. The road- direct cost including return of the empty container ranges from $284-$316 per TEU. The rail intermodal system, can achieve a cost of $110 per TEU plus a short haul PUD leg cost of $120, (based on efficient costs), for a comparative total cost of $230 (for the immediate Dandenong area).

Summary of indicative cost elements for an import TEU under supply chain alternatives

Road Direct ($284-$316 per TEU)

Capital expenditure assumptions

For modelling purposes, the capital cost of developing the suburban rail IMTs and the Melbourne Intermodal Terminal is estimated here at a nominal $386 million to be spent over 15 years from 2010. This involves both initial construction and land acquisition and construction of additional capacity (including new sites) as demand increases. A figure of $200m is used for attributable rail corridor upgrades (to service south-east corridor demand). A nominal $100m is allocated to the capital cost of developing road hubs.

Capital expenditure assumptions for modelling

2010 2013 2017 2025 TOTALS Capex Item $M $m $M $M $M Melbourne Port Terminal - split according to volumes South-east 3 60 - 30 93 West 1 20 - 10 31 North 1 20 - 10 31 Totals 5 100 - 50 155

Outer Urban Intermodal Terminals South-east - 50 5 45 100 West 5 - 50 15 70 North 1 - 20 40 61 Totals 6 50 75 100 231

Rail corridor enhancements (south east only) - - 50 150 200

Road hubs East 8 16 - 8 32 West 9 18 - 9 36 North 8 16 - 8 32 Totals 25 50 - 25 100

Totals by region South-east 11 126 55 233 425 West 15 38 50 34 137 North 10 36 20 58 124 Totals 36 200 125 325 686

Cumulative Totals 36 236 361 686

Full resource costs

The figure below shows the NPV of full resource costs of the intermodal system (including road and rail IMTs) in comparison with the ‘as is’ road-direct model.

NPV Analysis - Full Resource Costs (with and without externalities)

$600

terminal upgrades + $500 SE rail W & N IMTs & SE rail @ 2025 @ 2017

$400

MIT & SE IMT $300 @ 2013 @ 2013

$200

Cum. NPV @10% ($million) @10% NPV Cum. $100

$0 0 5 10 15 20 25

-$100 Year (beginning 2010)

North (inc. ext) West (inc. ext) South-East (inc. ext) Aggregate Total (inc. ext) North (w/o ext) West (w/o ext) South-East (w/o ext) Aggregate Total (w/o ext)

This figure shows how the system generates resource cost benefits by around year 4, including externality cost benefits, and is commercially viable in aggregate by around year 8 if externality benefits are not considered. This analysis includes all capital cost injections as per the table above.

The analysis also assumes a three year ramp-up period from 2010, during which rail and terminal operations are hampered by start-up inefficiencies as volumes develop, commercial arrangements are firmed up, and interface issues at port are resolved. By year 4, trains are assumed to be operating on 3 cycles per day, and terminal lift and transfer costs are at long term efficient levels.

The results for each terminal differ, due essentially to the different distances involved, and the competitiveness of the road-direct option over intermodal at short distances. The northern terminal already exists and could become cost-effective almost immediately. South-east terminals are cost effective by year 5, without considering externality costs. The western terminals do not generate positive NPVs until well after a new rail terminal has been developed in the more distant western zone (in 2017), and not at all when externality benefits are excluded.

Year by year analysis for the western area indicates that subsidies totalling $90m would be needed from 2010 to 2017 to cover all capital and operating costs necessary to capture the modal share that would warrant developing a rail option for the western areas. The main reason is the short road distance to port from the existing rail terminals, negating any rail line haul benefit, even where all chain components are run at full efficiency. With the development of a new terminal further west, the intermodal operation becomes genuinely competitive with the road direct option. Arguably, the earlier a new terminal site can be located and developed, the better.

Externality cost estimates for each corridor, based on conservative ATC cost-estimation research values are as follows:

Externality costs ($/TEU) Road Direct Rail North 21 8 West 16 7 South-East 49 12

Capital excluded

This figure shows how NPV changes once all capital (road and rail terminals, and rail corridor upgrades) is regarded as sunk. Overall commercial and economic benefits are almost immediately realised.

NPV Analysis - Full Resource Costs (no capital)

$800

$700

$600

$500

$400

$300

$200 Cum. NPV @10% ($million) @10% NPV Cum.

$100

$0 0 5 10 15 20 25

-$100 Year (beginning 2010)

North (inc. ext) West (inc. ext) South-East (inc. ext) Aggregate Total (inc. ext) North (w/o ext) West (w/o ext) South-East (w/o ext) Aggregate Total (w/o ext)

In this scenario however, the western terminal(s) remain problematic. On the basis of the inefficiencies assumed for the first 3 years, operating subsidies of about $30m would be required for the first 3 years until positive returns emerge. This is over and above the capital investments in terminal capacity. Once the new western terminal is developed, cash operating returns are achievable, though the overall NPV benefit is very slight.

The northern and south-eastern terminals, however, are very positive commercially and more so on full economic resource terms.

Message 2 – a systematic approach is required

Governance arrangements

The rail intermodal system will require a concerted effort by government agencies to provide an infrastructure and management platform for private sector activity. Previous attempts have failed largely because no individual private operator was positioned to manage the full complex suite of assets, systems and commercial agreements necessary.

A systematic approach to minimising the costs of all supply chain elements will be necessary to retain the competitive edge that the modelling shows will achieve the market share required for viability. This would also reduce risk levels for the private sector by establishing greater certainty in dock access and train path availability. Government could significantly increase the commercial attractiveness of the system by using its public agency powers to co-ordinate the system, rather than by underwriting risk with public funding.

A new agency (the Intermodal Authority), possibly established under the Port Services Act, (e.g. as a subsidiary of the Port of Melbourne Corporation or as a joint venture with VicTrack), with the power to allocate capital resources, contract with rail operators, rail access providers, terminal operators and stevedores, would be the most appropriate means of providing this platform. The agency would be expected to deliver the intermodal system by entering into contractual agreements with private or public sector business enterprises for provision of port access, terminals and the inter-terminal freight shuttle operations.

Interface efficiency at the docks is absolutely vital to the intermodal strategy. The Authority would ideally assume the powers (currently residing with the Port of Melbourne Corporation) to negotiate access terms for special purpose road vehicles to the docks, or for the trains using the on-dock terminals in the short term, that guarantee train cycle efficiency. Guaranteed, reliable train paths timed to meet the commercial requirements of the intermodal business, are also a pre-requisite for success. The Authority would negotiate with rail access providers for paths on behalf of contracted operators.

The Authority could initially oversee the commercial arrangements between existing terminal operators, rail operators and stevedores necessary to re-establish basic port shuttle services with existing equipment and infrastructure. It could then manage the investment in new terminal capacity (at the port and in the suburban industrial areas) and rolling stock to extend the capability of the system to meet latent demand. It could also be responsible for acquisition of a new dedicated locomotive and wagon fleet to service the longer term demand on the most efficient basis possible.

The Authority could also work with local government to plan the wider precincts surrounding the intermodal terminals to ensure that compatible land-use activities are encouraged and “last mile” PUD issues are facilitated.

Potential activity staging strategy

Sufficient market share is already available to rail (based on 2010 trade forecasts) to make a mature intermodal system viable. Reaching system maturity, however, will take up to 4 years from the establishment of an Intermodal Authority, and will require cost subsidies for both rail operations and terminal operations in the very early stages.

Interim operations serving the existing Altona and Somerton terminals on the Standard Gauge network via terminal space at North Dynon (or the on-dock terminals if available) could be initiated in 2009 using currently available rolling-stock. New terminals will be required at Dandenong to meet medium term south eastern demand, and in the Laverton area (or further west) to meet rail-favoured western region demand.

As the interim operations prove the concept viable, new terminal investments can be planned, and purpose-built train-sets can be acquired to replace the older equipment.

A possible staging strategy is set out below as the basis for more detailed evaluation:

Preparatory stage

− Prepare any legislative amendments which may be necessary to establish an Intermodal Authority and empower it to develop the system. Most of the following actions would be undertaken by the new Authority.

− Develop a business case for an application for Federal AusLink funds underpinning terminal development at Greens Rd, and siding connection improvements at Somerton.

− Commence process of locating new Western terminal site.

− Call for expressions of interest in provision of interim shuttle services (using currently available train resources) using the North Dynon terminal and currently operating terminals at Altona, Laverton and Somerton for a 2 year period.

− Negotiate efficient and priority access train paths for the interim shuttle services with relevant rail access providers.

− Establish and operate North Dynon (and associated road transfer services) under the auspices of the new Authority as an interim common user facility (or negotiate access to existing on-dock terminals).

− Negotiate short term commercial arrangements with existing terminal operators to underpin the costs of container handling and lock in performance requirements for the first 12 months of operation. Performance to include establishment of empty container storage capacity, management of customer relationships.

− Construct a booking and tracking system to be employed by terminal operators, rail operator and stevedores as required.

− Negotiate with the stevedores for efficient and priority access for road transfer vehicles from North Dynon terminal.

Year 1

− Commence single train-set operation to serve existing terminals, eventually on a 3 times daily basis (total capacity 225 daily TEU in each direction i.e. imports and exports).

− Use experience of a single train-set over the first 12 months at stable long term prices (subsidised where necessary) to confirm commercial viability at each location, and performance levels of terminals at each end.

Year 2

− Commence planning for new Greens Rd terminal, to be operated under the control of the new Authority. The terminal would be built as a dedicated port shuttle terminal, using broad gauge track and rolling stock unless standard gauge becomes available, possibly in connection with future development of Hastings Port.

− Prepare contract for rail service provision to the Dandenong terminal.

− Commence development of Melbourne Intermodal Terminal in southern Dynon area (market site or part of current interstate terminal) to replace interim North Dynon facility.

− Introduce second train-set to operate on the standard gauge network and ramp up volumes.

− Renegotiate subsidy arrangements with terminal operators as volume increases.

− Confirm site for development of western terminal (either one of the existing terminals or a new facility at Laverton or further west). Develop business case for capital funding if required.

− Develop specification for new locomotive fleet and wagons (as necessary) to replace existing equipment, including an analysis of whether the system should operate on standard or broad gauge in the long term.

Year 3

− Procure first train-set for the Dandenong services, using current broad gauge equipment, and let operating contract. Locomotives and wagons either broad or standard gauge (depending on analysis of the options) or a mix of both or with dual gauge capability (standard gauge dimension vehicles with ability to traverse broad gauge).

− Commence construction of new western terminal (or enhance existing terminals as appropriate).

Year 4

− Commence use of the MIT.

− Commission Greens Rd terminal.

− Commission new or enhanced western terminal.

Future years

− Introduce second Dandenong train set and new train sets for the north and west using new equipment.

− Add train sets as required.

− Renegotiate (or re-tender) rail contracts for the south-east and the north/west services separately or jointly.

Conclusions

1. An intermodal system for the Melbourne metropolitan port-related container freight task is warranted by forecast freight demand growth. There may also be an opportunity to extend its capability into the urban domestic freight market once such a system reached maturity.

2. The system as modelled for this study could attract 1.5 million TEU’s by 2035, 25-30% of forecast metropolitan port-related freight demand. When considered cumulatively with the regional and interstate rail traffic, the total port-related traffic on rail could approach 40%.

3. A “hybrid” solution integrating rail intermodal services, road shuttle services and direct road (‘as is’) services is proposed, provided that the development of rail terminals and freight hubs is planned within a closely managed system. Improved port-rail interfaces and integration of the empty container logistics tasks at suburban terminals are essential, which will require functional, commercial and behavioural adjustments across the supply chain.

4. Rail intermodal services could commence in the near future using the existing terminals at Somerton and Altona. The proposed Greens Road terminal (Dandenong) should be developed as soon as possible.

5. Initially, the recommenced shuttle operations could use the North Dynon rail terminal area with Internal Transfer Vehicle (ITV) road transfers to the docks, or could use on-dock terminals if suitable siding occupation could be negotiated.

6. The interface of the intermodal system with the stevedores requires careful negotiation, to ensure smooth and timely access for road transfer vehicles servicing the Melbourne Intermodal Terminal. If ITVs are to be used at this interface, they should be under the control of the MIT operator, rather than the stevedores.

7. A new, larger terminal will be needed in the west (possibly on the proposed Tarneit rail line) if rail is to be viable. In the interim, western services will require operational subsidies. It is also likely that little return on capital associated with the new western terminal could be recovered. Eastern terminals at Greens Rd and, longer term, Lyndhurst, will be more directly viable and will generate returns on capital investment.

a more suitable footprint for the development of the Melbourne Intermodal Terminal as proposed under Port@L strategy. This new northern terminal could also provide an overflow capability should demand exceed the capacity of the existing Somerton terminal in the longer term.

9. On a full resource cost basis, including externality costs, the system provides positive NPV values by year 5, increasing strongly thereafter, although the south-east and northern corridors are more positive than the western corridor. Some short-term subsidies will be required during the start up phase (potentially 3 years) while efficient terminal and rail operations are bedded in, and interface agreements made with stevedores at port.

10. Network governance is a key success factor and leadership by government is required. The private sector does not have the scope for investment needed at the network level, but can make cumulative contributions once the framework is established. A new Intermodal Authority, potentially established under the Port Services Act, is strongly recommended as the agency for managing the construction, co-ordination and operation of the intermodal system.

11. Discussions with the ARTC for the Interstate Infrastructure Lease need to accommodate future metro shuttle demand for train paths required on the standard gauge system. Rollingstock acquired for operation on the broad gauge electrified network (particularly to south east), needs to be suited to operation at passenger train equivalent pathing standard.

2. INTRODUCTION

The Victorian Government has a vision for an efficient and sustainable system to facilitate the movement of freight within Victoria in a way that provides a competitive advantage for Victorian businesses. Given Melbourne’s unique role as the primary hub for much of Australia’s non-bulk freight, considerable attention is being given to managing Melbourne’s freight task in a more effective manner; 70% of Victoria’s total freight task is carried within the Melbourne metropolitan region.

Urban freight is being given increasing attention for two reasons:

a) Urban distribution systems need to be efficient as a way of reducing production and procurement costs, and facilitate international and interstate trade.

b) Australia has a highly urbanised population and transport, including freight transport can impact health and safety, urban amenity, congestion and environmental issues. While there is constant debate about the volume of urban car usage, there are also clear opportunities for minimising the impacts of freight transport.

The Victorian Government has considered the role of rail transport within the metropolitan freight task and has established modal share targets for rail transport as one way of reducing road freight movements (BoozAllenHamilton, 2006). While such targets provide a policy direction for the freight sector, it is critical that those policies are supported by:

a) an understanding of how and why freight moves to satisfy demand;

b) a recognition of the competitive nature of freight transport and logistics firms;

c) an assessment of the current and future network and infrastructure requirements;

d) an application of efficient transport methods to match demand and capacity drivers;

e) a clear vision of the role of Governments in achieving these outcomes; and

f) definitive action towards achieving the Government’s goals.

The task of the study is to (a) assess whether an intermodal system is warranted, and if so, (b) assess the strategic options and staging processes for the development of an intermodal transport system for Melbourne.

2.1 Purpose and objectives of the study

The purpose of this report is to provide advice to the Victorian Government through the Department of Transport on the potential for an intermodal system within metropolitan Melbourne, and if proven viable, determine market demand factors, capacity and infrastructure requirements, governance and institutional arrangements, and cost/benefit outcomes within a multi-stakeholder and competitive environment.

The objectives of the study are:

a) develop strategic options for the development of an intermodal freight transport system as part of the freight network in Melbourne, based on forecast (especially containerised) freight demand, and existing and potential road, rail and port infrastructure;

b) identify and analyse the prerequisites/conditions for an intermodal freight system in Melbourne to be commercially successful (price competitive with alternatives) as part of the Victorian and Australian freight transport system;

c) assess the physical and economic feasibility of the strategic options, especially in relation to when such system options (and stages in their evolution) would be commercially competitive with alternatives or could be justified on a cost / benefit basis; and

d) identify options and priorities for Government to facilitate the development of such a system (if the development of such a system is warranted).

The present study was undertaken concurrently with the development of the VFNS and consequently as this overarching strategy is reviewed and refined, it may necessary to refine some of the findings in this report.

Secondly, the timeframes for this study were shorter than might otherwise be required, in order that its output coincided with, and informed the Victorian Freight Network Strategy (VFNS). Consequently, it was necessary to delimit its scope and depth of analysis and further analysis may be necessary in due course. The limitations have been identified throughout the report, and is summarised at the end as a basis for further research.

2.2 The structure of the report

The structure of the remaining chapters is as follows:

− Chapter 3 identifies a number of requisite policy objectives for the study and cross refers these to relevant chapters herein.

− Chapter 4 provides conceptual frameworks for intermodal logistics within an urban context and presents a series of scenarios for supply chain structures and associated logistics activities.

− Chapter 5 then provides a brief synopsis of development in other jurisdictions, namely Sydney and Perth where success in urban intermodal logistics is evident, and recounts recent developments within the Melbourne environment.

− Chapter 6 provides market segmentation for the Melbourne urban freight market which provides a means of focussing the study.

− Chapter 7 builds on the prior chapter by analysing the scope and distribution of demand, both current and future, and develops the analysis to determine the modal share for each of the scenarios identified in chapter 4.

− Chapter 8 constructs a strategic network of elements which make up an intermodal network for Melbourne and identifies a number of strategic initiatives upon which the viability of the network will rest

− Chapter 9 determines the operational dimensions of a potential intermodal system, expressed in terms of volumes and movements by vehicle type and by urban region.

− Chapter 10 summarises the strategic elements of the system and staging its planning and delivery, identifying what can be achieved now and what infrastructure investments are still required to provide a future platform.

− Chapter 11 is an economic analysis of the proposed intermodal system based on forecast demand, the operational design and resources, investments and staging, and externality and congestion costs.

− Chapter 12 identifies a number of governance issues which could augment or impede network sustainability.

− Chapter 13 provides a high level summary of the key findings and identifies areas for supplementary study.

− The appendix provides a range of supporting analysis tables and working papers on externality, congestion and critical input costs of labour and fuel.

2.3 Preface

The authors of this report would like to thank the executive and staff of the Department of Transport, Port of Melbourne Corporation, and Victrack for their input and guidance.

The report seeks to develop a basis for future action towards the development of an intermodal system for the Melbourne urban environment. Unlike other single mode transport systems, intermodal logistics strategies require the co-ordination of multiple organisations and are therefore a more complex process to initiate, implement and manage. Urban intermodal systems will not happen by accident and it is interesting to note that the “market” has not delivered any new initiatives since the broad privatisation agenda of the late 1990’s. Recent developments in Perth are being led by the Western Australian government and supported by the private sector.

Given Australia’s increasingly urbanised population and rapid growth of capital cities, managing urban freight logistics will become a critical priority for governments and should be seen as part of the urban infrastructure planned and provided by government directly or in partnership with the private sector.

There have been initiatives to develop an intermodal system for Melbourne, but they have been piecemeal and progress has been slow. Arguably, this has not been because of a lack of market demand or conditions, but because the institutional arrangements between private sector firms and government agencies have not been aligned. This study will show that sufficient volume and benefits can be identified to justify having an urban intermodal system, but it will only happen through deliberate action and investment.

This report identifies the port container task as the place to start the development of an urban intermodal system. Port-related traffic is less that 10% of the current urban freight demand. In most capital city ports, annual trade growth ranges from 6-10% and is double the present growth rate for the domestic national transport task (averaging 3-4% based on current projections1), The difference in the international trade and domestic land transport task reflects an ongoing adjustment of supply chains servicing Australia underway since the mid 1990’s. This has implications for port precincts and urban logistics tasks. There are a number of current initiatives underway to improve port-related supply chains. The port-related task offers sufficient freight density and consignment unit size to warrant immediate attention; whether or not intermodal systems can be expanded to other freight markets such as cross-urban domestic deliveries remains to be seen.

The economics of urban intermodal logistics can be counter-intuitive, and the “yardsticks” of traditional long distance or heavy haul rail may not be appropriate in the urban context. Firstly, rail systems can generally reduce the effect of road freight congestion, provided that the system of rail and road movements through a network of terminals is designed as a whole and operated efficiently. Secondly, the design of the system needs to ensure that service interruptions and failures do not resonate along the chain - highly interdependent service networks will generally fail. Thirdly, the initiatives that have so far emerged have been supported by modest investments and have not achieved sufficient traction for viability.

This record should not be seen as a failure of the urban intermodal concept but rather of implementation not being embraced on a system wide basis. Forward demand estimates suggest that a comprehensive city-wide approach to logistics is required, but this is beyond the capacity of a single firm to deliver. Only governments are positioned to facilitate this direction.

Finally, the analysis and recommendations within this report are based, in part, on first hand experience in developing and operating an intermodal system in Sydney, and on extensive road and rail freight modelling. The outcomes indicate that a viable and sustainable intermodal system can operate in Melbourne. The key ingredient however, is a deliberate plan to make it happen, as it will not evolve through market forces alone.

1 The BTRE has forecast that Australia’s land transport task will double in the next 20 years, which is equivalent to an annual compound rate of 3-4%.

2.4 Key assumptions adopted within this study

The study is intended to be a focused process to inform the development of the Victorian Freight Network Strategy (VFNS) and was conducted over eight weeks in March and April 2008. Given the specific scope and time commitments, the following comments outline the study’s underlying operating assumptions.

− An urban intermodal system does not exist in Melbourne in 2008; development of a new system is not impossible, but will be challenging.

− The study focuses on the design and economics of a system over the long term; further research will be required to develop the short-term implementation plan.

− This study focuses predominantly on the economic analysis of the cost of various transport modes and pathways, and incorporates analysis of externality costs. Full economic cost, rather than commercial service pricing, was seen as a more robust approach over the long term. Further analysis is required to consider pricing and market behaviour.

− Externality costs are not presently captured within the commercial pricing arrangements for freight transport. However, with the urgent environmental debate including carbon trading schemes, these costs will be actualised in future.

− The study acknowledges that some entities have corporate strategies and/or commercial practices which will not align with the outcome proposed herein. The overarching consideration is the need to develop a network wide system which looks to the future to address urban freight congestion rather than to perpetuate “custom and practice”.

− In developing an urban intermodal system, the empty container task must be integrated into the overall solution; the economics of establishing and sustaining a viable system depend on this requirement. In addition, the opportunity cost of storing empty container storage on strategically important port land needs to be considered. While there are strong arguments supporting aspects of the current system, a new paradigm has been proposed herein to strengthen the future commercial appeal of rail.

3. POLICY FRAMEWORK AND OBJECTIVES

The Victorian Freight Network Strategy (VFNS) is presently being developed by the Department of Transport in consultation with other relevant government agencies such as the Port of Melbourne Corporation (PoMC), VicRoads and Victrack.

The Strategy includes high-level strategic principles to guide the objectives and actions; specifically, the eight objectives identified in the Strategy are:

a) Facilitate the efficient movement of freight for the success of the economy

b) Reduce the cost and improve the reliability of supply chain through Victoria

c) Manage and mitigate adverse impacts of freight operations on communities (safety, environment, The overarching objective of the Victorian amenity, congestion) Freight Network Strategy is to deliver a d) Deliver new transport infrastructure and optimise practical, long term framework that will directly existing infrastructure and its use assist Victoria’s transport and logistics sector to effectively serve Victoria’s economy and e) Plan ahead to identify and protect freight community in an increasingly challenging network options on a “no regrets” basis to environment. The Strategy will specifically ensure future capacity, flexibility and robustness respond to a number of identified key f) Provide a predictable policy environment which challenges that have emerged over recent encourages efficient private sector investment years and assist the transport and logistics and promotes effective Public-Private industry to meet these challenges with Partnerships (PPPs) confidence (as draft, February 2008)

g) Provide appropriate priority for freight on the network – managing competing demands for infrastructure; and

h) Ensure compatibility with other transport and broader metropolitan and regional development objectives and strategies.

This study focuses on the assessment of strategic options and staging for the development of an intermodal transport system for Melbourne. As a consequence, it is relevant to recognise its links with, and support of, the emerging VFNS.

The eight objectives shown above therefore provide a basis for developing and assessing strategic options for an intermodal system for Melbourne, and are referred to throughout the study’s analysis.

Other policies which have also been used to inform this study are:

− Growing Victoria Together

− Metropolitan Transport Plan

− Victorian Ports Strategic Framework

− Meeting our Transport Challenges

− Melbourne Port@L Strategy

Table 1 - Alignment of intermodal strategy objectives within VFNS objectives

Strategic objective of VFNS Relevance to this Melbourne Intermodal Study Critical factors

a) Facilitate the efficient Melbourne is the premier freight gateway to/from Australia for non- The network of road and rail freight corridors will be leveraged so that the benefits movement of freight for the bulk products and acts as the dominant location for warehousing. An of efficient linehaul productivities will offset the costs associated with multiple success of the economy; intermodal strategy needs to identify diverse freight market handling at suburban terminals and the secondary road deliveries such that the requirements and service those where there is a sustainable economic cost is superior to the current operating patterns. competitive advantage. The intermodal system offers freight owners Chapters 7, 9 and 10 outline the details of the network configuration, operations and operators the opportunity to move freight through a number of and economic costs. efficient pathways depending on their service and cost expectations. b) Reduce the cost and improve System costs and performance, plus the commercial arrangements need to be the reliability of supply chain sufficiently attractive to stimulate a market response away from the current through Victoria; operating patterns

Chapter 7 identifies the comparative modal costs.

c) Manage and mitigate adverse Community expectations around “liveability” within Melbourne places The intermodal solution yields improved amenity benefits and lower externality impacts of freight operations increased demands on transport systems impacts than the prevailing operating patterns, commensurate with on communities (safety, network/pathway technologies and investment costs. environment, amenity, Chapter 11 analyses the externality cost impacts of the current and potential congestion); system

d) Deliver new transport Identify current and future road and rail system capacity available to The intermodal study confirms the capacity of the existing system and identifies infrastructure and optimise meet demand; this will require (a) identifying any adverse operational where improvements in operating efficiency unlocks further capacity to meet short- existing infrastructure and its practices which limit opportunities to efficiently leverage existing medium demand. Where market opportunities exist, new investments in urban use; capacity, and/or (b) investing in system enhancements to meet unmet freight hubs will be identified which underpin the operation of an intermodal demand where an efficient system is operating. system.

Chapter 8 and 9 specify system and network requirements and terminal developments

e) Plan ahead to identify and Melbourne’s freight demand will grow to meet the demands of Metro freight movements for international containers will grow from 1.6 MTEU’s to protect freight network options Melbourne’s economy and therefore planning for future system almost 6 MTEU’s by year 2035. The network and logistics system needs to expand on a “no regrets” basis to performance is critical. Investments and technology must be scalable to meet this demand, and ensure sufficient land banking and buffer zones exist to ensure future capacity, and timed to optimise capacity with demand. Prime facie, some freight separate freight precincts from residential zones. Secondly, the intermodal solution flexibility and robustness; sectors are presently suited to road-road or rail-road intermodal must not prejudice the opportunity for other freight markets (e.g. urban domestic) systems, while others are not, however as the intermodal network to access the intermodal network in future if/when commercially viable. matures, these market sectors may become more suited to an Chapter 8 and 9 specify system and network requirements and terminal intermodal logistics approach. developments

Strategic objective of VFNS Relevance to this Melbourne Intermodal Study Critical factors

f) Provide a predictable policy A successful freight policy recognises the various roles played by Identify the various business models which augment an effective intermodal environment which freight operators and Government in the provision of logistics services system (whether PPP models or otherwise). In addition, identify policy or encourages efficient private and infrastructure respectively. Consequently, Government is regulatory frameworks which inhibit business confidence through excessive risk sector investment and responsible for planning, building, managing and regulating the use of exposure, misaligned transactional arrangements and/or hype-competition. promotes effective Public- infrastructure. Some elements of infrastructure are suited to effective Chapter 12 discusses the governance issue and the role of government and the Private Partnerships (PPPs); PPP investment models and foster the opportunity for more innovative private sector. Insights from the other jurisdictional and case studies are also business models. important. Further, while micro-economic reform has opened markets to competition, there is potentially a greater degree of investment risk for operators and Government.

g) Provide appropriate priority for The intermodal system will co-exist with passenger and other freight In converting freight demand into finite road and rail movements over time, it is freight on the network – systems on shared infrastructure. necessary to concurrently determine the growth in demand for passenger transport managing competing demands on key road and rail corridors and whether (a) sufficient capacity exists for both or for infrastructure; (b) investments are required.

h) Ensure compatibility with other The VFNS builds on a number of long term policy statements, Identification of long term urban land use patterns, in particular the emerging transport and broader including “Growing Victoria Together”, “Metropolitan Transport Plan”, industrial precincts and their proximity to existing road and rail corridors. metropolitan and regional Victorian Ports Strategic Framework” and “Meeting our Transport A “one size fits all” approach may not suffice as freight demands, and corridor and development objectives and Challenges”. Each statement establishes broader contextual spatial characteristics will determine the most optimum set of logistics and strategies. influences on freight and non-freight transport demands which must infrastructure configurations. be reflected in an intermodal strategy. Chapter 6 and 8 identify the broad freight markets operating in Melbourne and outlines the characteristics of each and their fit with intermodal systems

4. INTERMODAL SYSTEMS; AN OVERVIEW

This section provides a conceptual framework on intermodal systems, and considers the urban freight markets which are suitable for servicing through an intermodal system. Firstly, a working definition of intermodal transport is established to resolve a number of misconceptions, specifically that intermodal transport is synonymous with rail transport. Secondly, the elements of intermodal transport are defined and compared with other direct movements. Thirdly, a segmentation of the dominant freight markets is undertaken to determine what freight market characteristics are suited to an intermodal solution, including service flexibility, product velocity, price competitiveness, and origin-destination delivery requirements. Fourthly, the economics of intermodal logistics are considered, and fifthly a framework of critical success factors is assembled to guide further analysis.

4.1 Intermodal logistics; a definition

There has been considerable research given to identifying a working definition for intermodal logistics. Put simply however, the key aspects are:

a) Most road journeys are single mode

b) Most rail journeys are multimodal (i.e. include the pick up and delivery (PUD) segment)

c) “intermodal” involves a conscious decision to depart from a and b above, to achieve efficiency or economic benefits

“Intermodal” does NOT include freight with no option but to move on more than one mode (e.g. to incorporate a PUD movement on a different mode).

