Tasmanian Freight Subsidy Arrangements, Report No

Tasmanian Productivity Freight Subsidy Commission Arrangements Inquiry Report No. 39, 14 December 2006 © Commonwealth of Australia 2006 ISSN 1447 1329 ISBN 978 1 74037 217 6 This work is subject to copyright. Apart from any use as permitted under the Copyright Act This work is subject to copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from the Attorney-General’s Department. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General’s Department, Robert Garran Offices, National Circuit, Canberra ACT 2600. This publication is available in hard copy or PDF format from the Productivity Commission website at www.pc.gov.au. If you require part or all of this publication in a different format, please contact Media and Publications (see below). Publications Inquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: [email protected] General Inquiries: Tel: (03) 9653 2100 or (02) 6240 3200 An appropriate citation for this paper is: Productivity Commission 2006, Tasmanian Freight Subsidy Arrangements, Report no. 39, Canberra. The Productivity Commission The Productivity Commission, an independent agency, is the Australian Government’s principal review and advisory body on microeconomic policy and regulation. It conducts public inquiries and research into a broad range of economic and social issues affecting the welfare of Australians. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Information on the Productivity Commission, its publications and its current work program can be found on the World Wide Web at www.pc.gov.au or by contacting Media and Publications on (03) 9653 2244. Canberra Office Level 3, Nature Conservation House Cnr Emu Bank and Benjamin Way Belconnen ACT 2617 PO Box 80 Belconnen ACT 2616 Telephone 02 6240 3200 Facsimile 02 6240 3399 Melbourne Office Telephone 03 9653 2100 www.pc.gov.au The Honourable Peter Costello MP Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 11 of the Productivity Commission Act 1998, I have pleasure in submitting to you the Commission’s report on Tasmanian Freight Subsidy Arrangements. Yours sincerely Mike Woods Presiding Commissioner Terms of reference INQUIRY INTO THE SUBSIDISATION OF CONTAINERISED AND BULK SHIPPING BETWEEN THE MAINLAND AND TASMANIA Productivity Commission Act 1998 I, CHRIS PEARCE, Parliamentary Secretary to the Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby refer the current arrangements for subsidising containerised and bulk shipping between the mainland and Tasmania to the Commission for inquiry and report within nine months of receipt of this reference. The Commission is to hold hearings for the purpose of the inquiry. Background 1. The Tasmanian Freight Equalisation Scheme (TFES) was introduced in 1976. The Government’s objective was to establish a cost equalisation scheme to alleviate the freight cost disadvantage incurred by shippers of eligible non-bulk goods moved between the mainland and Tasmania by sea. Since its introduction, the TFES and its subsidy rates have undergone review on several occasions, in particular in 1985 and 1998. A key recommendation of the 1998 review of TFES was that the key assistance parameters for TFES should be reviewed annually and indexation adjustments applied as sea freight disadvantage changed over time. 2. The Tasmanian Wheat Freight Subsidy Scheme (TWFSS) was introduced in 1989, coinciding with the deregulation of the Australian domestic wheat market and replacing the Tasmanian Wheat Freight Levy which had existed since 1959. In the 2004-05 Budget, the TWFSS was ceased with eligibility criteria for the TFES being extended to include containerised shipments of wheat. The Government subsequently introduced the Tasmanian Wheat Freight Scheme (TWFS) for bulk wheat shipments from 1 July 2004, with containerised wheat to remain eligible for assistance via the TFES. 3. The Government wishes to undertake an independent review of these arrangements to consider the extent of the continuing benefits as well as costs of these schemes. IV TERMS OF REFERENCE Scope of Inquiry 4. The Commission is to report on the merits and weaknesses of the current arrangements for subsidising containerised and bulk shipping between the mainland and Tasmania and provide recommendations on an appropriate future approach and/or arrangements. 