The Management of Western Australia's Freight Rail Network

Economics and Industry Standing Committee The Management of Western Australia’s Freight Rail Network Report No. 3 Legislative Assembly October 2014 Parliament of Western Australia Committee Members Chairman Mr I.C. Blayney, MLA Member for Geraldton Deputy Chairman Hon F.M. Logan, MLA Member for Cockburn Members Mr P.C. Tinley, AM, MLA Member for Willagee Mr J. Norberger, MLA Member for Joondalup Mr R.S. Love, MLA Member for Moore Committee Staff Principal Research Officer Dr Loraine Abernethie, PhD Research Officer Mr Michael Burton, BEc, BA (Hons) Legislative Assembly Tel: (08) 9222 7494 Parliament House Fax: (08) 9222 7804 Harvest Terrace Email: [email protected] PERTH WA 6000 Website: www.parliament.wa.gov.au/eisc Published by the Parliament of Western Australia, Perth. October 2014. ISBN: 978-1-925116-28-1 (Series: Western Australia. Parliament. Legislative Assembly. Committees. Economics and Industry Standing Committee. Report 3) 328.365 Economics and Industry Standing Committee The Management of Western Australia’s Freight Rail Network Report No. 3 Presented by Mr I.C. Blayney, MLA Laid on the Table of the Legislative Assembly on 16 October 2014 Chairman’s Foreword am pleased to present the Economic and Industry Standing Committee’s report from its Inquiry into the current lease arrangements and management of the IWestern Australian freight rail network. The important role the state’s entire freight network plays in Western Australia is widely acknowledged. An integrated, safe and efficient freight system creates employment, facilitates economic growth and, particularly in regional Western Australia, is critical to communities’ wellbeing. The Western Australian freight rail network is an essential part of this integrated freight network, with the importance of having as much freight on rail as possible well recognised by government and industry. Rail should, and will, fulfil an increasingly important role in the economic and social development of the state. The government’s aim in selling Westrail’s freight business and leasing the infrastructure was clear and well‐intentioned, particularly its express wish to dispose of the business on a vertically integrated basis. The lease document, in particular, establishes that the revenue from related entities of the lessee must be accounted for in determining the economic or uneconomic status of less viable lines. Not only did this acknowledge that some lines were less viable, but demonstrated the accepted need, and means, to keep them operating. Unfortunately, though, the lease instrument, the regulatory regime and the Public Transport Authority’s (PTA’s) management of the lease has not allowed the government’s vision to be realised. The lease instrument did not give the government any rights in the on‐selling of the above rail business, a situation which led to the loss of the vertically integrated business arrangement. The Railways (Access) Code 2000 (WA), which confers oversight and regulatory functions on the Economic Regulation Authority (ERA), aims to facilitate negotiations between the lessee and access seekers. However, the Code does not allow the ERA a role in setting access prices. The application by CBH Group in December 2013 is the first access proposal relating to the freight rail network to trigger the formal involvement of the ERA in considering the lessee’s floor and ceiling prices. In seeking access to the freight rail network, Karara Mining found the Code to be ineffective and negotiated directly with Brookfield Rail. As part of this process, and at Brookfield Rail’s request, Karara Mining agreed that the Code could not be applied for the duration of their 15‐year agreement. It seems that the Code is not as effective as it might be and, in some circumstances, may actually jeopardise development. Throughout its role as the public authority responsible for managing the lease and ensuring the lessee was meeting its lease obligations, the PTA has taken a ‘light touch’ approach to provide the lessee with quiet use and enjoyment of the below rail infrastructure. This approach has proven to be less than effective in ensuring the condition of the lines and the entire freight rail network remain at a standard that could be reasonably expected under the terms and intent of the lease. When combined, these factors have resulted in a situation where certain lines have been placed into a new category or standard called ‘care and maintenance’. Based on the government’s agreement to lease variations to date, it is a matter of serious concern that other line sections may be similarly placed into care and maintenance. Currently, the government’s rail freight network policy is largely based on the 2009 Strategic Grain Network Report (SGNR). Much evidence has