An intermodal or freight hub system can be characterised as incorporating the following:

a) Where rail infrastructure exists and sufficient scale of demand is available, rail transport can be used to provide an effective linehaul movement, and road transport completes the journey to the end destination.

b) Where rail infrastructure does not exist, higher mass road vehicles (such as B-doubles and B-triples) can provide an efficient shuttle movement through to a freight hub, with smaller road transport vehicles completing the journey.

c) A handling or transfer process is embedded within the movement typically undertaken at an intermodal terminal or freight hub, which does not impede the service performance of the overall movement.

d) Over time and where viable, it is possible to consider a transition from road to rail for the linehaul portion of the journey to a freight hub; scale and cost will determine the most efficient use of resources.

e) The proximity of the freight hubs to the end markets is an important spatial relationship to optimise the costs of the secondary road movement relative to the cost of multiple handling through the freight hubs.

The following diagram provides a working model of an intermodal system.

Figure 1 - A working model of an intermodal system

Destinations Linehaul Destination Origin Linehaul Origin freight hub freight hub

Consolidation Distribution

Linehaul movement of multiple consignments by rail or road to achieve scale economies and maximum utilisation of the conveying mode

Movement by road vehicle for consolidation at origin or distribution at destination typically on an individual consignment basis

4.2 Metropolitan differentiating urban freight markets

Not all freight is suited to an intermodal system, due in large part to the drivers of volume, distance, and product velocity. Consequently, it is necessary to broadly segment the freight markets operating within Melbourne. The following diagram provides a typology to guide the task.

Figure 2 - Market segmentation of a freight task

The freight task

•Bulk grain, minerals, liquids etc Product characteristics •Non bulk; containers, general, refrigerated, etc

End market •Domestic characteristics •International (import, export)

•Urban Geographical or •Inter-capital city corridor characteristics •Rural, remote

•Road Transport mode, •Rail choice and utility •Sea factors •Air

•Operations Core service provision •Infrastructure management •Regulatory, policy

Source: NSW Country Regional Network Rail/Road Competitive Analysis for the NSW Rail Infrastructure Corporation; unpublished (Sd+D, 2007)

The dominant freight activities relevant to the scope of this study are:

− Non-bulk consignments, including international containers and general freight consignments (containerised or loose cargo), and generally associated with manufacturing, retail/wholesale trade, and household and business consumption2

− Urban consignments where the origin and destination is within the Melbourne metro region3

− Road and rail transport only as full loads4.

The following diagram provides a spatial framework for the dominant types of freight flows within an urban context.

2 The bulk market within the Melbourne metro market will include construction materials, building spoil, minerals and other unprocessed materials, and bulk fuel, (for example), which are deemed to be outside the scope of the study.

3 Road and rail movements to/from the regional Victoria and interstate markets (including Tasmania) will be relevant to the extent that one end of the freight journey will intersect the Melbourne urban freight task; consequently, consideration as to coexistence on common infrastructure will be necessary.

4 Small consignments (as “less than a full container”) are not suited to an intermodal system, except where these have been consolidated into a full container at a freight forwarding terminal

Figure 3 – Generic supply chain structures within and to/from Melbourne

Linehaul by rail or road

Distribution by road or rail Inter-capital or regional freight hubs Distribution (e.g. Dynon or Distribution or Interstate regional chains by road Donnybrook) by road

Distribution Distribution by road by road Processor, Processor or wholesaler or wholesaler retailer Transfer by road or rail

Distribution by road Distribution by road

Port terminal chains Metropolitan Linehaul by Urban freight Linehaul by Urban freight rail or road hub (A) rail or road hub (B)

International chains Domestic distribution chains

Note: The diagram is illustrative and intended to show only the supply chains relevant to the scope of the study.

A number of high-level observations emerge from the framework and with supporting comments in Table 2 below. These are considered in the context of the Melbourne freight task.

1. International chains achieve greater freight density along network corridors than the urban distribution patterns which tend to be characterised by more distributed points of production and demand, in smaller consignment lot sizes.

2. Metro distribution systems tend to operate as door-to-door road transport services. If these were to operate through intermodal freight hubs this would incur substantial pick-up and delivery (PUD) costs at both ends of the journey. The total door-to-door cost, including PUD at each end, linehaul costs and terminal costs will generally outweigh the price for the direct delivery service between origin and destination.

3. As products move along a supply chain, consignment size generally reduces, and just-in-time and delivery demands increase. These factors will tend to leverage the flexibility and speed provided by direct road delivery, whereas linehaul movements via intermodal freight hubs seek to consolidate less demanding requirements to achieve greater freight density. The “rivers, streams, brooks” analogy is somewhat relevant here.

4. Haulage of non-port domestic freight between Greater Melbourne urban areas (such as Dandenong and Geelong) via intermodal means, may become viable in the future, provided clear price and utility benefits relative to the direct road delivery emerge. In this regard,

a. A watching brief should be maintained for corridor and terminal developments, and the application of smart technologies.

b. The development of intra-urban intermodal freight could leverage a mature intermodal system, the basis of which would be the port-related chains in the short to medium term.

c. The long term development of freight hubs based on a mature network may foster intra-urban distribution using rail.

Not withstanding future opportunities for the distribution of urban freight via road and rail freight hubs, the chains that will provide sufficient and immediate scale and freight density to establish a metro intermodal system are those which service international container supply chains.

Table 2 - Summary of freight types, drivers and influences for an intermodal system

Influences for accessing an intermodal system Freight type Drivers Opportunities Impediments

Demand located away from the dominant industrial clusters may lack sufficient Concentrated freight density expected to grow to >5MTEU’s, with high Volume scale; these will be serviced on “as is” road-direct basis for some time, and until proportion in proximity to key freight corridors road-based freight hubs are established

Growth in the southeast sector, some 40-50 km from port starts to Short linehaul distances (20-40km) have tended to favour road movements International chains Distance emulate the freight density and distance drivers unless sufficient scale and efficiency is achieved in the linehaul movement

Movements generally as result of inbound procurement for industrial International shipments are generally directed via a warehouse before the retail Product velocity processes or as replenishment stock for wholesalers; consequently there store deliveries is less “urgency” and delivery capability required

While the urban distribution task is substantial, the dispersed nature of movements tends to favour direct shipments; to date systems have not Urban distribution from local production and/or inventory is generally in smaller Volume been designed or operated to accommodate such strategies, and consignment sizes therefore are not presently considered by the market

Urban distribution Movements between urban zones such as Dandenong and Geelong may Except in special cases, the delivery patterns into/from the freight hubs may Distance chains offer opportunities once scale and service frequency is established favour a direct delivery

Next day deliveries of consignments between urban zones may emerge provided there is sufficient cost benefit for the consignee. “After hours” Often metro distribution delivery patterns are established based on agreed time- Product velocity urban freight movements that leverage the intermodal system serving slots against customer orders, and the intermodal system presents a service risk international containers is an opportunity for future consideration

Australia’s highly urbanised population does allow for concentrated flows Australia does have freight imbalances and causes under-utilisation in many Volume in corridors “back haul” journeys

A key advantage to consolidate loads and gain unit cost advantages Increases in road technologies have extended the “reach” of road transport in Inter-capital or Distance which offset multiple handling east coast corridors and compete vigorously with rail-based intermodal systems regional chains Tends to support movements between inventory staging points before Direct store deliveries and urgent consignments tend to be direct by road to meet Product velocity distribution to end customers and provides the opportunity for aggregation pre-determined time delivery windows through key nodes

4.3 Intermodal chain structures for international containers

The discussion so far has identified the strategic elements within intermodal systems. These are developed further in this section, focussing predominantly on international containers. Comparison with the existing road- based direct delivery methods is also made.

Four generic transport systems are broadly available to move import and export containers within Melbourne. These are referenced as:

1. The scenario based on the current “as is” transport patterns including the return/collection of the empty container to a designated empty container park (referred as Scenario 1);

2. A scenario based on potential road-to-road shuttle and PUD systems through urban freight hubs in key locations (referred as Scenario 2);

3. Existing and potential rail-to-road shuttle and PUD systems also through urban hubs located in the rail network (referred to as Scenario 3);

4. A hybrid approach which leverages potential combinations of the scenarios described above, and sites rail and road hubs to optimise the existing network capacities (within minimal investment), and minimises the costs and tonne-kilometres associated with the secondary (PUD) movement.

Each of these scenarios are shown in Figure 5 on page 31 and described in more detail below.

The establishment of road hubs and shuttle services can be considered less problematic than the higher cost investments and start-up effort associated with rail intermodal systems, however once matured, rail intermodal systems have been proven to provide cost and service advantages.

It is also acknowledged that each of the scenarios 2-4 above will necessitate some fundamental changes to the way empty containers are integrated and managed within the intermodal or freight hub supply chains. It will be shown in later analysis that the overall “system costs” are optimised with an integrated approach to the management of empty containers.

4.3.1 Current "as is" distribution patterns (Scenario 1) This is the dominant method of operation to/from Swanson Dock and involves semis and B-Doubles moving containers to/from importers and exporters in the Melbourne metro region. Depending on whether the movement is for an import and export shipment, the cycle involves sourcing or returning empty containers to an empty container park, generally located within the port or nearby western suburbs (Altona/Laverton).

Empty container parks have been traditionally located at or adjacent to the port to minimise the cost of evacuating surplus empty containers to ships for export, as there is an imbalance between import and export consignments in Melbourne. Importers and exporters are responsible for the land transport cost of their shipments; however shipping lines incur the cost of storage of their empty containers as well as the evacuation costs.

The cycle for vehicle movements for an import container therefore involves transport depot, stevedore port location, importer delivery destination, empty container park, and travel to “next task”. The cycle typically carries on average 1.2-1.4 TEU’s per journey and criss-crosses the metro areas twice for the loaded and empty movements. Depending on location of the importer or exporter, the cycle may take 4-6 hours at a transport price of $75-85 per hour. Some operators are also staging deliveries via depots to allow 24/7 fleet operations, yet their customers generally only operate on a 9-5 basis.

4.3.2 Road-road movements through freight hubs (Scenario 2) This scenario has been emerging in Australian ports in recent years, and provides an opportunity to improve vehicle utilisation and decrease congestion. Often referred to as “stack runs”, the larger carriers use vehicles with higher mass limits (HML) to shuttle containers to/from port and urban freight hubs. The containers are transferred to smaller semi-trailers for delivery/collection at the end-destination. Key advantages include the opportunity to load the vehicle with 3-4 loaded TEU’s in both directions and reduce the number of vehicles criss- crossing the metro region, and the opportunity to operate the linehaul vehicles on a 24/7 basis and minimise day-time port congestion.

The integration of empty container storage at the freight hubs would minimise travel to/from an empty container park. This will depend, however, on the scale of a particular operation and the number of clients and shipping lines being serviced by the carrier.

The interface with the end-destination would essentially be the same as for scenario 1.

4.3.3 Rail-road movements through suburban freight hubs (Scenario 3) This scenario has been operating in Sydney for around 10 years and commenced in Perth in 2007. Several attempts have been made to initiate port shuttle services in Melbourne. This has not been effective for a number of reasons, such as:

− Reluctance of some rail operators to embrace short haul operating practices in lieu of mindsets which have historically favoured long distance “big train” practices

− Fragmentation of the rail network management task and an insufficient focus on the role of rail freight task within a network which is dominated by passenger trains

− Conflicting stakeholder priorities managing the port-rail interface

− Sub-optimal rail infrastructure to support the port-rail interface

− Initial and high costs levied for transfers from rail siding to port storage location

− Insufficient urban freight hub capacity in the right locations

− Non-integration of the empty container movement into the overall cycle.

The scenario is similar in structure to scenario 2 for road-road movements; however trains replace the HML linehaul trucks operating between port and the suburban terminal. The key advantage is that for each rail journey, the train has the potential to carry up to 75 TEU’s in one direction and replace 50-60 semi-trailer movements, or less when HML vehicles are used.

Train operations are less flexible than road vehicles for start up volumes and where the number of daily services limits the speed of the consignment through the system.

4.3.4 A hybrid approach A key feature of Melbourne’s freight demographics is the radial nature of distribution from the port which contrasts the patterns for Sydney, Brisbane and Perth, whose ports are located on an edge of the built up area. The rail system is also configured in a radial system which accesses several large industrial precincts.

A unique aspect of intermodal economics however, is the need to optimise the length of the linehaul leg with the patterns of the secondary PUD leg of the total journey. The spatial relationship between the port, freight hub and end-destination must favour use of the hub, otherwise a direct door-to-door journey by road will ensue (scenario 1).

Example - two customers “A” and “B” and a suburban intermodal terminal (IMT) are shown in the following diagram. The position of customer “A” relative to the terminal “IMT” will influence the competitive advantage for

rail over direct road; an excessive distance of Ta over the rail journey will discount the cost benefits and scale provided by rail. Alternatively, the position of customer “B” relative to the IMT and the port will similarly influence

the competitive advantage of rail, given the PUD distances as Tb and Tdir. The following table expands on these concepts.

Figure 4 - Spatial relationships in intermodal chains A Final Rail or road delivery Port IMT point

Truck (T ) Truck (T ) dir B b Final delivery point

Table 3 – Comparative analysis of linehaul and PUD travel distances

Linehaul or shuttle Associated PUD journey by road (distance) (distance) Short (0-10 kms) Medium (10-50 kms) Long (>50 kms)

Short Ideal where consignee “A” is Rail not competitive and Rail is generally not located further away from the economics dictates that road competitive with road as the (25-50 km) port precinct, that is T(a) maybe best placed to complete linehaul movements do not relative to rail movement. For the entire journey. comprise the major portion of “B” T(dir) may eventuate where the overall journey. service demands require speed to market

Medium Ideal, however prevailing road Ideal where consignee is Also depends on the prevailing market rates may work against located further away from the road prices, train service (50-150 km) rail, e.g. back-loading port as per T(a), otherwise frequency and product type T(dir) will occur if T(b) is excessive relative to rail

Long Ideal and less affected by Ideal where consignee is Ideal where consignee is back-loading influences located further away from the located further away from the (>150 km) port, as above port, however freight densities may provide efficiencies under T(b) scenarios

Source: Sea Freight Council of NSW; Sustainable Terminals Study (Sd+D, 2004)

A number of key observations emerge. Firstly, the hybrid approach recognises that each freight hub location will have a natural and economic catchment area influenced by the cost and efficiency of the PUD activities relative to the scale of the linehaul leg and the multiple handling costs through the freight hub. Freight hubs (road or rail) will then compete around zones of indifference for the catchments.

Secondly, an intermodal system needs to compete on price with the “as is” method and secure increased volumes which in turn provide a lower operating unit cost. It is critical that a fledgling intermodal system leverage existing networks and avoid excessive start-up investments. Rail-road intermodal systems (scenario 3) will generally secure volumes within catchments surrounding its rail networks; however other catchments away from the rail networks may opt for a road-road (scenario 2) approach.

Thirdly, for catchments that are relatively close the port, markets and/or operators will generally use “as is” (scenario 1) as the distance drivers will not offset other handling or PUD costs.

Finally, as discussed in the case studies in Chapter 5, it is also possible that catchments serviced by Scenario 2 as road-road approach may transform into the Scenario 3 rail-road approach as volume builds. This is similar to the way that the Minto Terminal development in Sydney commenced (refer to section 5.1.3). As a consequence, land planning for larger terminals and expanded corridors must recognise the organic growth in demand yet the provision of capacity occurs in advance, and is in step-functions, and must be preserved prior to that demand.

Figure 5 - Generic supply chain scenarios for port-related metropolitan traffic

Scenario 1 – Current “as is” direct delivery from port Scenario 2 – Road-road through freight hubs Scenario 3 – Rail-road through freight hubs

Loaded movement, by road typically 1.2 – 1.4 TEU’s per journey Empty movement to Empty movement to Importer Importer Importer source or return empty RAIL 2-way loaded source or return empty container to decentralised with 50-75 TEUs container to decentralised Internal shuttles ROAD 2-way Loaded movement container park per journey Loaded movement container park loaded with 3-$ of 1-2 TEU’s of 1-2 TEU’s TEU’s in higher Port Loaded movement, by mass vehicles IMT Rail IMT Evacuate surplus road typically 1.2 – 1.4 Container Container empty containers Port Port terminal TEU’s per journey park Evacuate surplus park Evacuate surplus empty containers empty containers Empty Loaded movement Loaded movement Container movements of 1-2 TEU’s of 1-2 TEU’s park by road to source or Exporter return empty Exporter Exporter Port environment containers “As is” operations “As is” operations within 15kms within 15kms

The hybrid model – combines scenarios 1-3 to optimise spatial and end-market characteristics (metro only)

IMT (Rail) IMT (Road) IMT catchment zones for IMT PUD to/from end demand (Road) points ROAD 2-way loaded Scenario 2 IMT ROAD 2-way loaded (Road) Scenario 2

IMT Docks and (Rail) portside terminals

IMT RAIL 2-way loaded “As is” operations (Rail) Scenario 3 within immediate port catchment Scenario 1

4.4 The need to consider new perspectives

Urban freight systems are characterised by distributed demand and shorter travel distances. For rail or road shuttles to compete effectively in this market relative to the direct-road model, a different approach for integrating rail must be employed than has been traditionally adopted.

The analytical frameworks for assessing whether rail is sustainable in a metropolitan context do not align with the “traditional railway mindsets and practices” relevant to long distance inter-capital city non-bulk rail freight or regional bulk commodity rail freight.

Rail typically enjoys competitive advantage over road transport when long distances and/or substantial volume or mass is available. These factors are observable in the rail systems such as the Hunter Valley or Goonyella coal systems, or the Sydney-Perth inter-capital rail services.

In urban situations, rail can compete where service reliability is ensured and where volume can be aggregated in a seamless fashion.

Guiding principles

A number of guiding principles should be recognised in the development of an intermodal system5. These principles have been informed from analysis of commercial practice.

a) Sustainable urban intermodal networks require a proactive logistics/systems approach which integrates rail or road transport methods within the total solution, rather than these activities being the end in itself.

b) An intermodal system requires the alignment of institutional and commercial drivers with the physical activities.

c) The benefits from rail systems will only be realised by deliberate action to assemble critical demand and to offset high sunrise fixed costs.

d) Modal share targets are outcomes determined by network capabilities and cost/margin/price signals. A proof-of-concept is critical in order to stimulate the market’s awareness and acceptance. In this context supply precedes demand.

e) An intermodal system is the sum of its discrete subsystems as: − Origin - linehaul interface − The linehaul leg itself − Linehaul - terminal interface − PUD (secondary) leg to end-destination

f) Intermodal systems are managed by multiple stakeholders with varying strategic and commercial objectives and interrelationships. A strong alignment of the physical and transactional arrangements and an equitable distribution of value and risk is required. Operational interfaces without a corresponding commercial interface are generally zones where multi-operator objectives become misaligned and service failures can result.

g) Few firms have the scale to assemble and manage the inter-organisational demands of an intermodal system. An intermodal system requires 3-5 years to establish and mature, and the cash flow demands are generally beyond a single firm. The externality costs and benefits that arise from an intermodal system will accrue to the government and community and not to the operator.

h) The price of an intermodal system needs to be below that of the prevailing direct road delivery, in order to stimulate the market to consider the intermodal alternative and to offset perceived service and utility risks.

5 A recent study by the Sea Freight Council of NSW titled “Sydney’s Intermodal Solution” examined the organisational and commercial impediments surrounding intermodal systems (Sd+D 2006)

i) The intermodal system should recognise the different spatial and end-market characteristics, and employ complimentary transport methods; the system should also coexist with the road-direct delivery methods where an intermodal system is not viable on cost or service grounds.

j) There are commercial cost drivers relevant to the transport operators, whereas there are broader economic benefits which accrue to the community and government. A separation of operating costs, proprietary infrastructure costs and common infrastructure costs needs to undertaken. Government involvement is justified as it is likely to be beyond the ability of any single private sector entity to capture those external benefits and convert them into a revenue stream.

5. PAST AND PRESENT DEVELOPMENTS

In considering whether an intermodal system will be viable and sustainable in Melbourne, it is beneficial to review intermodal developments in Australia over the last decade, largely focussed on Sydney’s international container task.

5.1 Other intermodal systems in Australia

5.1.1 Sydney Metropolitan and short haul rail-based intermodal systems have been progressively developing in Sydney since 1997 and have increasingly been given policy support by NSW Government and Sydney Ports Corporation. While the initial rail volumes through Port Botany related to regional exports of commodities, volume growth over the last 5 years has been driven by the development of metropolitan terminals such as Minto, Yennora, Camellia and Villawood.

The Sydney metropolitan strategy had its foundations within the Freight Rail Corporation (FreightCorp) reform programmes around 1996-8. At that time, the movement of containers to/from Port Botany incurred substantial commercial losses as a result of excessive fixed costs, poor utilisation of assets, one-way loading, poor pricing and weak “power” relationships with customers and port operators6. Unable to withdraw from the sector, FreightCorp deliberately decided to expand its market share, earn additional revenues and lower its unit operating costs.

FreightCorp then engaged with road transport and terminal operators to assemble “bundled” rail-road services under the marketing banner of FreightCorp PortLink7. This included commercial arrangements with BHP Transport, the CRT Group, Seatons Transport, MCS Transport and later Bowport Allroads. The alliance with Bowport led to the joint investment in the Minto terminal (see section 5.1.3 on page 37). Metropolitan terminal developments over the last 10 years have mainly involved the conversion of existing facilities to handle trains of 400-500 metres in length typically carrying 40-50 TEU’s in one direction.

The essence of the PortLink strategies was to leverage surplus capacity and assets as a proof of concept rather than undertake any initial investments. By 1999, volume of intermodal rail traffic had grown from 60,000 to around 150,000 TEU’s, and FreightCorp had achieved reasonable market share, operating critical mass and had demonstrated the benefits to Government. New players, including Patrick and P&O Trans Australia had entered the port-rail market seeking to leverage their role as stevedore and to offer integrated services for their shipping clients. Other rail operators including Lachlan Valley Rail and Austrak Rail8 also entered the market.

By 2006, the Government had established firm aspirational targets yet required a more comprehensive policy framework. The Freight Infrastructure Advisory Board (FIAB) was formed to provide recommendation for infrastructure and commercial arrangements to stimulate demand towards achieving the desired 40% rail modal share (FIAB, 2005). Decisions to develop the Enfield and Moorebank as large intermodal terminals capable of handling 300,000 and 500,000 TEU’s respectively were taken. Terminals at Eastern Creek and Menangle were also identified for development.

The critical outcome of the FIAB process was the realisation that the planned expansion of Port Botany and the desired rail modal share targets required that reciprocal intermodal terminal capacity in the urban regions of

6 FreightCorp also received a Community Service Obligation to underpin the cost of some “non-commercial” services to regional locations, in particular cotton exports from the Narrabri and Moree area. By 1999 however, the CSO payments had been removed due to improved commercial outcomes driven by increased volumes.

7 The brand name PortLink was later used by the Patrick Corporation after it and Toll acquired FreightCorp in the Pacific National merger. Patrick PortLink continued to develop its market share and asset base.

8 Austrak Rail operated from Junee and is not related to AusTrack Estates who developed the Somerton (Melbourne) site.

Sydney was required. The process also recognised that for rail to effectively compete with road transport, a train needs to travel unimpeded from origin “A” to destination “B” and that terminal developments to date would not meet the expected demand of around 1 million TEU’s by year 2025.

Moreover, the terminal developments of the required magnitude were beyond the capacity of the private sector to deliver without Government policy and economic support.

Table 4 below provides a timetable of key events towards intermodal system development in Sydney

Table 4 - Timetable of strategic events in development of Sydney's metro intermodal system

1980s State Rail operates rail services for containers from White Bay terminal (Port Jackson) to Freightbases inland terminal at Villawood in Sydney’s west

1991-1995 Seaton’s Transport develops intermodal terminal at Camellia

1996 State Rail is restructured; open access regime installed and FreightCorp created as corporate entity Initial Port Botany volume by rail was around 70,000 TEU’s

1997 FreightCorp and Sydney Ports agree strategy to expand urban and regional rail market focussed on Port Botany Bowport Allroads establishes road-road and freight hub services between Port Botany and southwest Sydney Engagement with stevedores on establishment of port access “windows” to address rail reliability

1998 FreightCorp expands rail services to CRT and BHP Transport at Yennora and Villawood; metro and regional rail volumes expand to 150,000 TEU’s NSW Govt recognises growth of rail market and funds rail infrastructure improvements to accommodate growth in demand and entrance of new rail operators

1999 Bowport Allroads and FreightCorp create strategic alliance to develop rail-road services through proposed Minto terminal Enfield identified as potential site for intermodal terminal

2000 Minto terminal approved and commences construction

2001 FreightCorp sold to Toll/Patrick to form Pacific National First shuttle trains run into Minto and first year volume grows to around 20,000 TEU’s

2002 Patrick commences enhancements in port-rail interface and technology at Port Botany

2003 Volume through Minto, Yennora, Camellia and Leighton continues to grow Patrick PortLink and Silverton/South Spur expand services

2004 Port Botany rail volumes stable at around 250,000 TEU’s due to some terminal and network capacity constraints 2005 Road-road shuttles are established to/from Molineaux Point near Botany (Sd+D, 2007)9

2006 Freight Infrastructure Advisory Board established by NSW Govt and recommends development of terminals at Moorebank and Enfield as key enabler for achieving 40% target for rail modal share; other network enhancements also recognised Independent Rail enters rail linehaul market

2007 Enfield Terminal project approved by NSW Govt for max. 300,000 TEU’s Discussion between Federal and NSW Govt commences on Moorebank, with investors including Stockland, Kaplan and QR Rail volumes through port grow to 300,000 TEU’s

9 See case study of Molineaux Point on page 30 of the Sea Freight Council NSW report titled “Sydney’s Intermodal Solution” at http://www.strategicdesign.com.au/files/sydneys_intermodal_system_pt_1_report_for_the_sfcnsw_june_2007.pdf

Figure 6 - Sydney Ports’ volumes by rail

Source: Sydney Ports Corporation; Logistics Review 2006-7

5.1.2 Perth The development of an intermodal system for the Perth metropolitan area has been actively pursued by the WA Government and the Fremantle Ports Authority (FPA). The main metropolitan corridor is from Forrestfield/Kewdale to Fremantle Inner Harbour. The Government has progressively invested in capacity for rail and port terminal infrastructure, and recently commissioned the North Quay rail terminal. Rail volumes through the port historically capture minimal import volumes which were moved to the Kewdale inter capital city terminal for transfers to larger trains and land-bridged to the east coast.

The WA Government has also recognised and supports the start-up costs, associated with the Perth intermodal system development and provides a volume subsidy to the operator for a defined period that reduces towards zero as volume increases. The programme is administered FPA.

A new intermodal terminal has been developed at Forrestfield on a site owned by CBH Limited, the dominant grain handler in Western Australia. The site is managed by an independent transport and logistics company who provide services to CBH and other third party customers. There are plans to expand the site over the next few years, and presently rail volumes have grown to more than 80,000 TEU’s per annum.

The North Quay rail terminal has been developed by FPA and is managed by an independent terminal operator. Trains arrive/depart according to agreed operating windows and containers are transferred to the stevedore facilities by Internal Transfer Vehicle (ITV) to Patrick and by road vehicle to DP World. This is a model which is also similar to the management of Port of Brisbane Multimodal Terminal at Fisherman Islands, which is undertaken by Port Corporation and allows trains to arrive/depart without being impeded by stevedore terminal operating priorities.

Figure 7 shows the relationship between the container port terminals and the North Quay rail terminal at Fremantle.

Figure 7 - Schematic layout of Fremantle Inner Harbour port and rail terminals

North Quay rail terminal

Container terminals

Rail corridor

Source: Fremantle Ports

5.1.3 Minto Intermodal Terminal; a case study The Minto Intermodal Shipping Terminal (MIST) is located in the southwest industrial zone of Sydney and is adjacent to the main southern rail line that links Sydney and Melbourne. It is 12 hectares in area, with future plans for expansion and has established warehousing (and tenants) on site. Its primary function is to receive import and export containers by rail and to distribute these by road vehicle within the west and southwest regions.

As a case study, MIST provides worthwhile perspectives on the evolution of an intermodal terminal.

a) The terminal was developed by road transport company Bowport Allroads (BPA), after its owners identified the emerging opportunities for rail transport. Since 1997, BPA had operated road shuttles between its Ingleburn site and Port Botany, and containers were distributed using smaller PUD vehicles to end-market destinations.

b) BPA and the NSW Freight Rail Corporation (FRC) established a joint venture in 1999 to develop an intermodal terminal on a 12 ha site at Minto. The development pursued a joint funding model, with FRC investing in the rail siding and main connections, and BPA acquiring the land and undertaking the remaining civil works.

c) The first train ran in May 2001 and volumes in the first year exceeded 20,000 TEU’s largely underpinned by the road-road shuttle volumes which were transferred to rail.

d) FreightCorp was later acquired by Toll and Patrick in 2004-5, to form Pacific National; a protracted dispute between PN and MIST on rail services and land ownership continued until 2006 which stalled growth.

e) By 2007, volume has grown to around 70,000 TEU’s and rail services are provided by Independent Rail, an affiliated company to MIST.

f) MIST’s key competitive advantage stems from its capacity to integrate client requirements with rail services in a highly competitive market. A key efficiency is the ability to store and accumulate empty containers and reuse the import container for the outbound export leg10.

g) The opening of the M7 Orbital from Liverpool and Minchinbury has improved the road links from Minto to the industrial zones west of Parramatta and therefore has expanded the catchment area for MIST northwards.

10 It is beyond the scope to provide details of commercial arrangements between MIST and their clients however its management has always been open to discussing the advantages of an intermodal system.

h) MIST management has been effective in engaging with freight forwarders who manage consignments on behalf of the end customer. While the aggregated cost of rail-terminal-road costs is only marginally below the prevailing road-direct prices, MIST’s clients are able to capture other strategic and inventory related costs arising from use of the rail service.

i) MIST differs from other Sydney metro terminals in that it is the only “Greenfield site” developed to date, whereas Villawood, Yennora and Camellia are “Brownfield sites” adapted from their previous uses. Comparisons with Somerton and CRT-Altona can be made.

5.2 Melbourne intermodal developments

5.2.1 Austrak GPT Somerton Intermodal Terminal. The Somerton facility commenced its development in December 1999. The total site measures 114 hectares and is located to the north of Melbourne at Somerton and between the Hume Highway and the main North South rail corridor and is an ideal location for an intermodal terminal. In 2004, GPT purchased 50% of the Somerton holdings from Austrak.