5. In making assessments in relation to matters in paragraph 4, the report of the Commission should: a. Report on the characteristics of the freight task for containerised and bulk goods between Tasmania and the mainland of Australia, including a comparison with the freight task between regional centres and metropolitan centres on the mainland and related costs. b. Quantify any comparative freight cost disadvantage for goods eligible under the TFES and the TWFS, identify its primary causes and assess the impact of that freight cost disadvantage on Tasmanian business in terms of the cost of business inputs and access to markets on the mainland. c. Assess the effectiveness of the current scheme arrangements as a mechanism for addressing any freight cost disadvantage, including identification of the costs and benefits, the impact on stakeholders, and any unintended consequences or distortionary effects of the current arrangements. d. Identify any alternative mechanisms that could more effectively address any freight cost disadvantage, including assessing the full economic costs and benefits of any alternative mechanisms. 6. In undertaking the inquiry, the Commission is to advertise nationally, consult with key interest groups and affected parties, and produce a report. 7. The Government will consider the Commission’s recommendations, and the Government’s response will be announced as soon as possible after the receipt of the Commission’s report. CHRIS PEARCE [received 21 March 2006] TERMS OF V REFERENCE Contents Terms of reference IV Abbreviations XI Key points XIV Overview XV Findings and recommendations XXV 1 Introduction and scope of the inquiry 1 1.1 Background 1 1.2 What has the Commission been asked to do? 3 1.3 How has the Commission approached its task? 3 2 Overview of the schemes 7 2.1 The Tasmanian Freight Equalisation Scheme 7 2.2 The Tasmanian Wheat Freight Scheme 17 3 Tasmania’s freight task and freight cost disadvantages 19 3.1 The Tasmanian freight task 19 3.2 The cost of freight 25 3.3 Indirect elements of interstate freight disadvantage 36 4 Impact on Tasmania and Australia 43 4.1 Impacts on Tasmanian businesses 44 4.2 TFES assistance by commodity 50 4.3 Quantifying the impact 52 5 Assessment of scheme design 57 5.1 Road freight equivalent cost 58 5.2 Door-to-wharf and wharf-to-door adjustments 60 5.3 Route scaling factors 67 5.4 Intermodal cost adjustment 69 CONTENTS VII 5.5 The median wharf-to-wharf disadvantage, class thresholds and sliding scale parameters 70 5.6 Reduced assistance for high density cargo 75 5.7 Potential leakage of subsidy to carriers and freight forwarders 76 5.8 Calls for changes in eligibility 79 5.9 Are the Bass Strait islands well served? 83 5.10 Some administration and compliance cost concerns 85 5.11 The Tasmanian Wheat Freight Scheme 90 6 Rationales for the schemes 93 6.1 Rationales for subsidising Tasmanian sea freight 93 6.2 The Commission’s assessment 103 7 Alternatives to current arrangements 105 7.1 Require original wharf-to-wharf invoices 107 7.2 Pay a flat rate per TEU only 112 7.3 Change the basis upon which assistance is paid to wheat shipments 119 A Inquiry processes and consultation 123 A.1 Introduction 123 A.2 Submissions 123 A.3 Meetings with interested parties 126 A.4 Public hearings 127 B The Prime Minister’s statement of 7 September 2006 129 References 131 Boxes 2.1 Major claimants under the TFES, 2005-06 10 2.2 TFES allowances and scaling/adjustment factors 14 2.3 Calculating entitlements under the TFES 15 3.1 Stylised cost structures of road and sea freight 20 3.2 Licensing of Australian coastal shipping 22 3.3 Freight carriers across Bass Strait 24 3.4 Intermodal transfers from Tasmania to the mainland 32 VIII CONTENTS 3.5 Evidence on comparable freight costs 34 3.6 Variability of rural freight cost indicators 35 3.7 Reform of coastal shipping 39 3.8 Road and rail freight infrastructure pricing 40 5.1 Scope for significantly different TFES payments for the same door-to-door trip 65 6.1 Selected participants’ views on rationales for freight subsidies 95 6.2 Regional and other government assistance: Tasmania 102 7.1 Participants’ comments on a $400 per TEU flat rate 115 7.2 Sample calculation of assistance under the TWFS 122 Figures 2.1 Identifying the components of the freight task 8 2.2 Structure of TFES payments 12 3.1 Coastal shipping between Tasmania and the mainland, 1995-96 to 2003-04 23 3.2 Real Tasmanian shipping freight rates, 1974-75 to 2000-01 26 3.3 Real freight rates for land and sea based transport, 1984-85 to 2000-01 27 Tables 2.1 TFES program expenditure, 1995-96 to 2005-06 9 2.2 TFES rebates by notional wharf-to-wharf

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