been presented to show that the assumptions on which this report was based no longer hold true. Certainly, its assumptions in relation to the impact of deregulation on the export grain market have not yet been realised. This has been compounded by the failure of government to fully or properly implement the Brookton Strategy recommended in the SGNR. The freight rail network is clearly an issue that people care a great deal about. The Committee was presented with a significant amount of evidence, some of which was not directly related to its terms of reference. This meant that the Committee was not able to address those issues. For example, the Committee heard that to transport grain from Miling to Kwinana was $20.55 per tonne compared to $26.50 by road. Similarly, the average cost to transport grain from Bruce Rock was around $22 per tonne for rail, whereas for road it may well be $27 per tonne. Furthermore, these road rates do not include the cost of road upgrades and maintenance. As they were not included in the Inquiry terms of reference, the Committee was not able to undertake comparisons of the true cost of either road or rail freight, a cost that would include health, safety and community impacts. Another major issue revealed during the Inquiry was the lack of transparency around the lease instruments, the lease variations and the obligations of both parties to the lease. This generated a high level of anxiety and concern, particularly as misinformation and speculation spread. This situation is far from ideal. Following careful consideration of requests for evidence to be treated as closed, the Committee determined that as much information as reasonably possible should be in the public domain. Based on the ownership and management of rail freight networks in other jurisdictions in Australia, it is evident that Western Australia’s situation is unique. What is equally evident is that problems associated with owning and maintaining low‐volume freight lines have been faced by other Australian states over the past 15 years. Governments’ respective efforts at privatising railways have generally not succeeded over entire networks and some States have either bought back leases or provided substantial rescue packages. If the Western Australian Government supports ‘a growing role for rail in the distribution of the freight task’ it needs to do more than ‘continue to work with all parties’ to keep lines operational. It is time for all parties to stop ‘being careful with words’ and to find a way to ensure the freight rail network continues to be able to play its vital role in state development. Western Australia could do worse than look to the United States and Canada where governments have realised the importance of railway, including short or branch lines, and provided a number of programs to facilitate increased capital investment and encourage their use. I would like to take this opportunity to acknowledge the hard work of my fellow committee members—Hon Fran Logan, MLA, Mr Jan Norberger, MLA, Mr Peter Tinley AO, MLA and Mr Shane Love, MLA. Without their contributions this complex Inquiry would not have been possible, particularly in such a short time frame. I would also like to thank the Committee’s Principal Research Officer, Dr Loraine Abernethie, and Research Officer, Mr Michael Burton, for their assistance throughout this Inquiry. MR I.C. BLAYNEY, MLA CHAIRMAN Contents Executive Summary i Ministerial Response vii Findings and Recommendations ix Chapter 1 Introduction 1 Introduction 1 The Western Australian freight task 2 Rail freight demand in Western Australia 3 The rail freight network 6 The importance of this Inquiry 8 The Committee 9 Conduct of the Inquiry 9 Requests for evidence to be treated as closed 11 Lease documents 11 Information relating to costs, access fees and maintenance costs 12 Committee consideration of requests for evidence to be closed 15 Difficulties in obtaining evidence 15 Chapter 2 Rail Matters 23 Introduction 23 Confidence in the agricultural sector and the regions 24 Safety 27 The Freight Rail Network is a State asset 31 Lack of transparency 33 Concluding remarks 35 Chapter 3 Freight Rail Network Policy 37 Introduction 37 Government provision of infrastructure as a public good 39 Competition, market failure and monopolies 39 Monopoly providers of public goods 39 Profit maximisation versus the public interest 40 The disposal of the government’s freight rail business 41 The decision to sell Westrail’s freight business and lease the track network 41 Sale and lease of Westrail: A whole‐of‐business transaction 43 The disappearing $400 million commitment 45 Separation of above and below rail operations 47 Have the original objectives for the sale and lease been met? 50 Track standards,

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