In 2004, Austrak/GPT entered into a long term lease with P&O Ports as the terminal and container park operator, managing the terminal leased area comprising some 22 hectares. The site also encompasses 6 x 680 metre long rail sidings including 4 sidings as dual gauge.

The Somerton development has attracted major clients such as, Coles, Visy, Master foods, Linfox/Kraft, Cable makers and Barret Burston Malting. These companies have entered into long-term tenancies to be co-located at a rail head to access interstate and port rail services.

While the terminal operation works well as a road-shuttle terminal, several unsuccessful attempts have been made to initiate port rail shuttles. Under available start-up volumes and operational arrangements, the cost of rail shuttles could be competitive with road haulage until the train arrives at the on-dock rail terminals. At the docks a rail transfer charge of up to $8011 is levied by the stevedores which then renders the rail service substantially less competitive. This issue was identified in the VFLC Freight Intermodal Efficiency Group Intermodal Policy Toolkit Report for Victoria, and other studies.

The following observations have been sourced from various industry stakeholders.

− There is network and terminal capacity within the Melbourne metropolitan rail network to support the operation of port shuttles immediately

− Industry demonstrates a desire to use the service when competitive with road, and shipping companies would agree to de-hire empty containers at suburban intermodal terminals12

− The current ARTC access agreements disadvantage port shuttle operation because the access arrangements (including flag fall charges) only contemplate long haul trains ignoring port shuttles

− This situation is compounded by recent increases in Victorian rail network access pricing by Victorian Essential Services Commission

− Private investment in Metropolitan intermodal terminals will be compromised because of the lack of certainty in securing train pathways

− Waterfront road carriers are generally able to avoid City Link tolls by using Pascoe Vale Road and other local roads thereby reducing road cartage costs

11 Analysis of charges levied on stevedores was dealt with in detail in a ministerial advice on 2 March 2007; ref MBN009285

12 The author has engaged with a number of shipping lines who have indicated a desire to pursue alternative options; this is currently under active consideration in Sydney and Perth.

5.2.2 CRT Altona The Altona site is located west of Melbourne, was developed by the CRT Group, and has been subsequently acquired by Queensland Rail (QR). CRT/QR has been attempting to operate port-rail shuttles since 2000 in a way which reflected its successful Sydney operations. The shuttles have been based on the CargoSprinter concept as well as more traditional rail methods using 350 metre trains.

Initially the CargoSprinter concept lacked scale and was encumbered with network delays impact service performance and port access charges that could not be offset, and the operation has been postponed.

CRT/QR reactivated the port-rail shuttles in 2005 by contracting with PN to provide the service 350metre train size. The operation failed due to unreliability of train pats on ARTC network, high start-up port access costs and operational complexity servicing separate stevedores13.

5.2.3 Industry developments The Melbourne Metropolitan Port Shuttle Group consisting of Austrak, CRT/QR, SCT, Westgate Ports and the Port of Melbourne was formed in 2006 with the intention of developing a pilot port shuttle programme underwritten by Vic Government and to be operated for a period of 12 months.

The idea of the pilot was to work out a shared service between the companies who would commit 60,000 TEU’s of freight and to rail access paths for one year. Operating performance is to be measured against agreed KPI’s and be closely monitored and recorded with a view of providing quantifiable data behind a range of issues such as infrastructure capability, service levels, market attractiveness and actual cost. Further discussion and agreement to deliver this pilot is still required between the operators and Government.

5.2.4 Competitive tensions The initial attempts at developing an intermodal system have also been impacted by the considerable industry tension which arose from the strategies of the stevedores to vertically integrate within the chain, the rapid consolidation of the above rail market dominated by Pacific National and the hostile acquisition of Patrick by Toll during 2005. During this period co-operation amongst service providers was low and impeded the opportunity for channelling volumes through nearby open access terminals.

5.3 Lessons from the growth of intermodal systems in Australia

A number of key conclusions can be drawn from this review and case studies. These relate to port interface, capitalisation, governance and institutional arrangements.

5.3.1 Port interface There are two ways the port-rail interface can be configured, as (a) on-dock sidings at the stevedore terminal and (b) via a separately managed rail terminal. For either method, it is necessary to transfer the container from the train to a road vehicle for delivery to a designated location inside the terminal. In the case of (a), the stevedores provide this service and levy charges onto the rail operator or shipper. For (b), the terminal operator arranges transport ideally as a stack-run to the stevedore terminal rather than normal front gate queuing arrangements.

The advantage of (b) is that the management of the rail terminal is undertaken in such a way that the operation of the train can be optimised, whereas for (a), the arrival/departure of the train can be impacted by the conduct of the stevedore.

The recommendation for the Melbourne Intermodal Terminal (as proposed under the Port@L strategy) was to “disconnect” the stevedore port terminal operations from the freight train as these activities are influenced by

13 The need to achieve balanced loading cannot be achieved easily between the stevedore terminals without going back to the Tottenham sidings to transfer the locomotive, adding to train crew man hours and cost.

different demand and service frequencies. As identified by Booz Allen Hamilton (2006, p27), the greatest opportunity for cost reform within the rail intermodal system relates to the port-rail interface.

5.3.2 Network and train path management Rail shuttles are a relatively underdeveloped technique for moving containers from port to customers located in a metropolitan market. The approach has often struggled to receive consistent support from track/network managers who are often conflicted by competing demand for passenger services or have work practices which favour long distance inter-capital city freight trains. Interestingly,

− Passenger trains receive considerable political focus and therefore achieve the highest priority

− Long distance inter-capital city freight trains yield the network manager with the greatest revenue outcome per unit of effort.

Metro shuttles are competing in a market which is sensitive to unit costs, speed and reliability, whereas long distance trains may be able to absorb minor fluctuations.

The service design needs to mimic the predictable arrival and departure generally achieved by the passenger trains necessitating a higher degree of management by network managers to accommodate higher service expectations. In addition, terminal and port operators need to ensure that their operations are concluded in a timely manner to allow the on time departure of the metro shuttle and to avoid any “knock-on” effects to other services.

Arrival and departure windows at Port Botany were developed to instil these disciplines into both rail and port operators. RailCorp, which manages the Sydney network, has become accustomed to managing metro shuttles however the process took sometime to achieve a degree of reliability.

Melbourne metro shuttle trains must be accommodated within the broad gauge system by Victrack and on the standard gauge network, ARTC needs to be planning for their inclusion and growth to 2035.

5.3.3 Capitalisation Intermodal systems have high fixed costs and economies of scale are critical to derive lower unit costs and to offset the additional handling costs. The intermodal systems that have developed in Sydney and Perth did so by first leveraging existing assets and avoiding any early over-capitalisation which risked severely impacting operator cash flows. As market share grows, the operators have gained confidence to make further investments.

These processes also allowed for the demonstration of a “proof of concept” model for respective governments and market stakeholders. The inter-organisational arrangements then had time to develop, which allowed each of the supply chain participants and government to conceptualise opportunities and understand processes.

The Minto intermodal terminal in Sydney commenced as a road-based terminal with movements to/from port using B-Double road vehicles. As the volume grew, the operator transferred this volume to a rail operation which continues today.

This strategy does, however, have its limitations, in that intermodal systems need to be delivered on a network wide basis, particularly as freight trains need to operate between two or more terminals. This requirement presents investment dilemmas for individual operators as the demand for investment capital is great and there is a risk of a competitive disadvantage arising from “free-riding” by competitors. This also relates to the issue of “open access” policy arrangements required by governments and whether firms are less likely to be motivated to invest because a competitive advantage cannot be guaranteed.

Governments are best placed to lead the development of intermodal systems and provide a platform within which the private sector invest and operate. Little effective progress has been made in the development of intermodal rail systems in metropolitan markets since the deregulation of rail in Australia. Where progress has been made, this has generally been because of deliberate government action; the efforts of the Western Australian government in this regard are significant.

5.3.4 System establishment Given these observations, Governments need to consider the most appropriate institutional arrangements they can put in place. The key issues influencing the development of suitable governance arrangements are:

− Intermodal systems serving international containers start and end at the port precinct thus providing an option for participation by port corporations. Investments in outer urban terminals however, need to be integrated into a network-wide model and within an overarching planning framework which considers not only site location but rail and road access corridors;

− The integration of open access terminals into a network, presents unique challenges for private sector investment, which has tended to pursue vertical integration strategies to gain market share. Intermodal terminals can provide the operator with considerable leverage and competitive advantage (Sd+D, 2007).

− Any urban freight rail system in Melbourne operating on broad gauge, needs to share the rail network with passenger trains, where the latter are given priority for trains paths and curfews. In most States, preferences are also generally given to interstate or regional trains over metropolitan freight trains. The model developed in this study is for efficient trains that mimic the performance of the passenger trains and coexist in the working timetable. This requires a different rail freight network model than is presently the case, and is also likely to be non-aligned with the traditional focus of ARTC towards long distance and higher revenue-generating inter-capital city freight trains.

− The long term planning requirements of urban terminals need to be deliberately managed as a network of rail and road freight hubs rather than the ad hoc development of brownfield sites that has emerged. The exception is Somerton which was conceived as a greenfield site. Long term, and particularly for the south east and outer western areas, the required intermodal terminals will require substantial site development and will also require reservations for access corridors and buffer zones.

− Historically, the provision of rolling stock equipment for metropolitan rail freight has been ad hoc (except for CRT’s Cargo Sprinter), with no attention to equipment (or environmental) standard. Consequently, the opportunity for the services to collectively behave as a “system” has not been taken, with operational behaviours focussed on individual traffics14.

− A metropolitan rail fleet should be standardised so as to provide a degree of network flexibility and predictable operating practice.

− The standardisation also offers procurement advantages with the potential for funding through the Government, with assets leased to operators.

− Ongoing control over title of the assets avoids the risk of an operator removing capacity from the market as is presently being experienced with PN’s withdrawal from the regional grain sector.

− Comparison of this system with the Connex passenger train system is instructive.

− A substantial proportion of the economic justification for an intermodal system relates to externality cost reductions. These benefits are however, not presently captured by private sector firms unless a carbon trading system is instituted to establish desirable price signals. Once a mature intermodal system exists, the commercial arrangements should be sufficient to generate returns to the operators whereas externality benefits will accrue to government, providing an incentive to directly invest in the network and terminal infrastructures if necessary.

14 The paucity in rollingstock standards was identified in the FIAB study in Sydney as a critical factor limiting system performance.

5.4 Summary

Metropolitan intermodal systems have been operating Sydney for almost a decade following the initiation of business development strategies of Freight Rail Corporation (NSW) and later improvements by the private sector including investments at intermodal terminals at Minto, Yennora, Camellia and Villawood. More recently, the WA Government and Fremantle Ports have initiated strategies for the Perth metropolitan region with investments in the North Quay rail terminal and Kewdale/Forrestfield.

Key observations can be drawn from an analysis of these jurisdictions and supporting case studies relating to the port interface, capitalisation and governance:

− There is a need to create a functional demarcation between the stevedoring dock and the rail freight system as these two operations are driven by different demand requirements and service frequencies. While interstate and regional rail operations can work effectively onto the on-dock sidings, there is a need to disengage port terminal operations from the operation of high cycle frequency urban freight trains. Brisbane and Fremantle ports operate with rail terminals separated from the stevedoring terminals while Sydney uses on-dock links with heavy shunting obligations.

− Start-up investment in intermodal terminals should avoid over-capitalisation by leveraging existing rolling stock and terminal capacity until consistent volume has been achieved. There is sufficient terminal capacity and assets in the Melbourne intermodal system to reactivate the rail intermodal system through, for instance, CRT Altona and Austrak Somerton, subject to assurances from ARTC as to train path availability and efficiency. The opportunity also exists to develop the Greens Road (Dandenong) terminal with modest investment, although demand modelling indicates that the CRT Altona and Greens Road terminals will not have sufficient capacity beyond 2015. The strategy of leveraging existing terminals can also be complimented by the emerging strategies using high-mass road-linehaul vehicles and road operations, in areas not serviced competitively by rail.

− To date, investments in intermodal systems have been somewhat atomistic, and a new network governance model is required to deliver a network focussed outcome

− Network investment to support the long term growth forecasts is beyond the capacity of a single private rail freight operator. Investments in open access terminals and other shared networks need to be supported by Government. Given the complexity in governance arrangements and the high start-up costs, Government is also uniquely suited to provide this and to facilitate further investment by the private sector.

− The development of a metropolitan and network wide intermodal, calls for selective government intervention and asset ownership aligned with the policy objectives of the Government. Victoria has suffered through the strategy of Pacific National to acquire rail operators and consolidate the above-rail market. Its withdrawal from key regional rail markets in Victoria leaves a deficiency in rail capacity. History therefore suggests this situation needs to be avoided, in developing and delivering the metropolitan intermodal strategy. A model with private sector operation of services and terminals with government holding ownership over critical rolling stock assets would be attractive. Government could also make key investments (through grants) in terminal sites on the proviso that open access governance arrangements were adopted by the terminal operators.

6. THE MELBOURNE URBAN FREIGHT TASK

The annual Victorian freight task is estimated to be around 494 million tonnes, with 89% of the task being performed by road based vehicles15. The Melbourne intra-metropolitan road freight task totals around 12 billion tonne kilometres across bulk and non-bulk freight, and urban, regional and interstate domestic movements. This equates to around 260 million tonnes per annum including tonnage to/from interstate and international destinations16.

Figure 8 - Victorian and Melbourne freight task 2004 (million tonnes per annum) (DOI 2004)

Source: DOI for the AusLink Melbourne Urban corridor study (AusLink, 2007)

The core freight markets operating in and through the Melbourne urban region are categorised in the following table with volume estimates following.

1. Domestic urban movements; by light commercial vehicle (LCV), rigid trucks and semi-trailers

2. Domestic inter-capital city or regional movements by land, by road and rail

3. Bass Strait cargo, using Webb Dock

4. International movements to/from Melbourne, through the Port of Melbourne

5. International movements land-bridged to regional Victoria or other capital cities by road and rail, also through the Port of Melbourne.

6.1 Task dimensions

Approximately 45 million tonnes relates to port traffic for bulk, non-bulk and container traffic, which is around 10% of the states’ road freight task. While a detailed segmentation of this task is beyond the scope of this report, a broad estimation can be assembled from various studies as shown in Table 5.

From Table 5, the largest proportion of freight movements within Melbourne is for rigid/semi movements of domestic freight, totalling over 170 million tonnes. In some instances, these movements represent a secondary

15 Victorian Freight Network Strategy, Draft 2; unpublished

16 AusLink Melbourne urban corridor study; against a transport task of 12 billion ntks, the average journey is 45 kms.

move for products sourced from international or interstate destinations. As stated earlier, intra-Melbourne domestic movements are dominated by road transport due to speed of delivery against fulfilment orders, or proximity of origin to destination.

Table 5 - Segmentation of intra-Melbourne freight task (indicative only)

Million tonnes Nominal Tonne kms trip length

Mt Mt Kms Mtkms %

Intra metropolitan domestic

LCV (small consignments) 20 45 900 8%

Rigid/Semi

- Manufacturing 64% 110

- Retail/wholesale 16% 28

- Other 20% 34

- Total 172 55 9,460 78%

Port related

Containers 32 25 800 7%

Other 13 15 195 2%

Interstate

Domestic 18 35 630 5%

Port-related 6 3 15 0%

Total Metropolitan 261 178 12,000 100%

Source: Complied from various sources including the AusLink Melbourne Corridor Study, DOI Victorian Freight Network Review and industry sources

Separate experimental analysis of origin-destination data from the Freight Movement Model indicates that semi- trailer movements within Melbourne total around 50-60 million tonnes per annum (Hassall, 2007)17. This implies that the balance of intra-Melbourne freight being serviced by rigid vehicles (6-15 tonne capacity) totals around 100-110 million tonnes.

6.2 Market attractiveness for intermodal networks

The previous section identified 5 broad freight markets operating within or to/from the Melbourne region. Assessment of the task volumes shown in Table 2 and Table 5 lead to the following conclusions:

1. While the urban domestic task is large and represents almost 80% by volume, much of this segment is comprised of small consignment sizes, is time or temperature sensitive, or requires short travel distances where the cost of double handling through a terminal negates any consolidation advantage. As outlined in section 4.2 on page 25, a future opportunity may emerge for cross-urban movements of domestic freight by rail, once a mature urban rail freight network exists. For example, movements between more distant regions such as Geelong and Dandenong may be physically possible although will depend on scale and volume and the prevailing road pricing.

17 This experimental data analysis aligns with the ABS Freight Movements 9220.0 analysis of 50 million tonnes for semi-trailer movements as at 2001.

2. The market for intermodal services via the Dynon rail terminal to interstate destinations is well developed for east-west traffic (around 90% market share), although continues to experience vigorous market competition from the road sector for direct door-to-door services on the east coast (around 15- 20% market share). Planned rail network enhancements supported by new pricing regulatory changes will provide some upside for the rail intermodal sector. The location of the interstate terminal at Dynon introduces inefficient operating costs for the dominant rail operators as well as focuses considerable heavy vehicle traffic in the immediate port area and surrounding residential suburbs. It is estimated that around two-thirds of present road freight movements to/from the port area is not associated with the port, and considerable congestion can be relieved if the interstate terminal was relocated to the west or north of Melbourne.

3. Rail movements of regional domestic freight such as horticulture, and consumer or industrial goods have declined markedly, and now regional road carriers now vigorously defend their market shares. A strong market loyalty is also evident towards these carriers at a rural level.

4. Domestic distribution to Tasmania requires shipment through Webb Dock and emulates the inter- capital city movement, except that shipping services substitute rail services. It is estimated that around 60% of the volume moved to/from Tasmania is linked to warehousing within Melbourne, and movement between those warehouses and Webb Dock are generally undertaken by road to meet time-sensitive shipping schedules and/or end market demands.

5. International containers as imports/exports into the Melbourne urban region are suited to an intermodal system, whether using rail-road or road-road networks. Road-direct services from the port to the end customer will still occur for catchments within proximity to the port. Opportunities for rail-road systems will emerge for catchments within proximity to the rail network and located sufficiently far enough from the port to achieve the optimal distance-handling-PUD cost relationships. Where rail systems are not present or cost effective, then road-road intermodal systems using distributed hubs in strategic locations will serve to increase vehicle utilisation.

6. Export movements of commodities by rail to port should remain captive to the intermodal networks, given the freight density and less time-sensitive nature of the consignments.

6.3 Summary

The market most suited to an urban intermodal network is the international containers through Swanson. This may be followed at a later date by the opportunity to augment this task with interstate intermodal containers and/or the general urban distribution task.

The larger and more diverse general domestic task presents a longer term opportunity. The penetration of that market however will be incremental and high risk and therefore the general urban task is not an ideal foundation customer.

A more strategic approach is to leverage off the excess capacity and fixed costs in an existing international container focussed intermodal system to ‘cherry pick’ general urban tasks in an opportunistic manner.

The recommended strategy going forward is to develop a network rail intermodal terminal supplemented by a network of road freight hubs to service where it can, compete in the short to medium term, and to develop a robust base network (derived from the international intermodal network) towards future opportunities, whatever emerges.

This approach will require a proof-of-concept with strategies to address infrastructure capacities and deficiencies, underpinned by appropriate governance and regulatory arrangements. This will improve operating costs and market pricing and lead to a take-up of rail-road and road-road distribution systems. Increased road vehicle utilisation, reduced congestion and lower externality costs will ensue. These aspects are analysed in further detail in the following sections.

7. ANALYSING THE URBAN INTERNATIONAL CONTAINER TASK

The previous section analysed the characteristics for the main freight segments operating in Melbourne and identified that the international containers market is the initial target volume for a metropolitan network of intermodal terminals.

This section analyses Melbourne’s international container market in relation to potential modal share. Four key tasks are undertaken to distribute forecast volumes by geography and modal choice:

1. Confirm the headline demand associated with imports and exports in international containers over time to year 2035

2. Segment the headline demand into smaller geographical areas

3. Estimate market shares for the discrete modal types; namely (i) road-direct, (ii) road-road intermodal, and (iii) rail-road intermodal systems. This is done through four sub tasks:

a. Confirm the scope and configuration of the enabling infrastructure relative to spatial demand18

b. Calculate the comparative economic costs of each transport option under specific circumstances

c. Apply a ‘logit’ model to each geographical area to calculate expected modal share based on cost comparisons

d. Determine modal share by LGA, and identify potential clusters for each modal type.

The following sections summarise the output from each task. The analysis also integrates a number of earlier studies and has leveraged the capability of the DOI Freight Network Model.

Note: the financial analyses in section 11 are based on a timeframe for years 2010 to 2035. The spatial demand analysis presented here is based on years 2006 to 2031 timeframe consistent with the input data listed above.

7.1 Confirming headline demand

Forecast demand through the Port of Melbourne is based on key planning documents (DOI, 2004; Meyrick & Associates & ARUP, 2006; PoMC, 2006, 2007)19. For the metropolitan region, international container freight demand will grow from around 1.6 million TEU’s to 5.5 million TEU’s by 2035.

The headline demand volumes are summarised in the table below.

Table 6 - Forecast demand for Melbourne international containers

2010 2015 2020 2025 2030 2035 Thousands of TEU’s per annum Urban Volumes 1,608 2,114 2,712 3,481 4,376 5,506 Regional/Interstate 454 596 765 982 1,234 1,553 Total International Containers 2,062 2,711 3,476 4,462 5,610 7,059 Annualised Growth 5.6% 5.1% 5.1% 4.7% 4.7%

18 It is assumed that the intermodal clusters would be generally located near existing or future rail terminals.

19 This study has not sought to re-evaluate these forecast volumes.

This breakdown is based on application of different growth rate estimates for urban and regional exports and imports over time. Urban freight will grow strongly due to population and consumption growth, while regional export volumes will experience lower, and less predictable, growth due to climatic factors and other limitations such as land productivity and global agricultural trade instability.

Figure 9 - Forecast international container volumes through the Port of Melbourne

8,000 7,000 6,000 5,000 4,000 3,000 (000's TEUs per TEUs (000's annum) 2,000 1,000 - 2010 2015 2020 2025 2030 2035

7.2 Segmenting spatial demand

Allocating the relevant demand across metropolitan Melbourne has primarily used three data sources; namely;

1. The SKM Origin-Destination Study for Port of Melbourne containers (SKM, 2003b, 2003c)

2. Employment forecasts for years 2006, 2021 and 2031, focussed on the manufacturing, wholesale trade and transport sectors

3. Data from the DOI Freight Network Model relating to current and future travel distances and time

The analysis was conducted at the Statistical Local Area (SLA) level of division which provided 75 spatial zones within the Melbourne urban region. The analysis also provided a view of the origin and destination of demand and reconfirmed the presence of the three dominant freight generation clusters.

Table 7 - Distribution of freight demand – 2010

Distribution ‘000 TEUs % all % international % metro Outer North 309 12% 155 19% Southeast/Dandenong 742 30% 36% 46% Outer West 351 14% 17% 22% Inner Port 206 85 105 13% Total Metro 1608 655 78% 100% Regional/Interstate 454 18% 22% Total International 2062 835 100% Coastal/Tasmania 416 17% Total port traffic 2478 100% Various sources: SKM, PoMC, DOI

A broad regional breakdown of the estimated 2010 urban freight demand is calculated through the application of different growth rates to industrial activity in each SLA, which shows that 46% is based in the Southeast, 19% in the North, 22% in the West and 13% in the inner port area. While urban development is expected to be strongest in the west and north areas, driven by investment arising from the Outer Growth Area strategies, the southeast area will continue to experience growth.

Figure 10 - Current and projected industrial employment

2006 2031

7.3 Scope of rail networks and terminals

The road/rail modal share analysis reflects the scope of the existing rail network, as demand which falls outside the cost efficient catchment area for a terminal will use road transport as the least cost pathway. A rail intermodal strategy needs to leverage existing terminal networks to build “sunrise volumes” before sufficient critical volume is assembled to underpin larger investment.

The following diagram outlines the scope of the existing and potential rail network and location of current and potential future terminals.

Figure 11 - Scope of Melbourne rail network and terminals served by rail

7.4 Segmenting modal choice

Sustainable intermodal systems generally optimise the relationship between linehaul, terminal handling and PUD activities within defined catchments. It is therefore necessary to determine the demand clusters within the various catchments surrounding key potential freight hub locations. Proximity to key road corridors is also significant.

The analysis, models the economic cost by mode/pathway as the basis of comparison rather than using observed transport prices, which can vary widely according to commercial drivers - “spot” pricing, marginal pricing, opportunistic, and monopoly-based pricing can all occur. Modal shares for road-direct, rail-road or road- road intermodal freight hubs are modelled using cost elasticity analysis.

Real world divergence from the modelled outcomes will occur, due either to pricing initiatives or adjustments to underlying cost assumptions. The practice of market pricing for urban road freight remains an area requiring greater analysis. Rail service pricing tends to be more rigid and structured than road transport.

Within the scope of the study timetable, some benchmarking of the unit costs and utilisation assumptions has been undertaken.

7.4.1 Calculating the comparative costs of various transport pathways Determining the modal share for the import/export TEU demand for each SLA involves a direct comparison of the transport costs for each mode, and use of a logit function to model choice on this basis. This modal analysis was undertaken using the following assumptions:

− A ‘mature’ intermodal system exists

− Customers in each SLA face a binary choice between a rail-based intermodal solution and the best choice road option which is the least cost of:

o Road direct from port to customer (or vice versa for exports)

o B-double linehaul to an IMT followed by delivery to customer (or vice versa for exports)

Costing methodology

Road and rail costing models have been developed and applied to the forecast volumes generated in each SLA, with regard to the distance of businesses in each SLA from the nearest rail and road hub. Cost models calculate transport cycle times based on:

− Average fixed time at depots and waiting in queues, generally associated with collecting and delivering cargo; this also includes the handling of empty containers within the cycle

− Variable time being a function of distance and average travel speed

The cycle time for each scenario is constructed from first principles using the DOI’s Freight Network Model (FNM) data. For the rail movements, estimates of transit time for each line section were made with the assistance of PTD and VicTrack. Assumptions were applied for port waiting times, loading and unloading times and downtimes. These assumptions were based on experience and consultation with the PoMC and industry.

For road movements, time and distance estimates were obtained from the FNM along with industry estimates of port waiting times. These estimates are applicable to port-customer, port-to-hub and hub-to-customer movements for each SLA. A representation of the port-customer travel times is shown below:

Figure 12 - Freight Network Model Results – Road Travel Times to/from Port 2006

Based on these cycle times the road and intermodal system costs per TEU for each SLA are modelled using operational road and rail intermodal terminal models, with up to date unit costs for the capital and rolling stock costs, fuel, labour, maintenance government charges, access prices and other costs. Externality costs are not integrated at this stage of the analysis. These models also draw on experience with similar modelling studies in Victoria and NSW which had actively engaged with industry in regard to unit costs.

Table 24 and Table 25 in the Appendix on pages 94-95 provide details of the unit costs and other assumptions used in the modelling.

The rail cost model also assumes that, given the high demand for container movements, operators will be able to flexibly move rolling stock between corridors to achieve high levels of utilisation. This prevents a specific number of rakes being ‘captive’ to an IMT and reducing its utilisation.

The cycle time assumptions, drawn in part from the Freight Network Model, for the largest SLA in each terminal catchment zone are shown below.

Table 8 – Modelled Cycle Times by Mode Somerton Dandenong Altona Hume (C) - Gr. Dandenong (C) Hobsons Bay (C) - Highest Demand SLA Broadmeadows Bal Altona Travel time (full one-way trip) 0.62 1.10 0.34 Linehaul Cycle Port collection/delivery 1.00 1.00 1.00 Time Intermodal terminal 0.50 0.50 0.50 Total 2.12 2.60 1.84 B-Double Semi Distribution (ex-IMT round trip) 0.21 0.24 0.23 Shuttles Intermodal terminal 0.50 0.50 0.50 Delivery Truck Customer unload/load 1.00 1.00 1.00 Cycle Time Empty container park 1.00 1.00 1.00 Total 2.7 2.7 2.7 Total Cycle time 4.8 5.3 4.6 Travel time (full one-way trip) 1.08 1.42 0.70 Rail Cycle Time Total total Cycle Time 8.00 8.00 8.00 Semi Distribution (ex-IMT round trip) 0.21 0.24 0.23 Rail Linehaul Intermodal terminal 0.50 0.50 0.50 Delivery Truck System Customer unload/load 1.00 1.00 1.00 Cycle Time Empty container park 1.00 1.00 1.00 Total 2.7 2.7 2.7 Total Cycle time 10.7 10.7 10.7 Travel time (full round trip) 1.18 1.61 1.14 Port collection/delivery 1.00 1.00 1.00 Delivery Truck Road Direct Customer unload/load 1.00 1.00 1.00 Cycle Time Delivery Empty container park 1.00 1.00 1.00 Other delays 0.15 0.15 0.15 Total Cycle time 4.34.764.29

Using the models, comparative road-direct, road freight hubs and rail-IMT costs per TEU are derived. Table 9 details the results of the cost comparison at the LGA level while Figure 13 presents the results at the more detailed SLA level.

Table 9 - Intermodal System Cost Advantage over road direct (for 2006)

Cost Cost Cost LGA LGA LGA Advantage Advantage Advantage Banyule (C) -12%Hume (C) 22% Mornington P'sula (S) 39% Bayside (C) 0%Kingston (C) 8%Nillumbik (S) 8% Boroondara (C) -7%Knox (C) 7%Port Phillip (C) -6% Brimbank (C) 3%Manningham (C) -15%Stonnington (C) -7% Cardinia (S) 21%Maribyrnong (C) 3%Whitehorse (C) -7% Casey (C) 23%Maroondah (C) -3%Whittlesea (C) 6% Darebin (C) -4%Melbourne (C) -8%Wyndham (C) 3% Frankston (C) 24%Melton (S) 22%Yarra (C) -8% Glen Eira (C) -2%Monash (C) -2%Yarra Ranges (S) 16% Gr. Dandenong (C) 26%Moonee Valley (C) -5% Hobsons Bay (C) 20%Moreland (C) -5%

Figure 13 - Intermodal System Modelled Cost Advantage

The results show that an efficient rail-based intermodal system could offer significant cost advantages over direct road deliveries and road hub operations in areas where the customer is located within reasonable proximity to the rail terminal. Port movements to/from the inner areas are best suited to the direct road option.

7.4.2 Determine the relationship between cost and modal choice The analysis to determine mode share was undertaken at the statistical local area level, for the 75 SLA’s in the Melbourne urban area.

Under the hybrid scenario, three land transport pathways exist between port and end-customer:

a) Rail linehaul to/from port and intermodal terminal, with road PUD to end customer

b) Road shuttle (using higher mass limited trucks) to a road hub, with secondary road PUD movement to end customer

c) Road direct between port and customer

The modal share estimation methodology was limited by the need to use a binary probabilistic model. The following approach was therefore adopted, which considered that options (b) and (c) are dynamically interchangeable over time.

− The analysis started with a binary choice for road pathway for (b) and (c) based on the lowest economic cost

− The lowest economic cost for road was then compared with the economic cost of the rail option via most appropriate IMT location

− The cost difference between rail and the lowest road option assessed and applied to a logit model to derive a probabilistic outcome.

The limitation of this approach is that is might overstate the benefit of road hubs in some SLA’s rather than road direct services. It does however, arrive at the lowest possible cost option of road for comparison with rail. The following diagram summarises the choice modelling.

Figure 14 – Modal choice pathways based on economic cost by mode and SLA

Rail IMT and road PUD

Road IMT and road PUD

Choice 2: Based on the Choice 1: What is the lowest cost pathway lowest cost road pathway by road for each SLA; an “either/or” choice and the rail cost, what is the modal share outcome by SLA using logit curve Road direct (port-door)

With cost relativities determined, the market share for the rail-based intermodal system is modelled using a simple logit function.

The standard logit function, illustrated in Figure 15, is based on an assumption that when the total generalised costs for both modes are equal (and priced equally) then each will attract 50% market share. Recognising that the transport and handling costs in this system do not reflect the full generalised cost or externalities,20 the function is biased towards road using the calibrated coefficients.

Figure 15 - Modal Share Logit Function

100%

90% Calibrated Logit 80% e Standard Logit 70% Origin

60%

50%

40%

30%

Intermodal System Market Shar Market System Intermodal 20%

10%

0% 60% 70% 80% 90% 100% 110% 120% 130% Intermodal Cost as % of Road Cost

20 The customer will base their modal decision on cost, timeliness, service and other non-price factors.

A recent study (Booz Allen 2006) used a 35% estimate for rail share at price parity. This is considered overly optimistic, and a more conservative approach is taken here.

The standard logit function has therefore been calibrated here with the following assumptions:

- At price parity, rail will achieve a market share of approximately 10-15%

- Rail will never achieve a market share of greater than 75%

- Rails market share will be zero if it suffers a 10% price disadvantage.

There are no firm data sources available for the population of such curves. The recent industry trends, market knowledge and other studies have been used as a base in estimating the relevant coefficients of the function. The assumptions shown above have been confirmed in discussion with industry contacts. Conversely, there is evidence that significant freight attractors/generators may opt for rail over road at price parity due to other operational benefits such as staging supply and avoiding additional warehousing and property costs. Thus at maturity, an efficient rail intermodal system might attract greater share than modelled conservatively here.

The following table shows the results of the analysis for 75 SLA’s. Values shown are economic costs which are lower than commercial costs since margin and taxes are subtracted. Spot pricing and price gouging are discounted as being unsustainable over the medium to long term.

For rail-IMT and road-hub pathways, costs include terminal CAPEX and handling costs and road PUD costs to form a comparative door-to-door cost.

Table 10 - Modelled results and mode choice

Direct Road RoadHubs Least Cost Road option Rail via IMT Market Share SLA description IMT Location TEU pa Rail/Road Cost Cost Option Cost Cost % to road % to rail Coefficient Banyule (C) - Heidelberg Somerton 4,896 262 312 Direct 262 305 1.17 1.05 0.00 Banyule (C) - North Somerton 1,072 327 311 Somerton 311 304 0.98 0.84 0.16 Bayside (C) - Brighton Altona 407 285 297 Direct 285 302 1.06 0.95 0.05 Bayside (C) - South Dandenong 1,650 323 334 Direct 323 318 0.98 0.85 0.15 Boroondara (C) - Camberwell N. Altona 574 286 304 Direct 286 309 1.08 0.97 0.03 Boroondara (C) - Camberwell S. Altona 947 286 300 Direct 286 305 1.07 0.95 0.05 Boroondara (C) - Hawthorn Altona 1,403 279 294 Direct 279 299 1.07 0.96 0.04 Boroondara (C) - Kew Altona 612 278 295 Direct 278 300 1.08 0.97 0.03 Brimbank (C) - Keilor Rockbank 20,038 293 294 Direct 293 293 1.00 1.00 0.00 Brimbank (C) - Sunshine Altona 23,479 278 259 Altona 259 264 1.02 0.90 0.10 Cardinia (S) - North Lynbrook 2,809 392 363 Dandenong 363 325 0.90 0.73 0.27 Cardinia (S) - Pakenham Lynbrook 6,911 395 345 Dandenong 345 314 0.91 0.74 0.26 Cardinia (S) - South Lynbrook 1,855 455 383 Lynbrook 383 331 0.86 0.68 0.32 Casey (C) - Berwick Lynbrook 5,040 370 337 Lynbrook 337 273 0.81 0.59 0.41 Casey (C) - Cranbourne Lynbrook 4,920 374 300 Lynbrook 300 236 0.79 0.55 0.45 Casey (C) - Hallam Dandenong 15,463 329 336 Direct 329 272 0.83 0.62 0.38 Casey (C) - South Lynbrook 2,965 392 365 Lynbrook 365 302 0.83 0.61 0.39 Darebin (C) - Northcote Altona 2,919 276 305 Direct 276 298 1.08 0.97 0.03 Darebin (C) - Preston Somerton 8,407 286 299 Direct 286 292 1.02 0.90 0.10 Frankston (C) - East Lynbrook 222 386 338 Lynbrook 338 274 0.81 0.59 0.41 Frankston (C) - West Lynbrook 2,320 392 364 Lynbrook 364 300 0.83 0.61 0.39 Glen Eira (C) - Caulfield Altona 1,022 283 353 Direct 283 301 1.07 0.95 0.05 Glen Eira (C) - South Altona 960 319 361 Direct 319 310 0.97 0.83 0.17 Gr. Dandenong (C) - Dandenong Dandenong 74,518 323 300 Dandenong 300 237 0.79 0.55 0.45 Gr. Dandenong (C) Bal Dandenong 86,871 318 301 Dandenong 301 237 0.79 0.55 0.45 Hobsons Bay (C) - Altona Altona 194,476 282 276 Altona 276 224 0.81 0.59 0.41 Hobsons Bay (C) - Williamstown Altona 67,260 272 277 Direct 272 225 0.83 0.62 0.38 Hume (C) - Broadmeadows Somerton 104,927 290 234 Somerton 234 228 0.97 0.83 0.17 Hume (C) - Craigieburn Somerton 55,071 300 235 Somerton 235 229 0.97 0.83 0.17 Hume (C) - Sunbury Somerton 2,975 326 312 Somerton 312 306 0.98 0.84 0.16 Kingston (C) - North Dandenong 109,641 329 365 Direct 329 302 0.92 0.76 0.24 Kingston (C) - South Lynbrook 3,411 345 362 Direct 345 299 0.87 0.68 0.32 Knox (C) - North Lynbrook 56,601 348 380 Direct 348 316 0.91 0.74 0.26 Knox (C) - South Lynbrook 42,534 320 369 Direct 320 305 0.96 0.81 0.19 Manningham (C) - East Lynbrook 132 343 393 Direct 343 329 0.96 0.82 0.18 Manningham (C) - West Altona 1,176 295 396 Direct 295 345 1.17 1.05 0.00 Maribyrnong (C) Altona 28,956 266 309 Direct 266 258 0.97 0.83 0.17 Maroondah (C) - Croydon Lynbrook 8,170 350 421 Direct 350 358 1.02 0.90 0.10 Maroondah (C) - Ringwood Lynbrook 3,621 342 418 Direct 342 356 1.04 0.92 0.08 Melbourne (C) - Inner Altona 11,044 264 310 Direct 264 286 1.08 0.97 0.03 Melbourne (C) - Remainder Altona 36,342 265 310 Direct 265 285 1.08 0.97 0.03 Melbourne (C) - S'bank-D'lands Altona 5,495 264 313 Direct 264 285 1.08 0.97 0.03 Melton (S) - East Rockbank 435 300 320 Direct 300 265 0.88 1.00 0.00 Melton (S) Bal Rockbank 3,522 349 348 Rockbank 348 267 0.77 1.00 0.00 Monash (C) - South-West Dandenong 27,852 299 368 Direct 299 306 1.03 0.91 0.09 Monash (C) - Waverley East Dandenong 4,400 309 367 Direct 309 304 0.98 0.85 0.15 Monash (C) - Waverley West Dandenong 39,773 300 370 Direct 300 307 1.02 0.90 0.10 Moonee Valley (C) - Essendon Altona 6,451 269 303 Direct 269 285 1.06 0.95 0.05 Moonee Valley (C) - West Somerton 6,156 281 299 Direct 281 292 1.04 0.92 0.08 Moreland (C) - Brunswick Altona 32,179 271 301 Direct 271 290 1.07 0.96 0.04 Moreland (C) - Coburg Somerton 26,726 277 296 Direct 277 289 1.04 0.93 0.07 Moreland (C) - North Somerton 5,465 281 290 Direct 281 283 1.01 0.88 0.12 Mornington P'sula (S) - East Hastings 1,509 413 348 Hastings 348 285 0.82 1.00 0.00 Mornington P'sula (S) - South Hastings 456 633 410 Hastings 410 346 0.84 1.00 0.00 Mornington P'sula (S) - West Hastings 623 606 385 Hastings 385 322 0.83 1.00 0.00 Nillumbik (S) - South Somerton 989 335 321 Somerton 321 314 0.98 0.84 0.16 Nillumbik (S) - South-West Somerton 409 344 313 Somerton 313 306 0.98 0.84 0.16 Nillumbik (S) Bal Somerton 255 362 326 Somerton 326 319 0.98 0.84 0.16 Port Phillip (C) - St Kilda Altona 3,508 275 344 Direct 275 293 1.06 0.95 0.05 Port Phillip (C) - West Altona 17,935 267 317 Direct 267 284 1.06 0.95 0.05 Stonnington (C) - Malvern Altona 1,033 284 354 Direct 284 302 1.07 0.95 0.05 Stonnington (C) - Prahran Altona 920 273 343 Direct 273 292 1.07 0.96 0.04 Whitehorse (C) - Box Hill Altona 1,938 295 366 Direct 295 315 1.07 0.95 0.05 Whitehorse (C) - Nunawading E. Lynbrook 2,017 308 389 Direct 308 325 1.06 0.94 0.06 Whitehorse (C) - Nunawading W. Lynbrook 2,674 302 388 Direct 302 325 1.08 0.96 0.04 Whittlesea (C) - North Somerton 674 349 301 Somerton 301 294 0.98 0.84 0.16 Whittlesea (C) - South Somerton 11,100 301 293 Somerton 293 286 0.98 0.84 0.16 Wyndham (C) - North Altona 31,545 296 339 Direct 296 288 0.97 0.84 0.16 Wyndham (C) - South Altona 879 301 344 Direct 301 293 0.97 0.83 0.17 Wyndham (C) - West Rockbank 643 314 358 Direct 314 304 0.97 1.00 0.00 Yarra (C) - North Altona 16,854 270 309 Direct 270 292 1.08 0.97 0.03 Yarra (C) - Richmond Altona 7,503 271 344 Direct 271 293 1.08 0.97 0.03 Yarra Ranges (S) - Central Dandenong 499 696 511 Somerton 511 453 0.89 0.70 0.30 Yarra Ranges (S) - North Somerton 441 627 432 Somerton 432 425 0.98 0.70 0.30 Yarra Ranges (S) - South-West Lynbrook 5,949 366 391 Direct 366 327 0.89 0.70 0.30

7.4.3 Projecting to 2031 The analyses presented above are based on various inputs datasets for 2006. In order to project the demand results across the full 25 year time frame, the same analysis has been undertaken for the years 2021 and 2031.

Detailed time and distance estimates from the Freight Network Model were provided for each SLA over time, accounting for congestion factors and scheduled road infrastructure developments.

Other factors which have been varied over time include unit costs such as labour and fuel and operational characteristics such as average truck utilisation. Further discussion is provided in the Working papers in the Appendix.

7.4.4 Demand Analysis Results – Rail Demand by SLA The result of the demand segmentation process is a set of estimates and projections for rail-based intermodal demand per SLA, along with estimates for road hubs and direct road volumes. The initial potential task for the rail system is estimated at 392,000 TEU’s per annum in 2010. Road hubs could expect to handle around 483,000 TEU’s. The residual volume to be carried by direct port-customer truck services would be 730,000 TEU’s per annum.

Projected forward to 2035, the estimates show strong growth in rail-favoured intermodal traffic, particularly to the Dandenong IMT. Total intermodal rail-favoured freight demand in 2035 is estimated at 1.5 million TEU’s per annum, at an annual growth rate of 5.6 per cent. Road deliveries would increase at an annualised rate of 4.6 percent.

Table 11 summarises the results of the modelling. The analysis shows that for the metropolitan area, a rail share of 25-30% is realistic based on the adoption of a hybrid model and the calculated road/rail cost relativities. This share would increase in the event that externality cost differentials were also reflected in transport pricing, i.e. through a carbon trading scheme.

When considered with the rail share for regional and interstate traffic which is presently around 75% and forecast to remain high, an overall port-related freight result approaches 40% rail share.

Figure 16 on page 59 shows the distribution of rail share by SLA for 2010 and 2035.

Table 11 – Results of total intermodal system demand

2010 2025 2035 Units Road Road Road Road Road Road Total Rail IMT Total Rail IMT Total Rail IMT direct hubs direct hubs direct hubs North (modelled) 000 TEUs 283 51 188 44 616 65 435 116 974 89 688 197 West (modelled) 000 TEUs 651 319 134 198 1517 676 313 528 2565 1158 541 867 Southeast (modelled) 000 TEUs 579 268 161 151 1136 525 298 313 1812 869 460 483 Other Areas (modelled) 95 95 0 0 215 215 0 0 153 153 0 0 Metro total 000 TEUs 1608 732 483 392 3483 1481 1045 956 5504 2269 1689 1546 % subtotal 100% 46% 30% 24% 100% 43% 30% 27% 100% 41% 31% 28%

Regional/interstate/other 000 TEUs 549 100 49 400 1194 270 124 800 1708 360 148 1200 (estimates) 100% 18% 9% 73% 100% 23% 10% 67% 100% 21% 9% 70%

Total 000 TEUs 2062 832 532 792 4462 1751 1169 1756 7059 2629 1837 2746 % total 100% 40% 26% 38% 100% 39% 26% 39% 100% 37% 26% 39%

Note: values shown in italics for regional/interstate are derived based on forecast growth and extrapolating modal share; current port rail volumes are dominated by regional and interstate traffic and total around 350,000 in 2007.

Figure 16 - Rail Based Intermodal System Demand 2010 and 2035 2010 2035

TEUs per annum Altona Dandenong Somerton 250,000 to 500,000 50,000 to 250,000 10,000 to 50,000 5,000 to 10,000 2,000 to 5,000 1,000 to 2,000 0 to 1,000

No rail volumes originating/destined for SLA

7.5 Distribution of demand and modal share

Key observations from these results include:

− In the initial years, rail-favoured volumes are clustered tightly around the intermodal terminal sites at Somerton, Dandenong and Altona. Somerton in particular has over 90% of its potential volume originating in the Broadmeadows/Craigieburn area. The western system is somewhat less concentrated with 60 per cent of demand (initially) concentrated in the Altona/Williamstown areas.

− Dandenong has a more disparate demand pattern with 60% spread across the Greater Dandenong, Knox and Kingston areas. The remainder is dispersed across a wide region including the Yarra Ranges, Casey and Pakenham. The opening of EastLink provides rapid access between these areas and the Dandenong terminal site for the low volumes of freight involved.

− Projections of rail demand to 2031 show a ‘hollowing out’ effect away from the port with demand growing strongly in places such as Casey, Pakenham and Berwick and Sunbury. This growth is additional to continued strong demand close to the intermodal terminals.

− In future, it is likely that there will be some induced industrial activity close to the intermodal terminals, arising from the cost savings of associated reduced transport time to the terminal. Given the lack of available land however, this can only occur when non-terminal related businesses are replaced by terminal related businesses which generate container trade. This effect, therefore, will be most apparent at greenfield ‘freight village’ developments such as at Somerton.

The following diagrams show the current and future demand for each LGA and by transport mode type. The size of the semicircles denotes the total volume.

Figure 17 - Distribution of demand by LGA and mode type for 2010

Mode of Delivery 2010

Direct by Road to/from port Road to Hub to/from Port Rail to IMT to/from Port

Figure 18 - Distribution of demand by LGA and mode type for 2035

Mode of Delivery 2035

Direct by Road to/from port Road to Hub to/from Port Rail to IMT to/from Port

7.6 Summary

The Port of Melbourne is forecast to handle 2.06 million international TEU containers in 2010. Approximately 1.6M of these will be to/from the urban Melbourne market with the remainder from the regional and interstate market. Container throughput is projected to increase at an annualised rate of 5.7 per cent initially, slowing to 4.7 per cent by 2035. The urban container task is projected to be over 5.5 million TEU’s by 2035.

A broad regional breakdown of the “urban only“ demand shows that 46% of the metro demand is based in the Southeast, 19% in the North, 22% in the West and 13% in the inner port area. Whilst the urban development is expected to be focussed in the west and north areas, driven by investment arising from the Outer Growth area strategies, the southeast area will continue to have strong latent demand.

Cost modelling was undertaken based on this long term demand profile. The cost per TEU was modelled for each statistical local area for 3 possible options; road direct, road line-haul and rail line-haul. Both line-haul options included terminal costs and secondary pickup-and-delivery trucking costs. Results show that the intermodal system gives rail a cost advantage over direct road deliveries in the areas surrounding the proposed terminals. An intermodal system is not cost competitive in the inner city and port zone.

The market share gained by rail and the least cost road option, was modelled using a logit function calibrated using current market and industry knowledge. The resultant market share modelling shows that rail is likely to gain a 24 per cent market share initially, increasing to 28 per cent by 2035. The road-line haul component is projected to similar volumes to the rail system.

8. STRATEGIC ELEMENTS

This section outlines the current and future strategic elements of the port-related freight supply chains, and identifies the critical adjustments required for establishing a sustainable metropolitan intermodal network. A conceptual framework of the current network elements is outlined in Figure 19.

Figure 19 - Strategic elements of current port linked transport networks

Metro road and rail network links to Metro rail western demand cluster terminals Truck queuing (Altona and Somerton) Port terminals Metro road and rail network links to Webb northern demand cluster Road Empty transport & container freight hubs parks (various) PUD to Metro road and rail network links to end-market south-eastern demand cluster origins and destinations Dynon North Port terminals (PN) Swanson Rural road and rail network links Rural and interstate Dynon South terminals (PN) Interstate rail corridors; (MLB-SYD & MLB-ADL)

Networks Network staging

On dock sidings

Port queuing and circulation The current network represents an amalgam of past planning decisions and does not respond to the fundamental changes which have occurred in recent years in freight demographics and technologies for the Melbourne urban freight task. Some strategic adjustments are required to the network to underpin delivery of sustainable intermodal services. These are summarised in Figure 20.

Figure 20 - Future strategic elements for port and interstate networks

Metro road and rail network links to Metro rail western demand cluster terminals Truck queuing (Altona and Somerton) Empty Port terminals Metro road and rail network links to container parks Webb Empty northern demand cluster ContainerRoad container transportparks & & parks freight hubs (minimal) (various) Metro road and rail network links to south-eastern demand cluster Port PUD to intermodal Metropolitan networks Metro IMTs and freight hubs end-market Port terminals terminal origins and Swanson (MIT) destinations

On dock Rural sidings Rural road and rail network links terminals Port queuing and circulation

Interstate rail corridors; Interstate (MLB-SYD & MLB-ADL) terminals New MLB Port terminals interstate Hastings terminal Non-urban networks Non-metro terminals

8.1 Intermodal implementation strategies

To migrate from the current inefficient rail environment to a more managed and efficient intermodal system will require a concerted effort by government agencies and industry. The entire Swanson-Dynon area is the subject of attention regarding its future redevelopment for both port and non-port related uses. To maximise the opportunity to establish long term viable intermodal services with minimal intrusion on land use, a suite of strategies are needed to be developed.

Table 12 – Metropolitan intermodal strategy components

Condition Implication Strategy

The interstate Presently this represents Relocate Dynon South domestic freight terminal to the terminal 800,000 loaded and empty northern perimeter of Melbourne. Donnybrook has been vehicle movements pa. This is identified as a suitable site. The location of the between 50-60% of rail volume interstate terminal at Such a terminal site might also accommodate a northern IMT through the port precinct, though South Dynon causes servicing the port container freight task. unrelated to port itself. By year (a) excessive non-port 2035, this will increase to almost Undertake study to determine operating cost/benefit impacts for road traffic in the port 2 million loaded and empty interstate rail operators, as background to inevitable commercial precinct, and (b) movements. negotiations to relocate the current interstate rail operators from requires interstate Dynon. trains to negotiate the busy Footscray-Dynon Determine capability to free up northern and eastern Dynon SG corridor in transit areas for residential/commercial development that could part- between Sydney, fund any relocation. Adelaide and Brisbane.

The port-rail interface Recent strategies by stevedores Continue re-development of North Dynon terminal areas to to vertically integrate rail facilitate interim arrangements for urban rail shuttles The development of activities with on-dock activities during ‘proof of concept’ phase. It may even be preferable intermodal terminals at have seen a modest expansion for regional services to revert to North Dynon, with urban Somerton and Altona in capacity, focussed primarily services using the on-dock sidings. Some initial subsidisation of was motivated largely on interstate and regional road connection costs between dock and North Dynon terminal by successes in traffics. might be required until scale efficiencies can be found. Sydney, but market penetration has been The operation of metro rail Establish a Melbourne Intermodal Terminal model as restricted by cost shuttles requires arrival and proposed under Port@L, required to ensure trains operate impediments and departure on a strict timetable to independently of stevedoring activity. inefficiencies at the ensure maximum utilisation and The MIT would be under separate management to the port-rail interface cycle performance. stevedoring terminals as in Brisbane and Fremantle. The most efficient transfer methods between MIT and port terminals may be special purpose road vehicles on private roads.

Condition Implication Strategy

Empty container Terms of trade require that Review strategic value of port lands and assess ongoing parks consignees and consignors arrangements for empty container parks so close to port; meet the cost of initiate strategies to support development of container Location of empty sourcing/returning empty parks at urban rail and road freight hubs. containers parks at containers. Container parks near port minimises the cost Intermodal transport networks operate more cost effectively the port minimise the costs for to shipping lines for where the linehaul movement to/from port maximises TEU’s per shipping lines. evacuation of surplus movement. Any surplus empty containers can be transferred empty containers from Road movements to/from port back to port on an as needs basis, rather than routinely. port to ship, but exceed 7,000 loaded and empty increases cross-metro movements per day, with almost road movements for half associated with the return and sourcing of movement of empty containers. empty containers for This will grow to around 26,000 outer-urban locations. movements per day under current operating circumstances. Every loaded import This is equivalent to a truck container becomes an arriving or departing every 3 empty container before seconds. it is rehired for an export movement.

Road networks Road will remain the dominant The Victorian Freight Network Strategy is underway and the mode for transport within Victorian Government is expected to set strategic direction for Port traffic for Melbourne. With the key road freight corridors, including port access links for containers by road development of urban freight Swanson and Webb Docks. In addition a number of key presently represents hubs served by road or rail, road requirements are recognised: around 7% of the total networks for high mass vehicles metropolitan road − The MIT rail terminal must be contiguous with the Swanson are critical for (i) port access and freight demand and is port terminals and avoid the need for road freight shuttles to circulation links, (ii) road freight expected to grow at 5- cross public roads21 corridors, (iii) access to road and 7% per annum. Road rail urban terminals, and (iv) freight movements at − Road links to Webb Dock for shipments to/from Tasmania distribution from those terminals. port are highly will continue; as with Swanson Dock, access to the M1 concentrated with An intermodal network will Freeway and associated networks are critical to manage almost a quarter of relieve port road freight forecast growth to 1 million TEU’s. traffic on Footscray congestion, however may − Road shuttles between port and urban intermodal terminals Road being port- relocate this congestion to the are required to work 24/7 basis and the imposition of related movements. urban terminal location and curfews will impede efficiency and increase cost. By year surrounding road networks, for 2035, and together with the design of access and buffer movement of loaded and empty zones for intermodal terminals, road corridors will need to containers associated with PUD accommodate high mass road shuttles with a frequency of activity. 2-3 minutes on key corridors to the north, southeast and . west from port. − The location and design of a terminal must also consider the distribution (PUD) links through the roads surrounding the terminal and must recognise a concentration of semi-trailer traffic into daylight hours, determined by the operating hours of the customers.

21 The public roadway that separates the Brisbane Multimodal Terminal from the stevedoring terminals has been identified as a key impediment which adds cost inefficiencies. A recent study has sought to develop strategies to address the situation. The Rail Terminal at Fremantle’s Inner Harbour is contiguous with the port terminals, allowing terminal internal transfer vehicles to shuttle containers to/from the rail terminal.

Condition Implication Strategy

Rail networks The long term planning for the A paradigm shift is required for the design and operation of Port of Hastings together with metro rail shuttles, based on disciplined timetabling, Urban rail freight rail demand to the Dandenong standard train configurations and 3 cycles per day; co- presently shares the area will place marginal existence with passenger trains on a shared network avoids same networks as demands on the south east line. costly duplication of infrastructure. Comments above relating to passenger trains on the MIT at Dynon are assumed here also. the west and The rail demand to the southeast lines, yet southeast terminal will Freight trains should be standardised as a push-pull uses freight only liners necessitate up to 2 trains per configuration with 25 3-slot wagons; overall train length is to the north. There is hour (each way) by 2035 and limited to 500m. The push-pull configuration avoids shunting sufficient capacity to around 1 train per hour (each and delays at either end of the journey. Refer to Figure 21. handle rail shuttle way) for the north and west Western corridor demand for the short corridors. to medium term growth Current network projects underway or identified within AusLink Enhancements of the rail however is comprised are sufficient to support a demand of 1-2 freight trains per hour infrastructure on the southeast of standard and broad to year 2035. line will be necessary, driven gauge track which largely by the increase in Northern corridor limits flexibility. passenger rail. There is sufficient capacity to support 1-2 trains per hour

following completion of 5 current projects which will improve corridor performance. The issue of network coordination

between ARTC and Victrack remains an issue for further Note: It has been resolution22. confirmed during the conduct of this study Southeast corridor that there IS sufficient A new track from Oakleigh to Dandenong/Hastings is presently capacity on the under consideration justified for passenger demand and long southeast line to term links to Hastings port. Various options are also considered Dandenong to for Dynon-Oakleigh portion of the corridor23. commence train shuttle operations AusLink outside of the AusLink 2 has identified a number of metropolitan rail network passenger peak hours and grade separation projects many of which have been given support by the Federal Government and compliment the key directions identified in this document

Urban intermodal rail The two existing terminals at Rail intermodal terminal capacity should be secured and terminals Altona and Somerton have an developed progressively to enable the operation of an estimated capacity of 100,000 intermodal system. Rail and road terminals should be Presently, two and 350,000 TEU’s pa developed under a geographical plan, including recognition that intermodal terminals at respectively. a road terminal could be transformed into a rail terminal if Altona and Somerton suitably sited as volumes grow. Site services also need to occupy 12 Ha and 22 Rail terminal demand is forecast integrate value-adding activities to compliment core services Ha respectively. Both to be approx. 1.5 million TEU’s and offer supplementary revenues to the operator. terminals were pa by year 2035 as follows: developed as The development of intermodal terminals to meet long term − West: 480,000 TEU’s “greenfield” sites and demand involves considerable planning and investment and involved substantial should be linked to the Federal-State initiatives under AusLink

22 Northern corridor rail projects are: (i) the “W” track in Dynon, (ii) The Missing Link project, (iii) Dynon Port Rail project, (iv) inner west ARTC Tottenham junction project and (v) a number of long crossing loops.

23 The majority of passenger train movements on the Dandenong corridor would be via a new alignment from Oakleigh to the CBD and additional tracks between Westall and Oakleigh, releasing capacity for some passenger and freight trains to share the existing tracks. Train movements of 2-3 freight and 6 passenger services per hour could be managed by this arrangement with appropriate junctions at Westall. In the longer term beyond 2035, increased passenger and freight services may require separation which could be addressed by placing one or the other services into a tunnel in the vicinity of the CBD.

Condition Implication Strategy private investment. programmes. − North: 200,000 TEU’s Both have experienced − Leverage existing intermodal terminal capacity at Altona and difficulties in achieving − Southeast: 870,000 TEU’s Somerton to recommence port rail shuttles operations AND sufficient rail modal There is insufficient rail terminal concurrently institute the required long term planning and share due to limitation capacity in the Southeast and land banking arrangements to secure larger terminal sites, in port access and on- West areas to meet long term buffer zones and access corridors; leveraging immediate dock capacity future demand24. Somerton has capacity provides an opportunity to demonstrate positive There is no operating the capacity to meet forecast socio-economics from intermodal strategies. terminal in the demand. − Plan for new domestic intermodal terminal at Donnybrook southeast, though Total urban terminal footprint development options − Develop new urban terminals in the south east at capacity required for handling exist at: Dandenong and Lyndhurst and in the west on the proposed full containers and managing Tarneit rail line − Greens Road empty containers is estimated Dandenong (12 as follows: West Ha) The existing terminal at Altona is not sufficient to meet demand − 2015: 35-45 hectares to year 2035 but is suitable for short term operations. Other − Old General − 2025: 55-65 hectares sites in the Laverton area or on the proposed Tarneit line Motors site however, are under consideration and would be preferable for Dandenong (45 − 2035: 95-115 hectares the longer term. Road and rail modal share in the western Ha) region is highly sensitive to adjustments in the comparative − WestGate site at pricing between the modes. Initial strategies should focus on Lyndhurst (70 plus Altona to stimulate demand concurrent while greenfield site Ha) options are explored.

North A new interstate rail terminal at Donnybrook would free up land at South Dynon. For urban freight, Somerton can meet future rail intermodal demand for its catchment area with the enhancements proposed under AusLink 2. A substantial proportion of the 700,000 TEU’s of road shuttle demand could also be redirected to the Somerton terminal, in the event that rail costs fall below road in future.

Southeast A footprint in the order of 50-60 hectares is required to meet a demand of almost 1 million TEU’s by year 2035. The Greens Road Dandenong site is large enough to warrant development as a practical medium term option. In the longer term, either the General Motors site of the Lyndhurst site would be needed to provide additional capacity. All terminals would need to be developed to handle the same train configuration, size and strip/reload system.

Planning An immediate action is to secure land adjacent to rail networks for intermodal terminals and plan for suitable road access and PUD activity. Investigation of appropriate business models, access arrangements and PPP investment vehicles needs to be undertaken (Sd+D, 2006).

24 Presently, Sydney’s intermodal terminal capacity is around 350,000 TEUs with plans to expand capacity to around 1.1 million TEUs with developments at Enfield and Moorebank.

Condition Implication Strategy

Urban road freight Road shuttles using higher mass The strategy of establishing road-road shuttles through hubs limited trucks between port and urban freight hubs should be integrated into the over- urban freight hubs could arching intermodal strategy, as follows: Given the immediate increase truck utilisation from past impediments to − The road freight hubs can compliment the network of rail the current average 1.2 TEU’s to establishing rail terminals to avoid excess capacity and weakening of rail 3-4 TEU’s for each linehaul services, PoMC has viability road terminals should be located in areas not journey. suggested a road-road accessible by rail freight lines, such as Ringwood/Mitcham, intermodal terminal Provided empty container parks Bundoora/Greensborough and St. Albans/Deer Park. network to maximise are integrated with the urban − Once the “proof-of-concept” stage has been achieved, a linehaul productivity freight hubs, there is an detailed planning review of the location of terminals should and contribute to a opportunity to reduce the be undertaken reduction in port traffic frequency of empty container congestion. movements across Melbourne. − Where practical, terminals should be located with access to the planned Transport Corridors (as stipulated by the VFNS) Current price relativities to provide the capability for access to future heavy road between (i) road direct, (ii) road- The development of and/or rail road shuttles and (iii) rail-road road-based shuttles shuttles, suggest that road presents a relatively − The transfer of freight from direct road movements to road shuttles to urban freight hubs easier process than or rail terminals might require some regulatory assistance; could achieve the following rail, though long term this could take the form of a special permit system for heavy market shares by year 2035: capacity may be vehicle categories servicing the port limited by increased − West: 690,000 TEU’s − Road freight terminals should be integrated with empty road congestion container parks − North: 540,000 TEU’s unless out-of-hours operations are − Southeast: 460,000 TEU’s instituted. While the road shuttles will reduce the number of heavy truck movements (through Driver shortages and higher utilisation), the scale and fuel price increases impact of large numbers of B- will add to the costs of Doubles operating on key routes a road shuttle system. will be significant. Initial operations and volumes would establish proof of concept but could erode the competitive position of rail shuttles by fragmenting the rail task if not managed

8.2 Strategic Issues

An intermodal system comprises three key elements, being the port interfaces, the rail and road networks, and the urban terminals. The system will only be effective and sustainable to the extent that all network elements are connected and optimised. The following summarises the key recommendations from the previous section.

8.2.1 Port-rail interface Previous reports have identified that the greatest impediments to the development of a rail intermodal system in Melbourne are the port-rail interface and the provision of capacity on the standard gauge lines. While there are on-dock rail sidings at Swanson Dock, regional and interstate trains stand on those sidings for extended periods of time severely limiting access for urban shuttles and overall track capacity.

Metropolitan port shuttles can be efficient and price-competitive if the arrival/unloading/loading/departure cycle is separated from stevedoring activities and the trains can maintain regular timetables on the urban network. There is a history of rail interface difficulties at the port, related to operational hours and container handling priorities of the stevedores This leads to the conceptual preference for a purpose-built MIT to handle port shuttles at a location adjacent to the docks, with transfer by special purpose vehicles. While this would involve an additional road haulage expense, it would avoid the stevedore’s charge for the internal road movement from rail terminal to stack.

An alternative approach is to partner with the stevedores to provide equivalent services at the on-dock terminals on reasonable commercial terms. In the short term, this approach might be appropriate in order to facilitate the reinstatement of shuttles into Somerton and Altona, depending on the ability of the on-dock terminals to handle these in conjunction with current regional export and interstate services. In the longer term, projected volumes are likely to point to the need for the MIT.

8.2.2 Standard and broad gauge network capacity The effective capacity for freight on both the standard and broad gauge corridors has been difficult to define in relation to future freight demand. Standard gauge paths are generally defined around the operation of long interstate or export trains, and the needs of short, rapid shuttle trains have not been well understood. On the broad gauge network, passenger priorities and forecast need for more frequent services have marginalised any demand for future freight shuttle paths.

Currently, the SG network serving the west and north has sufficient capacity to meet the projected metropolitan intermodal demand as well as regional and interstate freight. The Dandenong corridor is also considered to have sufficient paths for rail shuttle services operating to passenger train characteristics, particularly outside peak periods.

In the longer term however, rail freight demand to the south east could increase markedly under an intermodal strategy and track capacity planning will need to accommodate this demand. The future development of rail links to Hastings may involve standard or broad gauge (or both). .In any case, corridor planning will need to cater for local as well as long distance rail services.

An effective intermodal strategy distributes the PUD task away from the port environment and reduces port congestion, however may concentrate traffic at or near the inland terminals. Planning of road networks between an intermodal terminal and the end-customers needs to be considered.

8.2.3 Terminals Urban terminals will consist of two types; i.e. rail-road intermodal terminals and road-road terminals. The rail terminals will naturally be located adjacent to he rail networks and service the immediate catchment. The road terminals provide a complimentary network to service demand which is not attracted to the rail networks and where possible are located with a view to achieving heavy road and/or rail access in the future as new infrastructure is developed on declared Transport Corridors.

The development of road hubs should be managed so as not to (a) erode the delivery of the “macro” intermodal strategy and/or (b) adversely impact suburban communities by simply relocating congestion away from the port to areas surrounding the suburban hubs.

Each suburban terminal must be large enough to accommodate empty container storage, to reduce the dependence on port area storage and wasteful transport movements.

Based on current and projected road and rail price/cost relativities, the rail terminal at Somerton is sufficient to meet demand for the northern urban region until year 2035. While supplementary capacity for international container could be provided at the future nearby interstate terminal, every effort should be encouraged to complement or integrate with the existing Somerton terminal.

The existing Altona terminals theoretically offer immediate capacity, but this is not likely to be sufficient in the long term. Modal share in the western areas is highly sensitive to price comparison and it is likely that rail and road terminals will need to co-exist in that market. New terminal facilities further to the west would be needed to improve rail’s commercial competitiveness.

For the south east, the development of a terminal at Greens Road Dandenong will provide short to medium term intermodal capacity, though plans for the development of a large terminal in the south east should be pursued for medium term expansion. The proposed Lyndhurst terminal appears to be sufficient in size and location.

The relocation of container park capacity to locations close to the suburban hubs is also a key element of a future intermodal system. The cost effective operation of the rail/road intermodal system must integrate the management of the empty container task. The storage of empty containers on valuable port land is increasingly recognised as sub-optimal use of scarce land resources.

9. PHYSICAL AND OPERATIONAL DESIGN

Based on the analysis of demand and modal share (driven by cost-price comparisons), it is possible to arrive at traffic forecasts for each mode, region and year, as shown in Table 13 below. This chapter provides a summary of the operational modelling, and uses broad vehicle and train configurations to determine the total road and rail movements, as shown in Figure 21.

It is important to also reiterate that fluctuations in the price relativities between road and rail could change the market shares between each of these modes, but more importantly, each region is likely to be serviced by all modes to some degree, driven by the underlying service demands or product types.

Table 13 - TEU Movements 2010, 2020 and 2035

2010 2020 2035 Task By Mode (000's TEUs per annum) Rail Linehaul 392 740 1546 Road Linehaul 483 819 1689 Residual Road 732 1152 2269 Total 1608 2712 5504

9.1 Equipment assumptions

For modelling purposes, underlying assumptions about the equipment types and configurations to be employed have been made as follows.

Figure 21 - Transport equipment configurations and capacities

25 * 3-slot wagons (75 teu’s)

Average 90% utilisation Push-pull train

6m 12m

1 teu 2 teu’s B- Double

12m 12m

Super B-Double 2 teu’s 2 teu’s

12m

Avg 1.2 teu’s Semi

9.1.1 Trains The characteristics of the train service need not be defined in detail at this stage. In one scenario, train sets would be of around 25 * 3-slot wagons, each wagon around 20 metres long. Trains would be operated as push- pull, with locomotives at either end of the train to (a) avoid shunting and (b) allow the train to remain as a single unit thereby permitting more flexible maintenance and train inspection regimes to operate.

Alternatively, trains could be run with orthodox locomotive leading, and engine run-around, favouring a model under which locomotives do not attend trains during the loading and unloading processes, potentially improving utilisation by moving other wagon sets on the network during these phases. The important condition is that the train operation be designed in conjunction with the terminals and the rolling stock.

It is also assumed that the metro freight trains will need to “mimic” the characteristics of the passenger trains in regard to pathing through the passenger network.

The overriding consideration is that the metro freight trains need to maximise daily cycles operating on strict timetables. Regional and interstate trains can operate with less rigour due to the lower requirement for micro-level on-time running away from the passenger network.

9.1.2 B-Doubles The road shuttle vehicles are assumed to be B-Doubles with a capacity of 3 TEU’s. Opportunity may exist to operate Super B-Doubles on the port - to IMT linehaul corridors which will certainly reduce movements and increase utilisation; this remains subject to road authority approval.

The B-Double linehaul vehicles should achieve maximum loading each way and also be used to evacuate surplus empty containers from the IMT back to port.

9.1.3 PUD semi-trailers Ultimately, all containers will be moved to/from the end-customer by road vehicle conducting the PUD function. This activity will largely be as operated today influenced by the site access and local road network which restrict larger vehicles. The modelling has assumed however, that the overall utilisation of the PUD function will grow over time from around 1.2 TEU’s per movement to 1.5 TEU’s per movement, driven mainly by the changing mix of large and small containers.

9.2 Movement outcomes

This section summarises the expected number of movements based on the equipment utilisation, forecast volume for each area, and the modal split.

9.2.1 Rail Rail volumes by year 2010 would be equivalent to 12 round trip daily shuttles (i.e. operating each way) to/from the port based on the expected operating costs and mode share outcomes. This will increase to around 45 trains per day operating each way, with more than half operating to/from the Dandenong/Lyndhurst area. Table 14 summarises the modelled results.

Table 14 - Physical movements for metro rail shuttles

2010 2020 2035 (two way cycles per day) North 1 2 6 Southeast 6 11 25 West 5 7 14 Total Arriving at MIT 12 21 45

9.2.2 Road Road movements need to be considered as (i) the number of direct deliveries from the port, (ii) the number of linehaul movements to/from urban terminals and depots and (iii) the PUD movements downstream from the terminals, and as shown in the following table.

Table 15 - Physical movements for road shuttle and PUD vehicles

2010 2020 2035 (One way truck movements per day) Direct Customer deliveries (primarily Semi-trailers) 2,016 2,485 4,254 B-Double Linehaul Trucks 537 910 1,876 Total arriving at Port terminals 2,553 3,394 6,130

Outer urban distribution truck trips per day 1,723 2,810 5,299

9.2.3 Terminals Subject to the availability of intermodal terminal capacity, the 2010 task for the rail-based system is estimated at approximately 390,000 TEU’s per annum. The road IMT terminals could also handle 480,000 TEU’s delivered by high productivity B-double line haul services. The initial residual demand to be carried by direct port-customer truck services is estimated at 730,000 TEU’s per annum.

Suburban rail IMTs

The suburban IMTs will handle the arrival and departure of trains, the transfer of containers between train and PUD road vehicles and the storage of empty containers. Value-adding activities such as container repairs and “on power” storage may also be provided to supplement the core services and generate additional revenues for the terminal operator.

The aggregate footprint for intermodal terminals required by 2035 is around 90 hectares to accommodate dynamic and empty container storage25. The following table and diagram shows the broad relationship between volume throughput and site footprint. Details of the underlying assumptions are shown in the Appendix in Table 26 on page 96. Note that these areas may be reflected across several sites within the catchment.

Table 16 – Aggregated rail terminal throughput volumes and nominal footprint areas

"000 TEU's Expected volumes through rail-IMTs 2015 2025 2035 North 62 116 197 West 194 313 483 Southeast 282 528 867 Totals 538 956 1546

Hectares Nominal areas (aggregated) 2015 2025 2035 North 8-10 10-12 12-15 West 12-15 15-20 25-30 Southeast 15-20 25-30 45-50

Totals 35-45 55-65 85-95

25 Dynamic storage is defined as the area for short-term movements between transport modes up to a maximum of 2 days and will depend of end-customer requirements and available short-term transport. Empty container storage is undertaken for shipping lines and results from import containers being emptied and held pending reloading for export shipments. Duration can vary depending on the time of year and trade imbalances; for modelling purposes an average of 12 days is assumed.

Figure 22 - Indicative throughput and footprint relationship for rail terminals

South east (2035) 40

Hectares West (2035)

20 South east (2015)

West (2015) or North (2035) 10 North (2015) -

0 0 0 0 0 0 50 0 0 10 15 20 300 4 500 75 ,0 1 1,250 1,500 "000 TEU's throughput pa Sidings and loading area Dynamic storage

Empty container storage Other activities, site circulation and set-backs

Suburban road hubs

Suburban road hubs would operate similarly to the rail terminals though on smaller sites, due to less activity surges that result from train arrivals.

Road terminals will also generally be more dispersed and have a reduced profile relative to rail terminals and will service smaller demand clusters. Presently Somerton is being used as a road-based terminal despite its rail capability and perhaps represents the upper end of scale for road terminals.

Road terminals will be built in areas away from rail-served areas so as to provide a complimentary, rather than competitive, network of terminals. There might also be an opportunity to develop road terminals in some areas adjacent to rail lines to facilitate a future switch to rail service as demand grows e.g. Bayswater.

The total area required for road IMTs with empty container parks will be approximately 25 hectares in 2015 and up to 60 hectares in aggregate by 2035.

Table 17 - Aggregated road terminal throughput volumes "000 TEU's Expected volumes through Road-IMTs 2015 2025 2035 North 254 435 688 West 197 298 460 Southeast 178 313 541 Totals 629 1045 1689

9.3 Overview of system demand

Figure 23 provides an aggregated assessment of demand for years 2010 and 2035, showing the split for each transport mode. It should be noted that while the road-direct option will dominate movements in close proximity to the port, it is also recognised that some road-direct movements will compete with the intermodal terminal options and has been reflected in the modelling and modal share outcomes shown in Figure 17 and Figure 18 earlier.

Figure 23 - Integrated system-wide activity for 2010 and 2035

563 Trucks per day Legend 1726 Trucks per day 2010 One way movements per day PUD 2035 One way movements per day

IMT (Rail) Hub (Road)

1 T 2 r a Residual Direct Road T in r a s

in p Services (All Areas) s e r day p d e a r per day y s Hub d per 17 a uck s 8 y k (Road) B-D 9 Tr uc 511 oub Tr B- les B-Doubles per 209 day B-Doubles per 765 day 185 3 Dou pe PUD ble r da 424 s p y 593 Trucks per day er day Hub 1505 Trucks per day 149 B-Doubles per day Docks and day (Road) 10 Trains per day 601 B-Doubles per PUD IMT portside 12 567 Trucks per day 28 Trains per day Train (Rail) terminals s per 2068 Trucks per day 50 day Trai ns pe r day IMT (Rail)

9.4 Operating Summary

The operational design of the intermodal system should accommodate 4 train-sets operating 12 services per day. These trains are likely to be 25 wagon trains, with each wagon having a capacity of 3 TEU’s for a total capacity of 75 TEU’s per service. Each train could either have traditional locomotive configuration or ‘push-pull’ characteristics .

Based on projected demand, 15 train sets, operating 90 one-way services per day, would be required by 2035. The impact on truck traffic at the port is significant. Without an intermodal system, the number of truck arrivals at the port is expected to be more than 12,000 per day by 2035. With an intermodal system in place, supplemented by high capacity road shuttle services, the number of truck arrivals at the port in 2035 is around 6300.

The total throughput at the Melbourne intermodal terminal is expected to be in the order of 500,000 TEU’s in the initial years, increasing to 1.5 million by 2035. This will required an initial footprint of 10-12 hectares, with a requirement for up to 20-30 hectares by 2035.

The Southeast terminal would need to be the largest of the suburban IMTs, and will attract more than 280,000 TEU’s initially, growing to 870,000 by 2035. This terminal will require a footprint of 45-50ha to accommodate this demand in 2035.

The Western Terminal would be the second largest facility, handling nearly 200,000 TEU’s in 2010 and 480,000 in 2035. This facility will require a footprint of 25-30ha.The road-shuttle services will attract a much larger market share than rail in the Northern region and as such, the terminal is likely to have a modest throughput of 60,000 TEU’s initially, growing to 200,000 by 2035. This will require a footprint of 12-15ha.

10. STAGING THE SYSTEM DEVELOPMENT

Having established the viability of and defined the strategic elements and scope of the system, it is necessary to determine the staging and investment to match growth. Two key questions arise.

1. What opportunities exist within the present network configuration to facilitate the introduction of port rail shuttles in the immediate future?

2. What investments are required to establish a new intermodal capability to handle longer term demand?

The second question is particularly pertinent given the need to immediately commence the planning and legislative requirements for long term reservation of freight precincts and corridors to 2035. Particular emphasis is given to the current planning in the western area under Melbourne 2030.

Strategy elements have been identified:

− Re-establishment of port shuttles between North Dynon and existing terminals at Somerton and Altona to develop basic rail capability

− Development of substantial intermodal terminals in the south east and western industrial regions. Somerton is sufficient to cater for long term rail demand in the north

− Relocation of the domestic interstate rail freight (and terminals) away from the port precinct

− Development of a Melbourne Intermodal Terminal (MIT) to facilitate the rapid turnaround of port-rail shuttles, and connected to the docks via high performance road vehicles and access

− Use of ARTC Standard Gauge track for the northern and western corridors, and Broad Gauge in the south east unless Standard Gauge conversion is approved for other projects such as development of Hastings and pending a fuller analysis of which gauge the system should use in the longer term

− Simultaneous development of road IMTs and routes in a manner complimentary to the overall “hybrid” solution and the location of the rail network

10.1 Staging

Staging of system development involves substantial lead times associated with planning and acquisition of land and access corridors. Table 18 provides a summary for the planning and delivery issues on the existing network and an expanded network as proposed for the Outer West Growth area.

Table 18 - Immediate and long term planning and delivery activities

Scope of rail Activity Timeframes network Immediate to 2015 Long term; 2015 to 2035

Within scope Planning Planning for major intermodal Contingent assessment of port-rail of the existing terminals in southeast (Lyndhurst) modal share in northern area and rail networks and west (linked to Outer West verification of capacity of Somerton Growth Area planning under terminal; if demand deemed to Melbourne 2030 strategy) exceed Somerton terminal, Planning for relocation of interstate consideration for overflow or rail task/operation from Dynon to consolidation at Donnybrook, new interstate terminal at although separate to domestic Donnybrook for PN and QRN interstate rail terminal Planning for Melbourne Intermodal Terminal at Dynon precinct

Confirmation of future port shuttle paths in ARTC or Connex agreements

Development of planning framework for road hubs to compliment rail intermodal terminals

Delivery Establishment of port shuttle Establish operation of new interstate operations between Altona, domestic terminal at Donnybrook; Somerton and North Dynon Potential integration/overflow of Development of Greens Road northern area international task terminal, and introduction of port subject to rail-road cost relativity and shuttle operations between modal share outcome Dandenong and North Dynon Establish operation of MIT at Dynon Acquisition of 4 metro shuttle train- for port shuttles sets and contract nominated Establish operation of new operator/s intermodal terminal at Lyndhurst Introduction of road shuttles and hubs in a “hybrid” network of terminals

Expansion of Planning Planning for Tarneit rail line Review of shuttles for urban rail networks integrated with emerging domestic freight once international developments under the Melbourne container task matures 2030 strategy for the western outer growth area

Operations Nil New intermodal terminal and logistics/industry cluster adjacent to Tarneit line

11. ECONOMIC ANALYSIS

11.1 Approach and methodology overview

The demand outcomes presented in section 7 are analysed here from an economic perspective, taking into account financial outcomes of the entities within the intermodal supply chain as well as the wider economic context.

The following economic analysis assesses the net present value of an intermodal system from a full resource cost perspective. This takes into account the expected capital costs associated with the intermodal system and the external impacts of road and rail transport levels with and without such a system.

The basic approach of the economic analysis follows 4 broad steps:

1. Take the market penetration and demand outcomes from chapter 7 as given

2. Calculate the per TEU cost over time for the current road delivery system and intermodal system for volumes handled by:

a. B-Double linehaul with semi-trailer customer delivery

b. Rail linehaul with semi-trailer customer delivery

c. Residual road direct delivery

3. Apply those costs to the demand estimates over time

4. Apply externalities cost to all estimates

From these results the economic benefit of the intermodal system over the existing 100% direct road delivery paradigm can be derived over time and expressed in net present value terms.

11.2 Financial outcomes for rail and terminal operators

Modelling of the intermodal system has been done on an efficient cost basis. Results show that a rail operator in the Melbourne intermodal market can achieve an operating surplus once the scale of demand allows for full train utilisation. That is, there is substantial market share available to the rail option at linehaul prices that cover operating and reasonable start up costs.

Rail operators

The actual train operation between the port and the suburban IMTs is a relatively small part of the total supply chain cost. The remainder of the chain includes the road transfers, interim storage and lifts at each end. The modelling assumes the trains can be run in an efficient, flexible and scalable manner. This flexibility and scalability of the operation is very important to the viability of the operator.

A Melbourne intermodal service would have several factors in its favour.

Firstly it would have access to stable and growing volumes, as compared to agricultural exports, for example. The stability of volume in the urban market means that operators can be reasonably confident in the purchase of new train sets to accommodate gradual growth in demand. Even if the market penetration is not as favourable as modelled here, the stability of volume means that rail operators will never be left with long term underutilised train sets.

Secondly, the scale of the task in urban Melbourne means that, in the medium term, rolling stock capital costs would be a lower proportion of total cost than usual in Victoria. An estimated 4 train sets would be required to meet initial 2010 demand and each additional train set will represent a relatively low investment cost and risk.

Importantly, the modelled above-rail operating surplus is not calculated on the total cost of any track or terminal infrastructure expenditure necessary to operate the intermodal system. Access fees are charged in the model at nominal rates roughly equivalent to standard regional freight network charges, suggesting ongoing subsidisation.

Terminal operators

Activities at suburban and port rail terminals are not modelled here on a cost-plus basis, since costs per TEU would change rapidly from year to year in the start-up phase. The model assumes a standard charge for lifts at terminals, which is based on efficient operation and high terminal utilisation on a 24 hour basis. In reality this charge would need to be subsidised during the start-up phase until sufficient scale of operation was achieved, and acceptable service performance was occurring.

At the lift charges used in the model, suburban terminals would begin to become fully viable at around the X TEU figure. This assumes the capital costs involved in establishing each rail terminal do not have to be reflected in operating charges. Charges would cover the cost of rent, staffing, equipment, maintenance and outgoings.

The costs of empty container management are not included in the total supply chain cost for any road or rail option, on the basis that the costs of import box de-hiring, storage and transfer to next export customer are usually met by the shipping line (owner of the container) rather than the importer/exporter or transport contractor.

The costs of lifts and transfers at the port terminal(s) are likewise assumed to be efficient and subsidised until critical mass is achieved. This point should be reached at around X TEU, in year Y.

11.3 Economic Analysis

The economic analysis is supported by three working papers (see Appendices) which address the modelling approach, congestion and input cost assumptions and externalities in detail. This section outlines the key assumptions in the analysis and presents the results.

11.3.1 Key Assumptions This analysis assesses the overall economic benefit of a mature intermodal system with a given modal share. In reality the commercial outcomes will be somewhat volatile in the start up phase, due to the non-linear relationship between price and cost with volume increase in rail and terminal operations.

Therefore, it is assumed that prices are relatively stable and road, rail and terminal operators will not engage in opportunistic pricing to change volumes on each mode.

More specifically, the analysis does not account for the likelihood of spot price reductions by road operators in the initial years in reaction to the competitive price available via the intermodal system. Given the relatively tight margins in the small fleet trucking industry and the opportunity for terminal distribution work for that industry, this type of market reaction is not likely to happen to any substantial degree.

11.3.2 Train capacity modelling As detailed in section 7, a price elasticity analysis has been undertaken to estimate the market penetration for road and rail line haul intermodal services. The estimated road transport costs for each SLA base have been carried forward into the economic analysis.

The initial rail demand modelling, aimed at estimating market share for rail, assumed an efficient rail system with a utilisation of 90%. For the economic analysis a second iteration of more detailed rail cost modelling was undertaken. This modelling was based the following assumptions:

− Rolling stock to be common across all services and of the same gauge.

− An initial investment in 4 train-sets, of which an 85-90% utilisation rate will meet projected 2010 demand

− As demand grows over time, an additional train set is added to the system each time the required utilisation reaches 90%, resulting in a ‘stepped’ cost function, shown in Figure 24, below.

Figure 24 - Rolling Stock Capacity and Volume

1800 16

1600 14 Trainsets 1400 12

'000s TEUs pa 1200 10 1000 8 800 6 600 Demand ('000s TEUs pa) Trainsets 400 4 200 2 0 0 2010 2015 2020 2025 2030 2035

11.4 Overview of comparative cost results

The following table shows the relative cost outcomes for the major SLA’s in each terminal catchment zone. The results show a clear operating benefit for the rail based intermodal system for these particular regions which are generally more likely to contain the terminals themselves. This figure relates to a mature system at 2010 demand levels.

Table 19 - Summary of relative cost outcomes by mode excluding externalities - 2010

Somerton Dandenong Altona Hume (C) - Gr. Dandenong (C) Hobsons Bay (C) - Mode Item Broadmeadows Bal Altona $ per TEU Direct Road Costs 287 317 277 B-Double Linehaul Cost 74 135 114 Storage & Handlng 35 35 35 B-Double Linehaul Semi-trailer distribution 125 131 126 Total 234 301 276 Rail Linehaul Cost 27 32 23 Storage & Handlng 75 75 75 Rail Linehaul Semi-trailer distribution 125 131 126 Total 228 237 224 Cost Advantage to B-Double Linehaul 53 16 2 Cost Advantage to Rail Linehaul 59 80 53 Figure 25 demonstrates the basic advantage of the rail intermodal system over the existing road direct system at a purely operational level. The values quoted reflect the range of costs for the Statistical Local Areas in the Southeast of Melbourne. The road-direct cost including return of the empty container ranges between $284- $316 per TEU, with the majority of demand in the Dandenong area at approximately $300 per TEU. The rail intermodal system, taking all the storage and handling costs into account, can achieve a cost of $107 plus the cost of the PUD leg. Given that most of the demand in the Southeast is located close to the where the terminal is likely to be located; the average cost of the PUD leg will be closer to $131, for a total cost of $240 per TEU.

Figure 25 - Summary of indicative cost elements for an import TEU under supply chain alternatives

Road Direct ($284-$316 per TEU)

Road Linehaul ($151 per TEU) Urban intermodal Swanson terminal docks North Dynon handling or MIT Rail Linehaul ($20-$40 TEU) ($31 per TEU) Destinations PUD by semi $120-$224 per TEU Port to MIT transfers Port rail terminal using Super B-Double handling ($20 per TEU) ($25-30 per TEU) These costs include the activity associated with the return of the empty container as part of the cycle. The location of the container parks, and the costs associated with return of empty containers to them, differ under each scenario. In the intermodal operations, container parks are located with suburban IMTs, while for the road direct option; containers are returned to near-port parks as per current practice.

One of the benefits of the intermodal systems is that empty import containers can be de-hired at the IMT, cleaned and repaired if necessary, and re-hired locally for an export movement, greatly reducing the cost of repositioning.

11.4.1 Integrating Externalities Externality costs are the exogenous costs and benefits of transport, outside the purely commercial costs. Specifically, they estimate the negative impacts such as pollution, climate change26, congestion, respiratory health, crashes, noise and severance or the mitigation of these impacts as a result of a development in transport operations or infrastructure. Both road and rail freight have external impacts in this regard, though the impact of rail is usually considerably less than road, particularly in urban environments.

Externalities are particularly important in this study as the congestion experienced by motorists in the inner Melbourne area is one of the main drivers of the intermodal paradigm.

The categories of externality cost types accounted for in this study are:

Table 20 - Externality costs considered in analysis

Externality Description Accident additional costs of medical care, economic production losses and suffering Noise damages (opportunity costs and land value) and human health Air pollution damages of human health, material/building and crop losses Climate change damages (opportunity costs) of global warming Nature and landscape additional cost to repair damages, compensation costs Urban separation time losses of pedestrians Up/down stream processes additional environmental costs (lifecycle- production/disposal) Crash costs human, vehicle and general costs associated with incident Congestion external additional time and operating costs

26 Factors such as crop variability, peak oil and carbon trading are covered implicitly in the externality estimate for climate change.

The estimation of the value of externalities is an extremely complex task and is the subject of a great deal of ongoing research. The most widely used Australian externality cost estimates are originally sourced from European data (Infras/IWW). This report is the basis of the valuation externalities in the AusLink process. The interpreted results however, vary widely, based on the selection of European countries with which to compare Australia and other conversion factors. The two major data sources in this regard are the National Guidelines for Transport System Management (ATC 2006) and AustRoads Report Valuing emissions and other externalities, which was authored in 2000 and updated in 2005.

The detail of this current debate is covered in Working paper two, however broadly speaking, the value externalities (excluding congestion) for road freight is within a range of $22-44 per thousand net tonne kilometres and $7-14 for rail freight. The estimates differ primarily due to different air pollution assumptions (human health, building and crops damage effects) and emissions reduction target sought. ATC data is considered ‘conservative’ in its assumptions and is approximately half of the AustRoads estimate.

The valuation of congestion costs is dealt with using Australian data however there is still a range of disparate estimates. Valuation ranges between A$18 and A$103 per thousand net tonne kilometres. The value used in this report is the mid range of these estimates around $26.30 adapted from a number of sources (BoozAllenHamilton, 2006; Meyrick, 2006).

These externality values are shown in Table 21 over page.

Table 21 - Cost of Externalities ($ per net tonne kilometre)

Australian Transport Council Austroads Road Rail Road Rail Costs per 1000 NTKs Costs per 1000 NTKs Externalities 22 7 Externalities 44 14 Congestion 26.3 0 Congestion 26.3 0 Total 48.3 7 Total 70.3 14

These values are converted into $ per TEU costs for each component of the supply chain based on detailed distance information at the SLA level from the Freight Network model.

The economic analyses in this report apply the lower bound externality values as a base case approach. Sensitivity analysis using the higher bound valuations is also provided.

11.4.2 Treatment of Capital Expenditure The capital cost of developing the suburban rail IMTs and the Melbourne Intermodal Terminal is estimated here as a nominal $386 million to be spent over 15 years from 2010. This involves both initial construction and land acquisition and construction of additional capacity (including a new site) as demand increases.

These terminal construction costs are based on verified industry cost estimates for terminal developments using broad construction cost estimates. As a rule of thumb, intermodal terminal space and associated rail infrastructure costs are estimated at $1.25-1.50 million per hectare.

The costs of initial investments in suburban road hubs are also included here for the full resource cost analysis. Nominal estimates of $8-9m per site are used, with the assumption that more sites, and site improvements, will be needed at regular intervals over the 25 year period.

Estimating the road and rail infrastructure costs attributable to (or avoided by) an intermodal system is a complex and somewhat subjective process. These costs can be separated into 3 broad categories:

Road Network Maintenance and Capital Cost

Every truck on Melbourne’s roads carries a marginal cost associated with road maintenance and general upgrades. While it is possible to calculate the average annual road capital and maintenance expenditure by truck in Melbourne, the marginal cost of each extra truck is hard to identify. Modelling, shows that under an

© Strategic design + Development Pty Limited Page 81 of 117 Melbourne Intermodal System Study Department of Infrastructure - Victoria FINAL REPORT intermodal system, around 5,800 truck trips per day would be generated by 2035 to and from the port, a reduction from the estimated 14,000 daily trips without intermodalism.

While a large benefit, it is a small proportion of the total Melbourne freight task and would lead to tangible road provision budget savings for the Government mostly in the near port area.

The removal of 8,500 truck movements in and around the Port of Melbourne each day would be a significant reduction in traffic for particular infrastructure elements. In particular, the West Gate Bridge is under particular pressure and currently carries large amounts of Port related traffic.

On advice from VicRoads and the East-West Link Study team however, the cost of major upgrades to these links has not been included as part of this analysis, as they are not avoidable costs. That is, the construction of additional capacity on the Westgate Bridge (for example) will occur with or without the intermodal system. The removal of 2-3,000 trucks per day from the route would be significant, but the primary driver for this decision is passenger demand, rather than truck demand.

Rail Infrastructure Costs

A detailed analysis of infrastructure is beyond the scope of this study, but a provisional cost for infrastructure should be used for the economic analysis. For this purpose around $150m has been allocated in the model for attributable rail corridor upgrades (to service south-east corridor demand) This is a nominal figure, given that several major projects are currently being evaluated by DOI in regard to both passenger and freight demand.

Table 22 summarises the capital investment assumptions made.

Table 22 - Modelled Capital Expenditure Requirements

2010 2013 2017 2025 TOTALS Capex Item $M $m $M $M $M Melbourne Port Terminal - split according to volumes South-east 3 60 - 30 93 West 1 20 - 10 31 North 1 20 - 10 31 Totals 5 100 - 50 155

Outer Urban Intermodal Terminals South-east - 50 5 45 100 West 5 - 50 15 70 North 1 - 20 40 61 Totals 6 50 75 100 231

Rail corridor enhancements (south east only) - - 50 150 200

Road hubs East 8 16 - 8 32 West 9 18 - 9 36 North 8 16 - 8 32 Totals 25 50 - 25 100

Totals by region South-east 11 126 55 233 425 West 15 38 50 34 137 North 10 36 20 58 124 Totals 36 200 125 325 686

Cumulative Totals 36 236 361 686

11.4.3 Results The results of the economic analysis can be expressed in terms of the annual net commercial operating result, with or without externalities and capital costs, and as a full resource cost analysis.

Full resource costs

The figure shows the NPV of resource costs of the intermodal system (including road and rail IMTs) in comparison with the ‘as is’ road direct model.

Figure 26 – Resource costs

NPV Analysis - Full Resource Costs (with and without externalities)

$600

terminal upgrades + $500 SE rail W & N IMTs & SE rail @ 2025 @ 2017

$400

MIT & SE IMT $300 @ 2013 @ 2013

$200

Cum. NPV @10% ($million) @10% NPV Cum. $100

$0 0 5 10 15 20 25

-$100 Year (beginning 2010)

North (inc. ext) West (inc. ext) South-East (inc. ext) Aggregate Total (inc. ext) North (w/o ext) West (w/o ext) South-East (w/o ext) Aggregate Total (w/o ext)

This figure shows how the system generates resource cost benefits by around year 4, including externality cost benefits, and around year 8 excluding same. This analysis includes all capital cost injections as per Table 22 on previous page.

The results for each terminal differ, due essentially to the different distances involved, and the competitiveness of the road-direct option over intermodal at short distances. The North terminal already exists and can become cost-effective almost immediately. South-east terminals are cost effective by year 5, without externality costs. The western terminals do not generate positive NPVs until well after a new rail terminal has been developed in the more distant western zone (in 2017), and not at all when externality benefits are excluded.

Year by year analysis indicates that subsidies totalling $90m would be needed from 2010 to 2017 to cover all capital and operating costs necessary to capture the modal share that would warrant developing a rail option for the western areas. The main reason is the short road distance to port from the existing rail terminals, negating any rail line haul benefit, even where all chain components are run at full efficiency. With the development of a new terminal further west, the intermodal operation becomes genuinely competitive with the road direct option. Arguably, the earlier a new terminal site can be located and developed, the better.

Capital excluded

This figure shows how NPV changes once all capital (road and rail terminals, and rail corridor upgrades) is regarded as sunk. Overall commercial and economic benefits are almost immediately realised.

Figure 27 – Resource costs (capital excluded)

NPV Analysis - Full Resource Costs (no capital)

$800

$700

$600

$500

$400

$300

$200 Cum. NPV @10% ($million) @10% NPV Cum.

$100

$0 0 5 10 15 20 25

-$100 Year (beginning 2010)

North (inc. ext) West (inc. ext) South-East (inc. ext) Aggregate Total (inc. ext) North (w/o ext) West (w/o ext) South-East (w/o ext) Aggregate Total (w/o ext)

In this scenario, the western terminal(s) remain problematic. On the basis of the inefficiencies assumed for the first 3 years, operating subsidies of about $30m are required for the first 3 years until positive returns emerge. This is over and above the capital investments in terminal capacity. Once the new western terminal is developed, cash operating returns are achievable, though the overall NPV benefit is very slight.

The northern and south-eastern terminals, however, are very positive commercially and more so on full economic resource terms.

Capital excluded, externalities doubled

In the following scenario, externality cost estimates have been doubled to reflect the AustRoads values rather than the more conservative ATC values. The impact on the overall NPVs is noticeable, but does not make any significant difference to the overall NPV outcomes.

Figure 28 Resource Costs (capital excluded, externalities increased)

NPV Analysis - Full Resource Costs (no capital, doubled externalities)

$1,100

$900

$700

$500

$300 Cum. NPV @10% ($million) @10% NPV Cum.

$100

0 5 10 15 20 25 -$100 Year (beginning 2010)

North (inc. ext) West (inc. ext) South-East (inc. ext) Aggregate Total (inc. ext) North (w/o ext) West (w/o ext) South-East (w/o ext) Aggregate Total (w/o ext)

11.5 Timing and Viability

The intermodal system, as modelled in this analysis, will generate a positive economic benefit from the outset. The scale of capital expenditure required at the outset may be larger than the preliminary figures used here and this could push the year of positive commercial returns into the future.

In terms of operational viability, that is excluding externalities and capital expenditure, the system can produce an operating benefit for operators from the outset, predicated on two critical factors. Firstly, the rolling stock must be well utilised. This will ensure a conservative initial purchase of rolling stock so that demand outstrips supply at the sunrise price. Secondly, interface arrangements at the docks must be harmonious with rail operations, and realistically priced.

The rationale and economics behind this timing and viability outcome are simple. The rail intermodal system can achieve a lower cost per TEU than road direct deliveries in those areas where demand is clustered close to an intermodal terminal. If the intermodal system begins conservatively, the burden of fixed rolling stock costs can be avoided and an early operating and economic benefit generated.

In the very early stages, subsidies would be required for the establishment of key supply chain components, such as road transfers between the North Dynon terminal and the docks, and at any of the current western area terminals.

Essentially however, there is sufficient demand for rail services already existing to utilise a mature intermodal service if it could be fully established by 2013. The modal share analysis indicates that four train-sets could be fully utilised based on pricing reflecting efficient train management, terminal management and interfaces.

To develop such a mature system however, will require a combination of capital investments, commercial negotiations and policy initiatives. A logical staged sequence of events could be:

Preparatory stage

− Develop a business case for an application for Federal AusLink funds underpinning terminal development at Greens Rd, and siding connection improvements at Somerton.

− Commence process of locating new Western terminal site.

− Negotiate efficient and priority access train paths for the interim shuttle services with relevant rail access providers.

− Construct a booking and tracking system to be employed by terminal operators, rail operator and stevedores as required.

− Negotiate with the stevedores for efficient and priority access for road transfer vehicles from North Dynon terminal.

Year 1

− Commence single train-set operation to serve existing terminals, eventually on a 3 times daily basis (total capacity 225 daily TEU in each direction i.e. imports and exports).

Year 2

− Prepare contract for rail service provision to the Dandenong terminal.

− Commence development of Melbourne Intermodal Terminal in southern Dynon area (market site or part of current interstate terminal) to replace interim North Dynon facility.

− Introduce second train-set to operate on the standard gauge network and ramp up volumes.

− Renegotiate subsidy arrangements with terminal operators as volume increases.

− Confirm site for development of western terminal (either one of the existing terminals or a new facility at Laverton or further west). Develop business case for capital funding if required.

Year 3

− Procure first train-set for the Dandenong services, using current broad gauge equipment, and let operating contract.

− Locomotives and wagons either broad or standard gauge (depending on analysis of the options) or a mix of both or with dual gauge capability (standard gauge dimension vehicles with ability to traverse broad gauge).

− Commence construction of new western terminal (or enhance existing terminals as appropriate).

Year 4

− Commence use of the MIT.

− Commission Greens Rd terminal.

− Commission new or enhanced western terminal.

Future years

− Introduce second Dandenong train set and new train sets for the north and west using new equipment.

− Add train sets as required.

− Renegotiate (or re-tender) rail contracts for the south-east and the north/west services separately or jointly.

12. SYSTEM GOVERNANCE

12.1 Background and observations

The report so far has analysed the market, operational and economic factors for an urban intermodal system servicing Melbourne. Supply chains however, do not operate in a commercial or institutional vacuum. This section therefore seeks to deal with the governance arrangements for a network-based intermodal system.

Urban intermodal logistics systems are generally more complex than long distance systems and have smaller tolerances for error. This operating condition and the corporate and regulatory changes of the last decade influencing rail, have not delivered a regime for contributory investment by government or operators. The progress which has been made was largely as a consequence of strategies initiated when rail operators were government-controlled. More recent strategies by some transport sector leaders in search of both vertical and horizontal integration with the promise of reform and investment. Those players have been progressively withdrawing from regional and urban rail transport services.

Review of the current situation suggests that an alternative port-rail governance paradigm is necessary in order to achieve a different outcome. This is not to suggest that improvements have not been forthcoming in recent years; however most attention has been on the inter-capital chains which are the easiest to measure, and where the larger players have the greatest opportunity to secure the best financial outcomes.

Forward estimates of demand, measured in truck and train movements, rather than tonne kilometres, clearly justifies the need to refocus attention onto the burgeoning urban freight task. The underlying complexity of the urban freight task, corporate opportunism and the atomistic role of transport operators however, have largely eliminated the possibility of supply chain cohesion. A recent study of those chains in Sydney, identified the lack of end-to-end chain visibility, risk of competitive threat, reluctance to collaborate and an avoidance of contractual commitment. An alternative model is required.

12.2 Wider perspectives required

Intermodal supply chains can be complicated by the interests of many stakeholder organisations including government agencies and industry.

Developing a successful intermodal system requires a holistic approach which recognises that:

− Individual firms are unlikely to have the capability to deliver network wide investments or outcomes commensurate with the scale required

− Intermodal systems require upfront capacity investments partially justified by savings in externality costs beyond the reach of those firms

− Strategies which deliver competitive advantage may in effect close the market to competition

− Concepts of “competitive advantage” and “open access” are often in conflict and the business models managing critical assets such as intermodal terminals require careful consideration

− Unless the policy and institutional environment provides surety, operators are unlikely to invest in large immobile assets such as terminals

The failure to date to deliver an intermodal system in Melbourne is not due to the absence of a market, but rather that no systematic approach has been possible.

12.3 Objectives

The VFNS has identified eight strategic objectives which are restated in Table 1 of this report. Each objective to a greater or lesser degree is relevant in terms of intermodal system governance. In particular, the objective relating to a predictable policy environment to promote private sector investment is relevant.

The governance arrangements need to deliver:

− An all of government planning regime to identify intermodal terminal precincts, corridors and networks and ensure sufficient land is preserved to year 2035

− System wide improvements which are co-ordinated rather than piecemeal; for example, development of urban terminals without a commensurate provision of capacity at the port-rail interface (at the MIT) will prevent delivery of the system

− A train management and access regime which is focussed on the specific needs of an urban intermodal network and its coexistence with the passenger rail transport system

− A co-ordinated approach for the development of rail and road terminals in a complimentary and integrated fashion

− Integration of the strategies with those of the Port Corporations of Melbourne and Hastings

− Uniformity in rolling stock standards and operating practices

− Compliance with national competition principles

12.4 Models

A range of potential business, operating and property models can be considered on a continuum from an “elemental” supply chain approach largely mimicking what has existed to date, through to franchised and/or vertically integrated models necessitating review and sanction under competition policy. The broad options are described in Table 23 on the following page.

Table 23 - Classification of potential governance models

A B C D Elemental Coordinated Franchised Integrated

Description Primary focus is on Co-ordinated variant on System wide assets Assets and operations individual corridors and Type A, with service assembled and for discrete corridors traffics providers opting for franchised through held by single entity, Service providers form operating or equity joint longer term periodic whether private or time-based contracts ventures competitive tendering government around vertical Strong integration of Potential three franchise interfaces; and compete urban terminals with rail “areas” available horizontally within and road services corridors

Ownership Terminals and rail/road Similar to A, however Government takes Proprietary ownership shuttle assets are held government agencies equity in fixed terminal of terminals and rolling by individual private provide seed capital in assets and rolling stock stock companies selected investments as fleet; assets leased to MIT managed by Access regimes control PPP models operators controlling entity entrance to rail networks MIT managed by PoMC Operators may provide MIT managed by PoMC handling equipment; other assets leased on

transparent contracts MIT managed by franchisees

Management Varied roles and models Managed co-operatives Management of Integrated for chain leadership and and joint ventures terminals and rolling management of co-ordination stock is arrangement terminals and linehaul through time and and PUD operations performance-based franchises Managed through nominated agency (e.g. PoMC or new entity)

Policy Aspirational targets Some intervention Rules governing conduct Does not comply with Managed within existing focussed on selective of franchisee national competition agency arrangements investments in terminal Assets may be held principles; although assets are required maybe resolved Light-handed within single GTE through open access intervention Rules for open access regime for terminals for terminals and train and train capacity capacity ACCC approvals based Periodic competitive on public benefit test testing in market

Implications Risk of fragmentation Risk of some Alignment with current Quasi-monopoly at the along chain due to hype- fragmentation and business models corridor or network competition inability to efficiently associated with level Lack of standardisation allocate assets/capacity passenger trains Lack of competitive of assets Lack of standardisation Asset standardisation pressure could reduce Largely represents the of assets service performance “as is” situation Substantial scale and market entry barriers

Examples Sydney and Melbourne Sydney and Perth Limited; e.g. Fremantle None operations North Quay rail terminal Connex passenger rail franchise Yarra Trams franchise

Options B and C best capture the benefits of a centrally managed system, while retaining incentives to maximise chain performance and innovate.

12.5 Discussion

12.5.1 Institutional arrangements Over the last decade, developments in urban intermodal systems have been led within government by central agencies with an infrastructure or state development remit, ports corporations or government-owned rail entities. In Victoria, value contributions have been provided by DOT and DIIRD, PoMC and Victrack.

The current institutional arrangements are limited in that no single entity is accountable for delivery of outcomes on a network-wide basis, or only have limited participation in a facilitation role. Arguably, the PoMC governance model with its commercial structures presently offers the most appropriate base for delivering such outcomes, yet is constrained by its more limited, traditional role within the port boundaries. In Sydney and Perth, the port corporations have sought a similarly enhanced role with limited success to date.

A new agency, with specific powers and responsibilities, needs to deliver the intermodal system, providing the leadership, funding capital through PPP vehicles, and delivering against policy outcomes. This is not to suggest a return to government-owned rail or road entities (such as V-Line Freight), but rather admits that some market intervention, in commercial partnership with the private sector, will be necessary.

A parallel with the management of urban passenger rail and tram systems is made where private sector operators can enter into franchise arrangements with government to manage the government’s assets. There are sound reasons why the “market” for urban passenger transport systems is not opened more widely to allow uncontrolled market access. It is also feasible to propose that some urban freight systems would achieve more effective outcomes than the current paradigm delivers.

The economic justification recognises the benefits which accrue from reduced externality costs from implementing an intermodal system. The intermodal system will require the expenditure of public capital for system infrastructure. It should be recognised that the intermodal system will capture value through rents, leases and externality benefits and therefore exhibits the characteristics of a classic statutory authority candidate. This observation will challenge the prevailing Hilmer competition principles, which are beginning to be seen as unsuccessful in their general application to the non-bulk rail sector.

12.5.2 Rail operations Network management

The management of the intermodal system requires that it is managed as a system, not as a collection of discrete linehaul movements by rail or road. Interfaces with port and urban terminals will need to be managed to optimise the efficiency of the transport function and not be encumbered by the operating variances of those terminals.

Over time, the rail freight task will grow to around 90 daily (one way) train movements and 1900 linehaul truck movements. While the latter achieves greater flexibility, the operation of 90 metro rail movements integrated with the metro passenger system will require new operating paradigms by ARTC and Connex train control. Train control issues could benefit from a more detailed analysis of the roles played by the individual parties involved in the operation of urban shuttle trains.

This is not to suggest any change to the principle that passenger trains will continue an operating priority over freight trains but rather that freight trains must achieve an operating reliability and technology consistent with that of passenger trains. Mandatory train paths and arrival and departure disciples will need to be the norm, whereas metro freight trains have traditionally lagged behind the level of management enjoyed by passenger and interstate trains.

The Victorian Government is presently negotiating with ARTC for the lease of the standard gauge interstate network under the Interstate Infrastructure Lease (which would extend to 2059). The standard gauge network is required to handle port shuttles to the northern and western intermodal terminals, requiring 12 and 28 one-way train paths each day by 2035. Given the importance of network reliability of port shuttles as a critical enabler of market share, it will also be important that the lease obligates ARTC to provide train paths which meet the requisite performance.

Rolling stock procurement

Over the last decade, metro rail freight operators have generally sourced old operating equipment with low asset book values. The operating performance of this equipment is generally poor and not conducive of efficient network-wide operations. In a mature system, the rolling stock needs to be uniform and reliable and capable of passenger train equivalent performance.

At its commencement, the freight rail system will require 4 train sets generating 12 cycles per day. This would require $50-$60 million of capital if new rolling stock of 10 locos and 120 wagons was sourced27.

In view of the need for specialist equipment, it would be reasonable for Government to make the acquisitions and lease trains to competitively selected operators on performance based contracts, as discussed above. As demand grows and the provision of additional capacity is required, supplementary train sets would be procured and leased on a similar basis.

The benefits of this arrangement are that the capacity will remain under the government’s control rather than the risk of private sector operators withdrawing capacity on short notice or not investing when additional demand emerges. Government would assume large amounts of capital risk, thus making the operating task more attractive to the type of niche rail operators that might be best suited to it.

12.5.3 Infrastructure planning Demand modelling has identified that a new intermodal terminal could be utilised immediately in the southeast and that existing terminals in the north and western areas could also support interim operations. The development of the Melbourne Intermodal Terminal at the port, the relocation of the interstate terminal and the freeing up of the market site would be important medium term components of the strategy.

Historically, urban terminal developments have been largely conducted by private developers although there has not been an overarching planning framework that links such developments to policies such as the VFNS and AusLink. Further rail and road intermodal terminals however, should be complimentary and fit within a pre- determine configuration. The VFNS will identify key Transport Corridors which will guide the process.

12.6 Summary

In summary, the question of governance must be considered against the following critical factors.

1. There is a need for government intervention and selective asset ownership; the private sector has very limited capability to deliver a network-wide system commensurate with the demands of a burgeoning urban freight task including international containers

2. There is a need to manage intermodal system as a system rather than to continue to develop and operate the system on a piecemeal basis

3. While the intermodal system will interface with the port terminals, there is a need to separate the management of each function, and to recognise that the intermodal system requires management by a government agency to protect the efficacy of the intermodal system. A new Intermodal Authority, perhaps established under the Port Services Act is recommended

4. The delivery of the system will require public and private investment, and must satisfy national competition principles. The competitive test will be satisfied by periodically inviting expressions of interest and periodic tenders for rail services, and long term performance contracts for terminal operators

5. The government should own the critical system assets such as terminal freeholds and rolling stock and lease where appropriate against performance based contracts

27 The annualised capital cost of this rolling stock was included in the rail cost modelling supporting this report.

13. CONCLUSIONS

8. The relocation of the interstate rail terminal at Dynon South to a site north of Melbourne (Donnybrook) is strongly recommended as (a) a means of reducing port precinct freight congestion, and (b) providing a more suitable footprint for the development of the Melbourne Intermodal Terminal as proposed under Port@L strategy. This new northern terminal could also provide an overflow capability should demand exceed the capacity of the existing Somerton terminal in the longer term.

14. APPENDIX 1 - MODELLING

Table 24 - Modelled Rail Unit Costs

RAIL Item Unit cost Fuel Cost ($ per L) (2006) $1.19 Fuel Consumption per GTK 6.5 Rolling Stock Type 48 Class H Power 1,000 Configuration Push-Pull No. Locos per Service 2 Crew Footplate Time 8 Crew cost p.a (fixed component) 80,000 Crew (people) per train 16 Locomotive Type 48 Class Loco Tare (t) 100 H Power 1,000 Fixed Locomotive Maintenance 100,000 Loco Maintenance Cost per hour 10 Loco Maintenance Cost per km 1 Wagon Type 76T Wagon Maintenance per 1000km 50 Depreciation - Locomotives (48 Class) 150,000 Depreciation - Wagons (76T) 3,000

Table 25 - Modelled Road Unit Costs

ROAD Unit Cost Item Semi B-Double Payload 24 40 - Rego and insurances (estimate) $16,000 $18,000 - Fuel - Litres per NTK 0.0224 0.0173 - Maintenance (Truck and trailers) - No per annum 12 20 - Maintenance (Truck and trailers) - Cost per service $2,500 $3,000 - Tyres - No. of tyres 22 34 - Depot costs - Total value for 2 depots over 5 trucks $40,000 $40,000 Working days 280 300 - Prime mover and trailer - Operating Life years - AGED 7 - Prime mover and trailer - Operating Life years - NEAR NEW 10 - Prime mover and trailer - Interest on loan % 8% - Fuel - $/litre (2006) $1.19 - Tyres - Cost per tyre (new + retreads average) $700 - Tyres - Kilometres per tyre 100,000 Wages - Hourly Rate $0.00 - Depot costs - Value per depot $100,000 - Depot costs - Depreciation years 25 - Depot costs - Rates and taxes (over 5 trucks) $3,000 - Depot costs - Annual maintenance (over 5 trucks) $2,000 - Management and overheads per truck 6% - Depot delivery costs - Cost per tonne/pallet $5 Profit margin 8% Capital Cost Aged Container Truck (Flatbed) $230,000 $400,000 Capital Cost Near New Container Truck (Flatbed) $390,000 $530,000

Table 26 - Site footprints for rail-based intermodal terminals

Nominal Terminal footprint

TEU's per annum per site 50,000 100,000 150,000 200,000 300,000 400,000 500,000 750000 1,000,000 1,250,000 1,500,000

Working days per annum 250 250 300 300 300 300 300 300 350 350 350 Daily throughput (TEU's per day) 200 400 500 667 1,000 1,333 1,667 2,500 2,857 3,571 4,286 Seasonal peak effect (daily impact) 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% Seasonal peak volume per day 230 460 575 767 1,150 1,533 1,917 2,875 3,286 4,107 4,929

Loaded import boxes as % total 55% 55% 55% 55% 55% 55% 55% 55% 55% 55% 55%

Import boxes handled daily 127 253 316 422 633 843 1,054 1,581 1,807 2,259 2,711 Export boxes handled daily 104 207 259 345 518 690 863 1,294 1,479 1,848 2,218 Total daily 230 460 575 767 1,150 1,533 1,917 2,875 3,286 4,107 4,929

Average terminal dwell time in dynamic storage (days) - imports 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 - exports 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Equivalent TEU's per day dwell volumes 420 840 1,049 1,399 2,099 2,798 3,498 5,247 5,996 7,496 8,995

Intermodal dynamic storage assumptions - stacking height 2 2 2 2 2 2 2 2 2 2 2 - utilisation 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% - TEU footprint area 16 16 16 16 16 16 16 16 16 16 16 - circulation 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% Number of footprints 350 700 874 1,166 1,749 2,332 2,915 4,372 4,997 6,246 7,496 Area (sq metres) 9,549 19,099 23,873 31,831 47,747 63,662 79,578 119,366 136,419 170,523 204,628

MT container park calcs Dwell days average 12 12 12 12 12 12 12 12 12 12 12 Imports daily average 127 253 316 422 633 843 1,054 1,581 1,807 2,259 2,711 MT storage capacity requirement 1,518 3,036 3,795 5,060 7,590 10,120 12,650 18,975 21,686 27,107 32,529 MT container storage assumptions - stacking height 5 5 5 5 5 5 5 5 5 5 5 - utilisation 70% 70% 70% 70% 75% 75% 75% 75% 80% 80% 80% - TEU footprint area 16 16 16 16 16 16 16 16 16 16 16 - circulation 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% Number of footprints 434 867 1,084 1,446 2,024 2,699 3,373 5,060 5,421 6,777 8,132 Area (sq metres) 11,840 23,681 29,601 39,468 55,255 73,674 92,092 138,138 148,005 185,006 222,008 Hectares 1.2 2.4 3.0 3.9 5.5 7.4 9.2 13.8 14.8 18.5 22.2

Other areas Sidings Average train TEU's per cycle (2*25 wagons*3*80%) 120 120 120 120 120 120 120 120 120 120 120 Daily train cycles per day 2.0 4.0 5.0 6.0 9.0 12.0 14.0 21.0 24.0 30.0 36.0 Dewll time in siding per train (hours in/out per cycle) 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Required sidings calculated 0.4 0.8 1.0 1.3 1.9 2.5 2.9 4.4 5.0 6.3 7.5 Required sidings rounded 1.0 1.0 2.0 2.0 2.0 3.0 3.0 5.0 5.0 7.0 8.0 - number minimum 2 2 2 2 2 3 3 5 5 7 8 - siding and approach length (metres) 900 900 900 900 900 900 900 900 900 900 900 - width per siding (metres) 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 - width of loading apron (metres) 20 20 20 20 20 30 30 30 30 30 30 Total area for siding and loading (sq mtrs) 24,300 24,300 24,300 24,300 24,300 36,450 36,450 42,750 42,750 49,050 52,200

Value adding repairs, preping etc - Ground slots (assume 5% of MT storage) 17 35 44 58 87 117 146 219 250 312 375 - Area per TEU 16 16 16 16 16 16 16 16 16 16 16 - Circulation 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% Total area 430 859 1,074 1,432 2,149 2,865 3,581 5,371 6,139 7,674 9,208

Total estimated operational areas 46,119 67,939 78,849 97,031 129,450 176,650 211,701 305,626 333,313 412,253 488,044

Internal roads, truck parking, boundary setbacks, offices, etc 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

TOTAL AREA - sq metres 59,955 88,321 102,503 126,141 168,285 229,646 275,211 397,314 433,306 535,929 634,457

TOTAL AREA - hectares 6 9 10 13 17 23 28 40 43 54 63

Table 27- Discounted Cash Flow - North Intermodal System

RESULTS - NORTH 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 As is Scenario Road Direct Task 000's TEUs 283 298 315 332 350 370 391 413 436 461 487 516 538 563 589 616 644 674 705 738 773 811 848 888 930 974 Weighted Average Cost per TEU A$ per TEU 352 347 343 340 336 333 330 327 324 322 319 317 315 313 311 310 312 314 316 319 322 326 330 334 339 344 Plus Externalities A$ per TEU 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 Minus Taxes & Charges A$ per TEU 46 45 45 44 44 43 43 43 42 42 42 41 41 41 40 40 41 41 41 41 42 42 43 43 44 45 Road Direct Resource Cost 347 343 340 337 334 331 328 326 323 321 319 317 315 313 312 310 312 314 316 319 321 324 328 332 336 341

Scenario 1 Combined Road and Rail Intermodal Service

TASK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total Task 000's TEUs 283 298 315 332 350 370 391 413 436 461 487 516 538 563 589 616 644 674 705 738 773 811 848 888 930 974 Rail-Based Intermodal 000's TEUs 44 47 51 54 58 62 66 71 76 82 87 94 99 104 110 116 122 129 136 143 151 159 168 177 186 197 Road Based Intermodal 000's TEUs 188 200 212 225 239 254 269 286 303 321 341 362 379 397 415 435 455 477 499 523 547 573 600 628 657 688 Residual Road Task 000's TEUs 51 51 52 53 54 54 55 56 57 58 59 61 60 62 64 65 67 69 71 73 75 79 81 84 86 89 Intermodal Share 82% 83% 83% 84% 85% 85% 86% 86% 87% 87% 88% 88% 89% 89% 89% 89% 90% 90% 90% 90% 90% 90% 90% 91% 91% 91%

OPERATIONAL COSTS

Rail-Based Intermodal Rail Linehaul A$ per TEU 56.3 36.6 30.7 19.9 19.4 19.0 20.7 20.2 19.7 21.1 20.6 21.8 21.5 22.7 22.4 22.2 23.3 23.0 24.0 23.8 24.7 24.4 25.3 25.1 25.9 26.6 Terminals/Container Parks A$ per TEU 150.0 131.3 112.5 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 Semi Distribution A$ per TEU 129 128 127 126 126 125 124 123 123 122 121 120 120 120 120 120 120 120 120 120 119 120 120 120 120 120 Rail-Based Price per TEU 335 296 271 221 220 219 220 218 217 218 217 217 217 218 217 217 218 218 219 218 219 219 220 220 221 221 Plus Externalities A$ per TEU 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 Minus Taxes & Charges A$ per TEU 44 38 35 29 29 28 29 28 28 28 28 28 28 28 28 28 28 28 28 28 28 29 29 29 29 29 Rail Resource Cost 308 273 251 209 207 206 207 206 205 205 204 205 204 205 205 205 205 205 206 206 206 207 208 207 208 208

Road-Based Intermodal B-Double Linehaul A$ per TEU 110 111 111 111 112 112 112 113 113 113 114 114 114 114 115 115 115 115 115 116 116 116 116 116 117 117 Terminals/Container Parks A$ per TEU 80.0 70.0 60.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Semi Distribution A$ per TEU 129 128 127 126 126 125 124 123 123 122 121 120 120 120 120 120 120 120 120 120 119 120 120 120 120 120 Road-Based-Price per TEU 319 309 298 278 277 277 276 276 275 275 275 274 274 274 275 275 275 275 275 275 275 276 276 276 276 276 Plus Externalities A$ per TEU 48 48 48 48 48 48 48 48 48 48 48 49 49 49 49 49 49 49 49 49 49 49 56 56 56 56 Minus Taxes & Charges A$ per TEU 41 40 39 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 Road-Based Resource Cost 326 316 307 290 289 289 288 288 288 287 287 288 288 288 288 288 288 288 289 289 289 289 297 297 297 297

Residual Road Task Direct Customer Delivery A$ per TEU 352 347 343 340 336 333 330 327 324 322 319 317 315 313 311 310 312 314 316 319 322 326 330 334 339 344 Residual Road Task Cost per TEU 352 347 343 340 336 333 330 327 324 322 319 317 315 313 311 310 312 314 316 319 322 326 330 334 339 344 Plus Externalities A$ per TEU 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 Minus Taxes & Charges A$ per TEU 46 45 45 44 44 43 43 43 42 42 42 41 41 41 40 40 41 41 41 41 42 42 43 43 44 45 Residual Road Task Resource Cost 347 343 340 337 334 331 328 326 323 321 319 317 315 313 312 310 312 314 316 319 321 324 328 332 336 341

Total Operational Costs As is Road Cost $ Millions 98 102 107 112 117 122 128 134 141 148 155 164 170 176 184 191 201 212 223 235 248 263 278 295 312 332 Intermodal Operations Cost Rail Shuttles $ Millions 14 13 13 11 12 13 14 15 16 17 18 19 20 21 22 24 25 26 28 29 31 33 35 37 39 41 B-Double Shuttles $ Millions 61 63 65 65 69 73 78 82 87 92 98 104 109 114 120 125 131 138 144 151 158 166 178 186 195 204 Residual Road $ Millions 18 18 18 18 18 18 18 18 18 19 19 19 19 19 20 20 21 22 22 23 24 26 27 28 29 30 Total Intermodal Operations Cost $ Millions 92 94 96 94 99 104 109 115 121 128 134 143 148 155 162 169 177 186 194 203 213 224 239 251 263 276

Capex Status Quo Capex Requirments $ Millions00000000000000000000000000 Intermodal System Capex Requirements $ Millions 1 36 20 58

Operational Difference $ Millions 6 9 11 18 18 18 19 19 20 20 21 21 21 21 22 22 24 26 29 32 35 39 39 44 49 56 Difference $ Millions 5 9 11 -18 18 18 19 -1 20 20 21 21 21 21 22 -36 24 26 29 32 35 39 39 44 49 56

Cumulative NPV @ 10% $ Millions $4 $11 $20 $7 $19 $29 $38 $38 $47 $54 $62 $68 $75 $80 $85 $77 $82 $87 $92 $96 $101 $106 $110 $115 $119 $124

NPV Total NPV 6.25% $200 7.50% $169 10.00% $124 12.50% $94 15.00% $74

Table 28- Discounted Cash Flow – South East Intermodal System

RESULTS - SE 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 As is Scenario Road Direct Task 000's TEUs 651 691 734 780 828 880 935 994 1056 1122 1193 1269 1305 1372 1442 1517 1595 1677 1764 1855 1950 2097 2205 2319 2439 2565 Weighted Average Cost per TEU A$ per TEU 378 377 376 375 374 374 373 372 371 370 369 369 368 367 366 366 366 366 366 366 365 365 365 365 365 365 Plus Externalities A$ per TEU 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 Minus Taxes & Charges A$ per TEU 49 49 49 49 49 49 48 48 48 48 48 48 48 48 48 48 48 48 48 48 48 48 47 47 47 47 Road Direct Resource Cost 427 427 426 425 424 424 423 422 421 421 420 419 419 418 417 417 417 417 417 417 416 416 416 416 416 416

Scenario 1 Combined Road and Rail Intermodal Service

TASK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total Task 000's TEUs 651 691 734 780 828 880 935 994 1056 1122 1193 1269 1305 1372 1442 1517 1595 1677 1764 1855 1950 2097 2205 2319 2439 2565 Rail-Based Intermodal 000's TEUs 198 212 228 245 263 282 303 326 350 376 403 433 455 478 503 528 555 583 613 644 677 711 747 785 825 867 Road Based Intermodal 000's TEUs 134 142 150 159 169 178 189 200 212 224 237 251 265 280 296 313 330 349 368 389 411 434 459 485 512 541 Residual Road Task 000's TEUs 319 337 356 376 397 419 443 468 495 523 553 584 584 613 644 676 710 745 782 822 863 951 999 1050 1102 1158 Intermodal Share 51% 51% 52% 52% 52% 52% 53% 53% 53% 53% 54% 54% 55% 55% 55% 55% 55% 56% 56% 56% 56% 55% 55% 55% 55% 55%

OPERATIONAL COSTS

Rail-Based Intermodal Rail Linehaul A$ per TEU 66.5 43.3 36.2 23.6 23.1 22.6 24.5 24.0 23.5 25.1 24.6 26.0 25.7 27.1 26.9 26.6 27.9 27.7 28.9 28.6 29.7 29.5 30.6 30.4 31.3 32.2 Terminals/Container Parks A$ per TEU 150.0 131.3 112.5 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 Semi Distribution A$ per TEU 139 139 138 138 137 137 137 136 136 135 135 135 135 135 135 135 135 135 135 135 135 135 135 135 136 136 Rail-Based Price per TEU 356 313 287 236 235 234 236 235 234 235 235 236 235 237 237 237 238 238 239 239 240 240 241 241 242 243 Plus Externalities A$ per TEU 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 Minus Taxes & Charges A$ per TEU 46 41 37 31 31 30 31 31 30 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 32 Rail Resource Cost 336 299 276 232 231 230 232 231 230 231 230 231 231 232 232 232 233 233 234 234 235 235 236 236 237 238

Road-Based Intermodal B-Double Linehaul A$ per TEU 171 172 173 174 175 176 177 178 179 180 181 182 182 181 181 181 181 181 181 181 181 180 180 180 180 180 Terminals/Container Parks A$ per TEU 80.0 70.0 60.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Semi Distribution A$ per TEU 139 139 138 138 137 137 137 136 136 135 135 135 135 135 135 135 135 135 135 135 135 135 135 135 136 136 Road-Based-Price per TEU 390 381 371 352 352 353 353 354 355 355 356 356 356 356 356 356 356 356 356 356 356 356 356 356 356 356 Plus Externalities A$ per TEU 93 93 93 93 93 93 93 93 93 93 93 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 Minus Taxes & Charges A$ per TEU 51 50 48 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 46 Road-Based Resource Cost 433 425 416 400 400 400 401 401 402 402 403 415 415 415 415 415 415 415 415 415 415 415 415 415 415 415

Residual Road Task Direct Customer Delivery A$ per TEU 378 377 376 375 374 374 373 372 371 370 369 369 368 367 366 366 366 366 366 366 365 365 365 365 365 365 Residual Road Task Cost per TEU 378 377 376 375 374 374 373 372 371 370 369 369 368 367 366 366 366 366 366 366 365 365 365 365 365 365 Plus Externalities A$ per TEU 99 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 98.5 Minus Taxes & Charges A$ per TEU 49 49 49 49 49 49 48 48 48 48 48 48 48 48 48 48 48 48 48 48 48 48 47 47 47 47 Residual Road Task Resource Cost 427 427 426 425 424 424 423 422 421 421 420 419 419 418 417 417 417 417 417 417 416 416 416 416 416 416

Total Operational Costs As is Road Cost $ Millions 278 295 312 331 351 373 395 419 445 472 501 532 546 573 602 632 664 699 735 772 812 873 918 966 1,015 1,068 Intermodal Operations Cost Rail Shuttles $ Millions 66 63 63 57 61 65 70 75 80 87 93 100 105 111 117 123 129 136 143 151 159 167 176 185 195 206 B-Double Shuttles $ Millions 58 60 63 64 67 71 76 80 85 90 96 104 110 116 123 130 137 145 153 161 171 180 190 201 212 224 Residual Road $ Millions 136 144 151 160 168 177 187 198 208 220 232 245 245 256 269 282 296 310 326 342 359 396 416 437 459 482 Total Intermodal Operations Cost $ Millions 261 267 277 280 296 314 333 353 374 397 421 449 460 484 508 534 562 591 622 654 689 743 783 823 866 912

Capex Status Quo Capex Requirments $ Millions00000000000000000000000000 Intermodal System Capex Requirements $ Millions 11 126 55 233

Operational Difference $ Millions 17 27 36 51 55 59 62 66 71 75 81 82 86 90 94 98 102 108 112 118 123 130 136 143 149 156 Difference $ Millions 6 27 36 -75 55 59 62 11 71 75 81 82 86 90 94 -135 102 108 112 118 123 130 136 143 149 156

Cumulative NPV @ 10% $ Millions $6 $28 $55 $4 $38 $71 $103 $109 $139 $168 $196 $222 $247 $271 $293 $264 $284 $303 $322 $339 $356 $372 $387 $402 $415 $429

NPV Total NPV 6.25% $702 7.50% $591 10.00% $429 12.50% $321 15.00% $247

Table 29- Discounted Cash Flow – Western Intermodal System

RESULTS - WEST 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 As is Scenario Road Direct Task 000's TEUs 579 602 627 652 679 708 738 770 803 838 875 972 994 1040 1087 1136 1187 1241 1298 1357 1418 1515 1585 1657 1733 1812 Weighted Average Cost per TEU A$ per TEU 280 279 278 277 276 275 274 303 302 301 300 299 298 297 296 295 295 295 296 296 296 296 296 296 296 296 Plus Externalities A$ per TEU 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 Minus Taxes & Charges A$ per TEU 36 36 36 36 36 36 36 39 39 39 39 39 39 39 39 38 38 38 38 38 38 38 38 38 39 39 Road Direct Resource Cost 277 276 275 274 273 272 271 297 296 295 294 293 292 291 291 290 290 290 290 290 290 290 290 290 291 291

Scenario 1 Combined Road and Rail Intermodal Service

TASK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total Task 000's TEUs 579 602 627 652 679 708 738 770 803 838 875 972 994 1040 1087 1136 1187 1241 1298 1357 1418 1515 1585 1657 1733 1812 Rail-Based Intermodal 000's TEUs 151 158 167 175 184 194 204 215 226 237 250 263 274 287 299 313 327 341 356 372 389 406 424 443 462 483 Road Based Intermodal 000's TEUs 161 167 174 181 189 197 205 213 222 231 240 250 261 273 285 298 311 325 339 354 370 386 404 422 440 460 Residual Road Task 000's TEUs 268 277 286 296 306 318 329 342 355 370 385 459 459 480 502 525 550 575 602 630 660 723 757 793 830 869 Intermodal Share 54% 54% 54% 55% 55% 55% 55% 56% 56% 56% 56% 53% 54% 54% 54% 54% 54% 54% 54% 54% 53% 52% 52% 52% 52% 52%

OPERATIONAL COSTS

Rail-Based Intermodal Rail Linehaul A$ per TEU 44.8 28.9 24.5 15.8 15.3 14.9 16.3 15.8 15.4 16.5 16.0 17.0 16.7 17.7 17.4 17.1 18.0 17.7 18.5 18.2 18.9 18.7 19.3 19.1 19.7 20.2 Terminals/Container Parks A$ per TEU 150.0 131.3 112.5 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 Semi Distribution A$ per TEU 123 122 121 120 120 119 118 117 116 116 115 114 114 114 114 114 114 114 114 114 114 114 114 114 114 114 Rail-Based Price per TEU 318 282 258 211 210 209 209 208 207 207 206 206 206 207 207 206 207 207 208 207 208 208 208 208 209 209 Plus Externalities A$ per TEU 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 Minus Taxes & Charges A$ per TEU 41 37 34 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 Rail Resource Cost 288 257 236 196 194 193 194 193 192 192 191 191 191 192 192 191 192 192 193 192 193 193 193 193 194 194

Road-Based Intermodal B-Double Linehaul A$ per TEU 150 150 151 151 151 151 151 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 Terminals/Container Parks A$ per TEU 80.0 70.0 60.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Semi Distribution A$ per TEU 123 122 121 120 120 119 118 117 116 116 115 114 114 114 114 114 114 114 114 114 114 114 114 114 114 114 Road-Based-Price per TEU 353 342 332 311 311 310 309 309 308 308 307 307 307 307 307 307 307 306 306 306 306 306 306 306 306 306 Plus Externalities A$ per TEU 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 Minus Taxes & Charges A$ per TEU 46 45 43 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 Road-Based Resource Cost 339 329 320 302 302 301 301 300 300 299 299 298 298 298 298 298 298 298 298 298 298 298 298 298 298 298

Residual Road Task Direct Customer Delivery A$ per TEU 280 279 278 277 276 275 274 303 302 301 300 299 298 297 296 295 295 295 296 296 296 296 296 296 296 296 Residual Road Task Cost per TEU 280 279 278 277 276 275 274 303 302 301 300 299 298 297 296 295 295 295 296 296 296 296 296 296 296 296 Plus Externalities A$ per TEU 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 33 Minus Taxes & Charges A$ per TEU 36 36 36 36 36 36 36 39 39 39 39 39 39 39 39 38 38 38 38 38 38 38 38 38 39 39 Residual Road Task Resource Cost 277 276 275 274 273 272 271 297 296 295 294 293 292 291 291 290 290 290 290 290 290 290 290 290 291 291

Total Operational Costs As is Road Cost $ Millions 160 166 172 179 186 193 200 228 237 247 257 285 291 303 316 329 344 360 376 394 412 440 460 481 503 527 Intermodal Operations Cost Rail Shuttles $ Millions 43 41 39 34 36 38 40 41 43 46 48 50 52 55 57 60 63 65 69 72 75 78 82 85 89 94 B-Double Shuttles $ Millions 54 55 56 55 57 59 62 64 66 69 72 75 78 81 85 89 93 97 101 106 110 115 120 125 131 137 Residual Road $ Millions 74 76 79 81 84 86 89 101 105 109 113 134 134 140 146 152 159 167 175 183 191 210 220 230 241 253 Total Intermodal Operations Cost $ Millions 172 172 174 170 176 183 190 207 215 224 233 259 264 276 288 301 315 329 344 360 377 403 422 441 462 483

Capex Status Quo Capex Requirments $ Millions 00000000000000000000000000 Intermodal System Capex Requirements $ Millions 1 38 50 34

Operational Difference $ Millions -12 -6 -1 9 9 10 10 21 23 23 25 26 26 27 28 28 29 31 32 34 35 37 38 40 42 44 Difference $ Millions -13 -6 -1 -29 9 10 10 -29 23 23 25 26 26 27 28 -6 29 31 32 34 35 37 38 40 42 44

Cumulative NPV @ 10% $ Millions -$12 -$17 -$18 -$38 -$32 -$27 -$22 -$35 -$25 -$16 -$8 $0 $8 $15 $22 $20 $26 $32 $37 $42 $47 $51 $56 $60 $64 $67

NPV Total NPV 6.25% $141 7.50% $111 cumulative negative returns before operating profit = $69m 10.00% $67 12.50% $39 15.00% $21

15. APPENDIX 2 - WORKING PAPER ON EXTERNALITIES AND CONGESTION

15.1 Introduction

In Australia, a number of cost-benefit analyses have been conducted in the transport sector, taking into account negative environmental effects (BTCE, 1996b). These studies however, refer to specific transportation projects, situations or policies and do not provide an integral evaluation of the actual transport system country-wide. At the current state of transport policy, most of the environmental effects of transport are external (i.e. mostly borne by those not responsible for them). Typical examples are noise and air pollution, which adversely affect society as a whole but are not (or only partially) compensated for by motorists. Note: that in Australia, there is some debate that fuel excise (at 38 cents per litre for passenger vehicles) can be regarded as some form of externalities tax.

The current debate on road pricing suggests a need for the road sector to incorporate environmental and social externalities with the traditional costs and benefits of road transport project proposals (e.g. crash costs, vehicle operating costs, travel time for drivers, other car occupants and payload). The literature review performed by Austroads (2000) indicated numerous attempts to develop cost estimates for externalities. Such estimates provide opportunities to extend traditional economic evaluation of project proposals to include a wider range of impacts (an approach towards a triple-bottom-line evaluation), although there will be some level of uncertainty associated with these costs. The key externalities considered in this report and their definitions are:

− Accident; additional costs of medical care, economic production losses and suffering

− Noise; damages (opportunity costs and land value) and human health

− Air pollution; damages of human health, material/building and crop losses

− Climate change; damages (opportunity costs) of global warming

− Nature and landscape; additional cost to repair damages, compensation costs

− Urban separation; time losses of pedestrians

− Up/down stream processes; additional environmental costs (lifecycle- production/disposal)

− Crash costs; human, vehicle and general costs associated with incident

− Congestion; external additional time and operating costs

This paper identifies the significant variance involved in the estimation of externality costs. In particular, two sets of unit cost ranges emerge using different climate change assumptions relating to CO2 emissions reduction targets. The Infras/IWW(2000) study uses a 50% emissions reduction target (which has been recommended by the IPCC as an appropriate reduction target) whereas other studies are based on reduction targets specified in the Kyoto Protocol (which specifies that countries reduce total emissions by 5% from 1990 levels by 2008-2012).

Different targets apply to different countries (e.g. EU countries have a collective reduction target of 8% below 1990 levels, while for Australia, the current Kyoto target is for an increase of 8% above 1990 levels). Based on the different methodologies used, the Infras/IWW control/avoidance cost estimates are of the order of four times higher than the ExternE(1997) damage costs estimates. This may be partly accounted to Austroads study estimating externality costs that are typically higher than the more widely used BTRE/ATC values.

The key objective of this paper then is to:

1. review the existing knowledge base of environmental externality valuation as applicable for project analysis

2. provide comprehensive look-up-tables estimating the ‘calibrated’ range of externality costs in an Australian context and

3. assess the case of congestion cost as suitable for metro Melbourne traffic conditions

Based on our analysis, the total road freight externality cost, excluding congestion costs, amount to either A$22 per 1000ntks (ATC) or A$40 per 1000ntks. To include congestion costs specifically for Melbourne, add A$26.3 above base rates resulting in A$48.3 (ATC) and A$66.3 per 1000ntks respectively. For rail, only one set of externality values are available, sourced from ATC- A$7 per 1000ntks excluding congestion costs. It is assumed that rail congestion cost is negligibly small. Note that the alternative estimates of congestion costs are available from DOI ‘default values tables’ which range between A$18 and A$103 per 1000ntks depending on peak time and congestion severity considerations.

15.2 Externality Cost Estimates

15.2.1 What are the primary international sources? The Infras/IWW process for the determination of environmental externalities has been identified as a comprehensive and useable data source available internationally. The costs produced are in units which can be directly applied to traffic streams, i.e.: passenger-km, vehicle-km, or tonne-km. A consistent approach has been applied across the 17 European countries (EU17) participating in the Infras/IWW study and 15 European countries participating in the ExternE study, which provide comparable data.

The search of available literature did not find comparable consistent data for the US over the range of externalities examined in the Infras/IWW study. For this reason, the European studies (Infras/IWW and ExternE) were used as the basis for determination of ‘calibrated’ externality cost ranges for Australia and New Zealand. Other sources investigated, as summarised in Delucci(2000) incorporate a range of units including /pollutant tonne and /dB (noise), which are difficult to compare across jurisdictions, or to apply to a given transport project.

For calibration purposes, given the uncertainty and the variability of values in the EU17 set, a smaller set of five countries (Denmark, Ireland, Greece, Portugal and Spain) were selected as potentially more comparable to Australia. The EU5 countries were selected on the basis of characteristics including the percentage of population residing within urban areas, the level of economic development characterised by purchasing power parity, and similar population weighted urban densities. In addition, the level of ‘vehicle intrusiveness’ (measured in urban vkt per hectare of urbanised land) is similar between these countries. Therefore, the results described in this report are those calibrated using the EU5 values and the externality costs derived based on the EU5 subset were found to be less than the EU17 total costs.

15.3 The Australian Context

Noting the high level of variability and uncertainty involved in the unit cost estimates, the average externality costs spectrum as stated by various sources are summarised in Table 30 on the following page. Note that water pollution has not been factored in EU data sets while it appears in Austroads data. This may be due, in part, to the high priority Australia places on water conservation. Contrastingly, the up/down-stream processes cost, which appears in EU studies are excluded for Australia due to the unavailability of vehicle lifecycle or ‘grey energy’ data.

Table 30: Summary of the externality cost estimates derived from various sources

Road Rail

European Data Australian Data Europe Australia Average costs ($A/1000ntks) BAH/ EU5 EU5 Austroad ATC ATC EU17 IPCC Kyoto Urban Urban DOI EU17 Urban

Air pollution (combined) 60 24 24 23.4 9.7 2.7 7 3.3

Noise 10 3 3 2.6 2.6 2.9 7 1.4

Climate change 28 16 4 4.5 0.7 0.8 9 0.3

Nature and landscape 4 4 4 2.6 2.6 - 1 0.8

Upstream and downstream processes 16 16 6 - - - 9 -

Urban separation 2 2 2 2.2 2.2 - 2 0.8

Crashes 13 - - 3.2 3.2 2.6 0 0.3

Congestion - - - 0.9 0.9 26.3 - 0

Water pollution - - - 2.2 1.0 0.2 - 0.1

Total of average externality costs 133 65 43 41 23 35 35 7

Note:

Assume an average of 20tonne load/ truck

‘-‘ represent data which is either not provided or not applicable

From Table 30, substantial variances are attributed to different environmental reduction target scenarios and therefore have been analysed using headings ‘EU5 IPCC’ and ‘EU5 Kyoto’ respectively. In Australia, Austroads(2003a) adopts the latter Kyoto targets as the basis for environmental costing28. An average total externalities cost of A$41 per 1000ntks for road is estimated by Austroads for urban areas.

In an attempt to maximise the usages of Australian data, ATC(2006) provides a modified set of externality values (Austroads, 2003a; Laird, 2005; Pratt, 2002). Overall, ATC estimates the total cost of all externalities as A$23 per 1000ntks or approximately 55% of Austroads estimates. For rail, there are substantial reductions on most of the externality costs compared to road. ATC (2006) data suggests a total externality cost of only A$7 per 1000ntks for rail or 30% of the A$23 per 1000ntks charge for road under urban settings. Rural values are typically between 1-30% of urban values depending on the externality. Further details on these assumptions are tabulated in the statement of assumption in Table 33.

Prior Austroads (2003) and ATC (2006) estimates based on Australia as a whole, a study by Booze Allen Hamilton (BAH 2006) uses a combination of Austroads and DOI ‘default externality values’ DOI(2006) to generate a total externality cost of about A$35 per 1000ntks specifically for freight in Melbourne. This value however, excludes urban separation, nature and landscape, so assuming these are constant with BTRE/Austroad values, a cost of A$40 per 1000ntks results, which is similar to Austroads estimate of A$41 per 1000ntks. Compared to previous estimates, BAH (2006) report shows a reduced contribution from air pollution but a substantial increase in congestion costs.

28 In its first official act, the Rudd Labour Government ratified the Kyoto Protocol, demonstrating the Australian Government’s commitment to tackling climate change (Dec 2007), Sourced from http://australianpolitics.com

Figure 29: Comparison of externality costs composition between Austroads and ATC data sets

100%

80%

60%

40%

20%

% share of total externalitycosts Austroad data (Urban) ATC data (Urban) BAH/DOI VIC

Air pollution (combined) Noise Climate change Nature and landscape Upstream and downstream processes Urban separation Crashes Congestion Water pollution

From Figure 29; note that air pollution contributes most to the total costs for ATC and Austroads while BAH emphasise congestion. Congestion, by nature, is an issue subject to severe degrees of variability depending on the time of day and road type.

15.4 Traffic congestion in Melbourne

The congestion cost of traffic, reflects the additional travel time (‘congestion delay’) taken by road users in undertaking a trip, above the time it would take travelling at posted speed limits. Austroads (2000b) provides a snapshot of congestion delay through the publication of ‘Congestion Indicators’ in their annual publication ‘National Performance Indicators’.

Congestion costs vary from one capital city to another depending on the ratio of traffic volumes to road capacity, so it is not appropriate to apply a generic nationwide value. Since neither traffic volumes nor road capacity are static quantities, congestion delay times will vary from year to year. In the 2 years that the Austroads NPI series has been compiled, the change in average congestion delay time has ranged from – 4% (Melbourne) to +63% (Perth). It is thus possible for 12 month old congestion cost estimates to be conservative by as much as 30%.

More recently, the Victorian Competition and Efficiency Commission (VCEC, 2006) requested that the Department of Infrastructure (DOI) use its transport model to analyse Melbourne’s congestion costs. BTRE has also prepared preliminary estimates of congestion costs in Australian cities for the Council of Australian Governments, and there are significant differences between the two models. DOI’s model is highly disaggregated and incorporates detailed network effects, but does not include freight and other commercial traffic. While a limitation of the BTRE model is, that it uses aggregated data, it can also be used to estimate the costs of extra vehicle emissions and higher travel time variability caused by congestion. Both models include limited behavioural responses to congestion as it grows in the future. The BTE (1999) model measures both the free-flow and economic costs while the DOI model assesses costs against a free-flow situation.

Although the BTE (1999) estimate of A$0.9 per 1000ntks congestion unit costs generically applies to Australia as a whole, this value reflects average rural conditions and is not suitable for a highly urban context, as is the case in Melbourne. Another source (BTCE, 1996a) has a more detailed estimate when considering capital cities based on an adjustment factor according to road types and peak/inter-peak considerations. Under this new scheme, the average congestion unit costs for Melbourne are between A$20.4 to A$25.5 per 1000ntks depending on the time of day (peak/inter-peak period) and road types (freeway, CBD, arterial-inner and arterial- outer). The methodology and the assumptions are based consistently with BTE(1999) and are tabulated in Table 31. Note also, that this methodology was applied to a ‘maximum’ (heavy congestion) estimate in addition

© Strategic design + Development Pty Limited Page 103 of 117 Melbourne Intermodal System Study Department of Infrastructure - Victoria FINAL REPORT to the average calculations. The maximum congestion estimates in Melbourne, amounts to a substantial sum of A$151.2 to A$189.0 per 1000ntks or approximately 7.4 times of average. Table 31: Traffic congestion cost in Australian cities (BTE 1996a)

Urban

Adelaide Brisbane Canberra Melbourne Perth Sydney Total

Average congestion cost estimate ($/km) 0.03 0.08 0.06 0.17 0.04 0.13 0.1

Convert $/km to cent/km 3 8 6 17 4 13 10

Convert pcu to vkt (x3) 9 24 18 51 12 39 30

Convert vkt to ntk (/20t load) 0.45 1.2 0.9 2.55 0.6 1.95 1.5

Convert to $/'000ntks 4.5 12 9 25.5 6 19.5 15

Maximum congestion cost estimates ($/km) 0.08 0.31 0.4 1.26 0.28 0.75 1.26

Convert $/km to cent/km 8 31 40 126 28 75 126

Convert pcu to vkt (x3 6axle) 24 93 120 378 84 225 378

Convert vkt to ntk (/20t load) 1.2 4.65 6 18.9 4.2 11.25 18.9

Convert to $/'000ntks 12 46.5 60 189 42 112.5 189

From Table 31, the methodology and assumptions can be simplified into the following steps:

− Given that in Melbourne, the congestion unit cost is A$0.17 per km or 17 cents per km pcu

− Assume a 6-axle articulated truck is equivalent to 3 pcus, this figure becomes 51 cents per vkt (converting passenger vehicle based unit to truck vehicle unit)

− Divide by an average truck load of 20 tonnes to get A$2.55 per ntk or A$25.5 per 1000ntks

− Note however, that inflation adjustment factors have not been included in the above preliminary analysis. A recent source (BAH 2006) suggests that Melbourne congestion costs amounts to 17.5 cents per km (or A$26.3 per 1000ntks), which aligns closely to the 17 cents per km estimate sourced from BTCE (1996). The small 0.5 cents difference is likely due to the inclusion of some inflation adjustments.

− DOI (2006) ‘default externality tables’, also suggests another set of congestion costing estimates suitable for metro Melbourne. During peak period, the A$ per 1000ntks cost range between A$18 (light congestion), $A68 (moderate congestion) and A$103 (heavy congestion), while for off-peak A$18 per 1000ntks is applied. These values are reserved for further congestion sensitivity analysis in our modelling section.

A comprehensive summary of externality cost review and the selected basis numbers to be used in our model are presented next.

15.5 What number will we use in our model?

A comprehensive review of externalities and congestion costs highlighted several facts:

− Australian externality cost estimates are originally sourced from European data (Infras/IWW). 5 of the 17 countries studied were identified as particularly relevant to Australian conditions

− Two notable externality cost estimates, excluding congestion, are available in Australia which ranges between A$22 (ATC) and A$40 (Austroads) per 1000ntks (see Table 30). ATC and Austroads values differ primarily due to different air pollution assumptions (human health, building and crops damage effects) and emissions reduction target sought. ATC data is considered ‘conservative’ in their assumptions and is approximately half of Austroads estimate.

− A third study by BAH uses a combination of the two above sources as well as DOI’s ‘default values’ to derive an estimate of A$40 per 1000ntks. Although BAH value closely aligns with Austroads estimates, their composition varies significantly with almost two thirds of BAH sum attributed to congestion (see Figure 29), while air pollution contributing the most to total externality costs for ATC/Austroads at 42% and 57% respectively.

− Congestion cost assumptions used by both ATC and Austroads are more suited for rural conditions, and amounts to only A$0.9 per 1000ntks. The A$26.3 per 1000ntks estimate by BAH is more suitable specifically for Melbourne metropolitan environment. Note however, that congestion is further subject to variability in time of day (peak/non-peak) and road types (freeway, CBD, arterial-inner, arterial-outer). As an initial point, A$26.3 per 1000ntks is used as the average congestion costs within a recommended range between A$18 (light congestion), A$68 (moderate congestion) and A$103 (heavy congestion) per 1000ntks.

− Rail externalities, according to ATC data are A$7 as compared to A$22 per 1000ntks for road and therefore as a general rule, approximately one third of the ATC road costs. Rail congestion is assumed negligibly small and therefore, A$7 per 1000ntks is applied for both inclusive and exclusive of congestion costs.

For the purpose of further analysis, a base ‘conservative’ externality estimate excluding congestion, of A$22 per 1000ntks will be used, representing ATC (1.0 multiplier) and a more ‘aggressive’ value which is twice ATC to represent Austroads (2.0 multiplier).

As part of sensitivity analysis, a midpoint multiplier of 1.5 will be applied to ATC values for control. An option to include congestion for Metro Melbourne would add a generic A$26.3 BAH estimates of congestion resulting in a new ATC (1.0 multiplier) estimate of A$48.3 and (2.0 multiplier) A$66.3 per 1000ntks. This procedure can be illustrated in the equation below and summarized in Table 32:

Externality ⋅Cost = (multiplier ×baseExternality)+ Congestion

Multiplier Base Externality Congestion = 1.0(ATC) = A$22 per = A$26.3 (average) = 1.5(midpoint) 1000 ntks = A$18 (light congestion) = 2.0 (Austroads) = A$68 (moderate) = A$103 (heavy) Table 32: Summary of numbers to use in model

Externality Costs (A$ per 1000ntks)

ATC Austroads Mid point Excluding congestion

Original (from literature) 22 40 N/A

Multiplier 1.0 2.0 1.5

Multiplied original (calibrated) 22 44 33

Including Congestion

Average (+26.3) 48.3 70.3 59.3

Light congestion (+18) 40 62 51

Moderate congestion (+68) 90 112 101

Heavy congestion (+103) 125 147 136

15.6 Statement of Assumptions

This section provides details on the default values for environmental externalities as published in the ‘National Guidelines for Transport System Management in Australia’ (ATC 2006), assumptions behind each externality and their basic descriptions (Table 33). To ensure the default values are applied under appropriate circumstances, the assumptions behind each value should be noted. Consult the references in this section for further information. Table 33: Assumptions and descriptions underlying each externality (ATC 2006)

Externality Description Assumptions

Air pollution Recent studies identify a strong link The total air pollution values in Table 30 were selected because they between air pollution and increase in maximise the use of Australian data in their calculations. They are adverse health effects imposed on higher than other sources because the values include larger health society as a result of transport, costs for each chemical type; for example, particulate matter is higher particularly in urban areas where than other sources. population is highest. The values in the ATC guidelines are calculated using $/tonne health Pollutants relevant to Australia costs from Watkiss (2002), emission factors from Cosgrove(2003) and include: ABS Survey of Motor Vehicle Use (SMVU) data (ABS, 2000).

− carbon monoxide (CO) Watkiss (2002) reports $/tonne estimates using results from the European Commission’s ExternE project (1995-2005), and include − oxides of nitrogen (NOx) health impacts, damage to buildings and damage to crops. ExternE − particulate matter (PM), and excludes damage to ecosystems. The impacts excluded have a lower cost relative to human health effects. Values recommended by Watkiss − total hydrocarbons (THC) (2002) are constrained to health impacts only.

Air pollution values are refined Costs per tonne values have been transferred to Australian values estimates identified in Pratt (2002). according to population. Population densities in Australia are compared For an alternative to the air pollution against the site types reported in ExternE, based on a regression parameters, other sources such as analysis. Due to lower, more dispersed populations than in Europe, may be useful (Austroads, 2003b, secondary air pollution values are considerably lower in Australia 2006). (Watkiss 2002).

Air pollution in rural locations is estimated as being close to zero or 1% of urban value. In order to assess these non-urban emissions, more consideration of the locations of roads, vehicle flows and population is required. Although vehicles travelling on inter-urban routes between cities have some air pollution costs, these are much lower than for urban areas, as most vehicle-kilometres are in urban areas (Austroads 2006).

Climate Valuation of greenhouse gas CO2-e is a measure used for the emissions of CO2, CH4, and N2O. CO2- change emissions is speculative at this point e emission rates assume a global warming potential of one for CO2, 21

(greenhouse in time. Under a national programme for CH4, 310 for N2O. gas to achieve a target reduction in In the guidelines, greenhouse gas values are calculated using the AGO emissions) greenhouse gases, it is unclear how $/tonne costs, emission factors from Cosgrove (2003), which contain a much of the burden is attributed to petrol/diesel fleet mix average, and SMVU data. transport. As a result of uncertainties in valuation and absence of Australian data, In the current absence of an AGO’s lower cost of $10/tonne CO2-e is generally recommended. international market for carbon However, a sensitivity analysis using a low and high range (e.g. dioxide equivalent (CO2-e) emission, A$10/tonne to A$50/tonne CO2-e) may be undertaken if further analysis the Australian Greenhouse Office is required. (Cosgrove (2003) suggests using the values contained in its 1999 As the greenhouse effect is global in nature, the values are the same publication, Issuing the permits (AGO, for urban and rural locations. 1999). The discussion paper The calculation methodology adopted in BTE(1999a), for heavy trucks suggests a permit price range of $10 only, was applied to rail. to $50 a tonne CO2-e

The lower value of $10/tonne CO2-e

Externality Description Assumptions is consistent with the upper bound of the cost of government of abatement purchased under the Greenhouse Gas Abatement Programme (GGAP) and aligns with the first commitment period 2008-12 under the Kyoto Protocol (COA, 2003)

Noise Analysis of noise pollution requires Values in Table 30 are based on the Infras/IWW (2000) methodology, the use of logarithmic scale of which estimates the total noise costs. These values were selected for decibels (dB), and frequency the guidelines because they represent the sum of a WTP component sensitivity is included by applying an and include a health cost component. ‘A-weighting’ scale (dB(A)). The WTP component is expressed as a share of per capita income, The noise depreciation index (NDI) is and the health cost component considers the health effects of noise a widely used parameter to link road exposure such as disturbance and other stress reactions and health traffic noise to a monetary value using risks. hedonic pricing. The NDI gives an Infras/IWW (2000) suggests that approximately 60% of the total costs estimate of the depreciation (%) in- are associated with the WTP for noise reduction and 40% with health house value for a unit (1 dB) increase effects (Austroads 2003a) in noise level above the threshold level selected. Austroads(2003a) notes that key factors affecting the unit costs include exposure levels of the population (urban/rural density and day-night In Australia, a NDI of 0.5% of property population movements), and variations in per capita income that affect value per dB(A) is typically applied for WTP. noise levels in excess of a threshold level of 50db(A)-55dB(A) (Austroads Values are also dependent on vehicle speed, proximity to the road, 2003a) gradient of the road, surface and the noise-generation function of each vehicle type (tyre noise, engine type, maintenance). The effect of lower Other approaches to value the cost of speeds is partially offset by the proximity of houses (Pratt 2002) noise include estimation of control costs, health costs and ‘willingness to Rural heavy vehicles values are estimated as 10% of the urban value. It pay’ (WTP) for reduced disturbance is recommended that for rural townships, the urban value should be (Austroads 2003a) used.

For rail, the estimates were obtained from Laird (2005).

Water Estimates for water pollution include Methods to value water pollution impacts resulting from road transport pollution values of organic waste and include dose-response, contingent valuation and WTP. Estimates persistent toxicants (road run-off from provided in the guideline are based on mitigation costs, which are value vehicles such as engine oil leakage transport-related impacts by estimating social costs of installing and disposal, road surface, mitigation devices (i.e. vegetation, sedimentation tanks, combined particulate matter and other air catchments and treatment of stormwater run-off) over entire road pollutants from exhausts, tyre networks or on a per vehicle-kilometre basis. (Pratt 2002) degradation). Note that unit values for water pollution are not included in the Costs are unlikely to reflect all externality values covered in both the European studies (Infras/IWW damages costs from transport alone, and ExternE). Separate water pollution values are estimated using and depend on rainfall intensity, other sources of information(Austroads 2006 and Pratt 2002) drainage path length, type of road Rural values are estimated as 10% of the urban figure for passenger and type of system. vehicles and 1% for freight.

Rail parameters are estimated by scaling the Infras/IWW (2000) nature value for heavy freight vehicles and rail freight.

Nature and Estimates for nature and landscape Although nature and landscape values are difficult to quantify and are landscape costs are derived from Infras/IWW highly specific to the initiative being appraised, the values (2000) which includes effects such as recommended in the guidelines provide a rough guide. loss of natural areas, ecological Austroads (2006) notes that as most infrastructures are in urban areas, impacts (to land, water and rural values should be set at 30% of urban values. biodiversity) and reductions in the

Externality Description Assumptions quality of the landscape.

The methodology applied is based on Rail parameters are estimated by scaling the Infras/IWW (2000) nature the costs of repair and compensation value for heavy freight vehicles and rail freight. measures See Austroads (2003a) for further details.

Urban Estimates for urban separation costs Although urban separation values are difficult to quantify and are highly separation (alternatively known as urban specific to the initiative being appraised, the values recommended in severance) are derived from the guidelines provide a rough guide. Infras/IWW (2000) which assesses The Infras/IWW (2000) study applies typical average waiting times that the constraint to mobility of depend on traffic volume and road type. Space scarcity, which is the pedestrians as a technique to value space compensation for bicycles, is another urban separation factor urban separation. See Austroads considered in European study but not adopted for Australia. (2006) for further details. Rail parameters are estimated by scaling the Infras/IWW (2000) nature value for heavy freight vehicles and rail freight.

Accident BTE (2000) estimates of crash costs The unit cost published by Austroads (2005; 2006) sets a nationwide (crashes) are based on more extensive criteria standard for road crashes to ensure consistency between than previously by including: jurisdiction/agencies and adopts a single set of unit costs, based on an assumption that costs for each vehicle type are equal to the total crash Human Costs – Value of lost labour, cost multiplied by the proportion of fatalities for that vehicle type. lost quality of life, medical costs, long term care, coronial costs, premature The BTE(2000) costs are higher than previous estimates based on a funeral costs, legal costs, correctional pure human capital approach because they include amounts for loss of services costs, workplace disruption quality of life based on monetary compensation awarded by courts. and staff replacement; Other reasons for the higher estimates are that the BTE approach:

Vehicle costs – Repairs, towing, time − introduced a “Quality of Life” component which has not lost due to vehicle unavailability; and previously been used;

General costs – Non-vehicle − used current (higher) estimates of the cost of long term health property damage, police, fire care compared to the earlier Austroads estimates; services, insurance administration, − used improved estimates of costs of traffic delays resulting travel delay costs. from crashes; and Generally, there are two approaches to valuing fatality and injury costs − used a rate of 4% for discounting future costs (loss of from crashes. The human capital earnings, long-term care, and household labour) compared to approach involves estimating the a rate of around 7% used for the earlier Austroads estimates discounted present values of all costs The current Australian approach can be described as a human capital arising from a crash that can be approach with an element of WTP grafted on. If Australia switches to directly measured (including loss of the WTP approach, as is the case in Europe, higher unit crash costs future earnings) while the WTP would alter the pattern of infrastructure expenditure to give higher approach estimates monetary priority to safety. amounts people are willing to pay in order to reduce the risk of injury or BTRE (2003) estimates total costs of rail accidents in Australia, but did death. not convert them to unit costs in the way Austroads did for the total road crash costs in BTE (2000). Other sources indicate default values for rail accident costs based on system-wide averages (BAH 2006). For rail, costs of delays to trains caused by accident can be significant.

16. APPENDIX 3 - DISCUSSION PAPER: INPUT COST PROJECTIONS (FUEL AND LABOUR)

16.1 Introduction

The price of crude oil has more than doubled over the past four years in Australia and the fluctuating nature of global business cycles, indicates that prices may remain high and volatile for an indefinite period of time. ABS Producer Price Indexes shows that the transport industry experienced difficulties in ‘passing on’ these rising fuel costs to freight customers, to a point where profit margins have dropped below Australian industry-wide levels. These in turn affect the transport industry to attract and retain quality drivers thus further inhibiting the capability of the industry to service the growing freight operations, which is expected to double by 2020 (as advised by BTRE). Recognising the significance of fuel and labour costs towards a sustainable freight transport industry, these input costs are factored into our model in order to achieve a better planning outcome.

With fuel and labour representing the two largest input cost components29, this paper aims to (i) review latest forecast projection estimates and assumptions (ii) determine the appropriate level of weighting to be applied, within our model and (iii) provide relevant supplementary background information, using international benchmarks to support our analysis in a highly debatable issue. Based on our analysis, an upward +2% variation (above inflation) is estimated for fuel costs and 5% for labour costs. In both of these cases, the underlying cost of inflation is driven by supply constraints which is expected to intensify in the mid to long term future. The overall analytic framework for these input costs is illustrated in Figure 30 below. Note that the sources of fuel and driver assumptions are detailed in the following two sections, while the third group projections (e.g. tyres and overheads) are neglected as it is beyond the scope of this paper. Figure 30: Framework to estimate projected growth in input costs.

29 The cost structure of a typical truck operation that undertakes predominantly long distance tasks, and is operating a relatively modern heavy vehicle, can be broken down into six components as classified by the Australian Trucking Association (ATA): fuel (30%), labour (24%), capital (16%), repairs and tyres (12%), overheads including road user and registration charges (12%) and insurance (6%)

16.2 Future Outlook on Fuel Costs

16.2.1 Australian Context Geoscience Australia (2005) predicts that production of crude oil plus condensate will hold at current levels of about 550,000 barrels per day until about 2009 and decline thereafter to about 224,000 barrels per day by 2025, as reserve growth and new discoveries fail to match the rate of production. Meanwhile, Australia’s demand for petroleum (including crude oil and condensate) is over 750,000 barrels per day, and is projected to rise to over 800,000 barrels per day by 2009-10, and over 1,200,000 barrels per day by 2029-30 - an increase of almost 2% per year over the period (Figure 31). Figure 31: Australia’s oil production and consumption (ASPO)

On the Geoscience figures, it appears that over the next 20 years Australia’s, self-sufficiency in oil and petroleum products will decline from 84% to 20% (using a middle range estimate of future production), or from 98% to 31% (using an optimistic estimate of future production). Note that these production estimates do not formally include future gains from reserve growth, enhanced oil recovery, and undiscovered resources. These may be partly accounted for in the more optimistic estimate.

Whilst demand for oil and petroleum products in Australia is likely to increase considerably in absolute terms over the next period, and given Australia’s limited capacity to fulfil this demand from domestic supplies therefore increasing our reliance and vulnerability to imported product prices, one must look to projected international crude oil prices to begin to estimate what the price for diesel may be in Australia over the ensuing period. Oil is a particularly difficult commodity to price forecast, due to the many supply and demand side sensitivities that govern its price.

16.2.2 Global Context Building on the data presented by the US Government’s Annual Energy Outlook 2006 by the Energy Information Administration (EIA), which forecasts the price of distillate fuel in 2004 US dollars between 2003 and 2030, and assuming that the Australian diesel pump price mirrors the percentage change in the forecasted price of US distillate fuel, one may estimate what the future Australian diesel prices might be (Figure 32). Figure 32: Projected average Australian capital city diesel prices based on US fuel prices (EIA)

Using this approach, and given that the average capital city diesel pump price in Australia in 2004 was 102.6 cpl, then the average capital city diesel pump price in Australia between 2003 and 2030 would be approximately 116

© Strategic design + Development Pty Limited Page 110 of 117 Melbourne Intermodal System Study Department of Infrastructure - Victoria FINAL REPORT cpl, an annualised average increase of approximately 0.5%. Note, however, that this approach does not take into account exchange rates or refinery costs fluctuations and should not be relied upon for any substantive reason but to indicate that diesel prices in Australia may continue at their current high levels equating to sustained high freight rates.

The data presented in Figure 32 is supported by ABARE (2005) whose current forecast is for a ‘gradual easing’ in oil prices over the short and medium term. There are however, alternative views which indicate EIA projections are ‘overly optimistic’ as oil prices may not ease considering (i) rapidly rising demand, (ii) uncertainty of demand elasticity, (iii) uncertainty of future production and (iv) uncertainty about oil substitutes.

The German-based Energy Watch Group (EWG) released their study in 2007 saying that global oil production peaked in 2006, much earlier than most experts had expected, and world oil production has already peaked which will fall by half as soon as 2030. This translates to a rate of approximately 7% cost offset per year compared to the 0.5% from EIA, and a third source from World Energy Outlook (IEA, 2005, p45) of 1%.

The ongoing debate surrounding the availability of oil (i.e. the ‘depletionists’ and ‘anti-depletionists’ views), as to whether a supply peak has been reached and accordingly, what the long term price may be, is not a debate this paper is qualified to enter. Observation from literature however, shows that six prominent forecast estimates are available from the various fuel authorities and experts (Figure 33). Figure 33: Past oil production and forecasts

Source: Association for the Study of Peakoil (ASPO, 2006)

International Energy Agency (IEA) predicts that in a reference scenario, world demand for oil will grow to 92 million barrels per day in 2010 and 115 million barrels per day in 2030. It argues that resources are adequate to meet the demand providing there is adequate investment, but it concedes that financing the required investments in non-OECD countries is one of the biggest challenges posed by their energy-supply projections.

With the exception of IEA, all other sources suggests a ‘peak oil’ scenario will be reached before 2020, whereby the maximum rate of global petroleum production is reached and supply enters its terminal decline. There is mounting credible evidence based on sound geological data that Global oil production has or is about to peak, and will decline steadily over the next three to four decades. Highly respected authorities like Kenneth Deffeyes put the peak at 2005. Australia's oil production also appears to have peaked in 2000 and is now in decline.

In the absence of radical technological breakthroughs and successful commercialisation of low cost and highly reliable alternative fuels, there is likely to be a continued reliance on imported fuels for heavy vehicle road transportation into the future. This view is reflected by ABARE’s long-term energy consumption and production projections that indicate ‘Australia’s dependence on imported oil and petroleum products will increase considerably over the period to 2019–20’. Based on the volatility outlooks analysed thus far, and considering a conservative mid-point between EIA, EWG and WEO estimates, as well as ABARE’s view towards a ‘gradual easing’ in price, a conservative growth rate of 2% above inflation cost is selected as the basis for our modelling purpose.

16.2.3 Flow-on impacts from rises in the price of fuel The socio-economic impacts of rising fuel prices has been significant with the road freight industry having variable success in ‘passing on’ higher freight costs. Analysis of the Australian Bureau of Statistics (ABS) Producer Price Indexes for Australian ‘petroleum products’ and ‘road freight rates’ indicates that between March 1997 and March 1999, there was a parallel symmetry of freight rates and oil prices, meaning that freight rates increased ‘at pace’ with oil prices. Post March 1999, freight rates however, did not increase proportionally to the increases in petroleum products, meaning that operators have absorbed a percentage of these higher input costs over this period (Figure 34). Figure 34: Producer Price Indexes for Australian ‘petroleum products’ and ‘road freight rates (ABS)

Source: ABS Producer Price Index, 8155.0

As a reflection of very high levels of competition, this absorption of rising input costs has contributed to the road freight industry earning on average, profit margins that are lower than Australian industry standards. The ABS estimates that the Australian industry average profit margin (i.e. all industries) was 7.2% in 2002-03. This compares to the ‘Transport and Storage’ industry whose profit margin in 2002-03 was estimated to be 5.6%, decreasing from 6.4% in 2001-22. This 13% decrease in profit margin between 2003 and 2002 is against the backdrop of an approximate 21% increase in diesel ‘burn prices’ over this time.

Assuming that rising costs (fuel, other compliance costs, etc.) are passed on by the industry, higher freight costs may have a very large and perverse effect on the community and the macro economy at large. Given the highly contestable nature of most Australian industries, it is likely that much of these costs will be absorbed. Regardless of whether absorption is or is not possible, the adverse consequences in terms of GDP, exports and investment could be significant. An inability on behalf of the road transport industry to pass these costs on will lead to lower operating profits, which can lead to:

− An inability to expand the business and employ more staff – thereby mitigating efforts to develop economies of scale and scope and increase profitability and preventing investment in more modern and productive equipment. This is significant because not only does this detract from profitability, but more modern prime movers and trailers are considered to be safer and more environmentally friendly than equipment manufactured before it;

− An inability to pay competitive wages to retain and develop staff; and

− Performance standards being compromised.

In the absence of a new wave of productivity and efficiency reform in the industry, and a very low ability to absorb higher fuel costs as reflected in decreasing profit margins, the freight transport industry must pass higher costs onto customers as well as placing a higher emphasis on labour shortages issue (addressed next) to become sustainable.

16.3 Labour Shortages in the Trucking Industry

A precondition for the existence of skill shortages is usually (but not always) a rising demand for skilled labour in a growing labour market. It would appear that this is the case in the road freight transport industry, with shortages reported where employment in most occupations is increasing.

Based on the five key indicators representing future labour shortage trends, the following cost growth assumptions are made, and in no particular order of relative importance:

− Mean weekly earning - average wage rates for drivers are lower than all occupation (+1%)

− Ageing population - average truck driver age is 49 years compared to 39 years overall (+1%)

− Lifestyle considerations - society trends favour ‘balanced lifestyle’ esp. young people (+1%)

− Industry complexity - technological advances to freight handling require extra training (+1%)

− Rules and regulations - stricter laws for heavy vehicle such as insurance, rego and RUC (+1%)

Thus, a conservative aggregated total of 5% growth above inflation is assumed for our modelling purpose. Note that in actuality, a disaggregated weighting allocation should be applied to each of the indicators but this level of detail is beyond the scope of this paper.

16.3.1 Key Facts Most road freight is undertaken by hire and reward transport companies (including subcontractors), but most trucks are in fleets which are ancillary to other businesses. The hire and reward and ancillary trucking industry (excluding storage and logistics) contributed approximately 3.4% of Australia’s GDP in 2002-03 and employ 154,800 people as truck and delivery drivers, representing about 1.7% of Australian employment.

The National Industry Skills Initiative (NISI) report remains a benchmark to demonstrate the employment situation and examine current and emerging skills issues in the road freight industry. Since publication in 2003, the report highlights that the industry’s skills shortage is worsening, especially for drivers and diesel mechanics. There is concern about the high rate of personnel turnover, the difficulty of filling job vacancies and the slow pace of skill replacement arising from the loss of qualified workers, particularly as migration of skilled labour is a relatively minor source for the industry.

Earnings potential relative to other occupations, ageing demographic trends as well as lifestyle factors, complexity of tasks, tightening regulations associated with long haul driving were all identified as main contributors to the departure of existing workers and in deterring potential new entrants.

The demographic challenge in industry recruitment can be further gauged from the fact that the Productivity Commission (ABS, 2004) has estimated the annual growth in Australia’s workforce at only:

− 175,000 pa between 2000 and 2005

− 138,000 pa by 2010

− 57,000 pa by 2020 to 2030

These trends clearly highlight future recruitment problems facing the road freight transport in Australia.

16.3.2 Mean Weekly Earnings Among other reasons for the shortfall of skilled workers in the road freight industry, is the rate of earnings growth for road freight occupations has tended to be lower than the average for all occupations. Wages in these occupations fell dramatically in 1998, and although recovering subsequently, wages for truck drivers and

© Strategic design + Development Pty Limited Page 113 of 117 Melbourne Intermodal System Study Department of Infrastructure - Victoria FINAL REPORT delivery drivers still remained lower than the average for all occupations30. This provides less of an incentive to enter the industry as well as increasing casualisation trends of the workforce being a deterrent.

16.3.3 Ageing Workforce The road freight transport industry workforce is ageing, with the average age of the Australian truck driver at 49 years compared to 39 years for all industries. Each of the road freight transport occupations has a proportion of 45 to 54-year-olds relatively higher than the proportion for all occupations, while the proportion of 15 to 24 year olds is low. An estimated 10% of the road freight transport workforce will retire in the next decade.

Fleet operators currently attempting to recruit younger workers report that they are experiencing a range of impediments. Major hurdles to overcome are insurance excess requirements for drivers under 25 and the licence restrictions on them. Whilst the road freight industry can employ school leavers as new apprentices in office jobs, general depot duties and as mechanics, it is not practical to employ them as trainee drivers because graduated licensing and insurance requirements for drivers normally prevent them from driving heavy trucks (especially articulated trucks) as part of their training. Thus, the lack of experience in young workers becomes a significant deterrent and it would seem that most employers prefer to take on older employees with the requisite training or qualifications in place.

There are however, other attitudinal barriers by employers to the recruitment of younger workers. While some industry observers are critical of a perceived failure by the industry to support recruitment of the young or provide the wages to attract them, quite a few employers seem inclined to view younger workers as lacking motivation and self-discipline.

The road freight transport industry remains at a disadvantage with other industries while it is unable to recruit employees for heavy vehicle driver training at school-leaver age.

16.3.4 Lifestyle Considerations The lifestyle of trucking operatives and their working conditions (especially those involved in long distance operations) are seen as major disincentives to enter or remain in the road freight transport industry. As a result of lifestyle changes and expectations in the broader Australian society, employees are placing increasing value on home and family life and recreational activities in comparison with their work. These changing priorities have particular significance for the road freight transport industry because of the extraordinary hours traditionally worked by many of its drivers and operations employees. Such conditions run counter to the domestic needs of older employees and more particularly, they do not encourage younger people.

In any case, the industry and individual employers are required to acknowledge changes in lifestyle occurring within our society and adapt the conditions under which it employs workers to take account of these changes.

16.3.5 Industry Complexity Freight is becoming more complex, trucks have become larger and more technologically sophisticated in order to carry the increasing freight tonnage more efficiently. More broadly, there is an emerging awareness that drivers will need to be multi-skilled, able to comprehend accreditation requirements, legislation, regulations and insurance agreements among a host of other talents. As a result of changes in the road freight transport industry, particularly those arising from Chain of Responsibility and Duty of Care considerations, employers are placing increasing emphasis on the need for employees to possess relevant generic skills. These include planning and time management skills, and appropriate personality attributes such as a tolerant attitude and calm, reasoned behaviour.

Equally, there is a growing perception that drivers of the future will need to be much more professional, with a tighter attitude towards paperwork and accreditation, and exhibiting skills of self-presentation and customer

30 Supplied to NCVER by DEWR and based on ABS Employee Earnings, Benefits and Trade Union Membership August, 2006 (Cat No. 6310.0)

© Strategic design + Development Pty Limited Page 114 of 117 Melbourne Intermodal System Study Department of Infrastructure - Victoria FINAL REPORT service. The advent of these factors means truck driving develops a variety of skills, which are marketable in the modern workplaces thus causing staff retention issues.

It is clear that the nature of the industry and the required skill sets of employees are changing in line with increasingly sophisticated freight management systems, more complex trucks and the need for greater emphasis on interpersonal and customer relations skills at all levels. The quantum of regulatory, technical and other changes of the past decade will be sustained into the future, and consequently the ability to interact positively with changing requirements is in itself a vital skill. These factors combined with the impending legislative requirements of the draft Compliance and Enforcement Bill developed by the National Road Transport Commission (NRTC) are having the effect of emphasising to employers the need for a multi-skilled, formally qualified workforce.

16.3.6 Rules and Regulations Since the early 1990s Australia’s regulation of the road transport sector has undergone a significant process of reform, and has seen significant rationalisation of a myriad of state based regulations. There is more to be done however, and there is a danger of losing the balance between safety and environmental regulation and productivity reform.

Regulation reforms implemented or in progress cover:

− Heavy Vehicle Charges

− Vehicle Operations

− Road Transport of Dangerous Goods

− Vehicle Registration

− Driver Licensing

− Hours of driving and rest

− Compliance and Enforcement.

All heavy vehicles, including trucks over 4.5 tonnes, are required to pay the Heavy Vehicle Charge to recover all maintenance and construction costs associated with their share of road use. The charges are administered in two parts through a fuel charge (part of the diesel excise) and an annual registration charge. On average, the fuel charge accounts for about two-thirds of the total charge31.

The registration fee component of the Heavy Vehicle Charge is adjusted on the basis of road expenditures, and reflects the changes in road use by heavy vehicles. The fuel charge component is also periodically revised by the NTC. The current heavy vehicle road user charge is 20 cpl of the diesel fuel excise plus the annual registration fee, which ranges from $331 to $9,809 depending on vehicle type.

Current reforms in the area of vehicle operations and compliance and enforcement, include fatigue management, noise, emissions, performance based vehicle standards and chain of responsibility regulation.

Currently, diesel powered heavy vehicles that travel long hauls and/or meet the urban regional boundary requirements of the Energy Grants (Credits) Scheme receive a partial excise rebate. These eligible vehicles pay a partial excise at a rate which is close to the excise component of the road user charge determined by the NTC. Diesel powered trucks however, operating in metropolitan areas, regardless of their location or distance travelled, are not eligible for the excise rebate.

31 NRTC (1999) and BTRE estimates, in BTRE 2003 Land Transport Infrastructure Pricing –Australian Logistics Council

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