Constraints to Capacity Growth

Limiting Factors on the Australian Heavy Haul Rail Sector

Heavy Haul Rail 2013, July-2013

Ken Devencorn, Technical Director - Rail, Aurecon

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Australia’s rail history dates back to 10-Dec-

1831 when the Australian Agricultural

Company opened Australia's first railway

located at the intersection of Brown & Church

Streets, Newcastle

Rail and the Australian Economy HH Rail is an Intrinsic part of the Australian Economy

• Although only operating 1t payload wagons, the

gravity rail hauled export coal (from Hebburn

Colliery) down the hill to the Port of Newcastle

• Australia’s economic fortunes are very closely

reflected in that of its Railways

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Australia’s economic fortunes and HH Rail -

• Around 1900 Australia had the highest level of labour

productivity in the world

• By 1950 Australia’s GDP had slipped to 81% of the USA,

and ranked 4th among the top 20 economies

• By 1983 this decline had accelerated with Australia slipping

to 14th place (Dean Parham, “Microeconomic reforms and the revival in Australia’s growth in

productivity and living standards”)

Labour productivity is closely linked to the cost of transport

Australia’s HH Railways are most often the “path to market” for

Australia’s export economy

Mining productivity is for nothing if the product can’t be

competitively provided to the end user customer

Rail and the Australian Economy A “rail history” of Australian Economics

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Australia has enjoyed the benefits of an economic revolution,

again reflected in rail – but it could have been very different -

• By the end of the 1980s there was a strong lobby to divest

government ownership in rail – in favour of road

• The 1991 Council of Australian Governments (COAG)

provided a direction to the Australian Federal Government to

initiate competition policy reform

• The subsequent Hilmer Review proposed wide-ranging

economic and social reform on the basis that -

“Where effective, competition can be relied upon to improve

performance”.

Rail and the Australian Economy Economic Reform

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In terms of rail, the 1991 Industry Commission Report (The

Hilmer Report), saw each of the Australian Governments

interpret the reforms slightly differently -

o Queensland – retained a single integrated railway but opened to Third

Party Access

o New South Wales – separated State Rail Authority into 4 separate

businesses

o Tasrail - was sold to a private operator Australian Transport Network

o Australian National Railways – was purchased by a private operator

Australian Southern Railroad

o V/Line was sold to Freight Victoria

Rail and the Australian Economy The Competition Revolution

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What followed was an economic revolution

Privatisation was seen by many Governments to be the most

efficient means by which to achieve Hilmer reforms

Concerns that Government ownership leads to –

• Political interference in timetabling and Industrial Relations,

• Anti-competitive freight rates because Governments are not bound

to a commercial return,

• Interference in management decision-making,

• A short-term focus linked to the election cycle, and

• Irregular and non-specific investment planning

But such was not the case with Queensland Rail – the

exception which highlighted that no one remedy can be applied

to all

Rail and the Australian Economy The Competition Revolution

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Queensland Rail Coal and Freight firstly became QR National

and then subsequently privatised as Aurizon

• Aurizon Holdings Limited has emerged as a top-50 ASX-

listed company offering rail and road-based freight transport

and infrastructure solutions across Australia

• It now successfully competes head-to-head in-market with

other private companies

Queensland Rail Passenger was a Government Owned

Corporation (GOC), has just recently become a Statutory

Authority

Rail and the Australian Economy Success stories and turnaround

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Australia’s economic turnaround in Rail has been nothing short

of spectacular

There is now increased competition between rail firms (“in-

market competition”) for HH Rail business -

• “In some cases, such as export coal by rail, this has led to

massive investment in new infrastructure, and rail freight

costs falling up to 42% in the latter half of the 1990s” (Rod

Sims, Chairman of the Australian Competition & Consumer Commission,

Apr-2013)

Dynamic results such as this are driven out of long-term

investment in better and more economical use of existing

assets, and continuing investment to drive costs down

Rail and the Australian Economy Success stories and turnaround

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Australia’s economic revolution is being

closely studied by developing countries

hoping to stimulate economic growth

through increased competition – and HH

Rail is a key element

The UN’s Africa Review Report on

Transport (Aug-2009) found –

• Transport is a key driver of economic

development and poverty reduction

• The “Cost to Market” of resources is

hampered by reliance on road transport

• International competitiveness is linked to

the availability, reliability, and cost of

transport

Rail Regulatory Reform Around the World The pressure upon developing countries

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• Politicians tell us that we

are facing the “end of

the mining boom”

• Miners tell us that the

benefits of that boom

have been squandered

It is the case though that

whilst project investment

might decline in the coming

years, many new projects

are coming on-line and the

task of HH Rail is yet to

really begin

Rail and the Australian Economy The “End of the Boom” and HH Rail

HH Rail serves the

mining and resource

industries

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Rail and the Australian Economy The “End of the Boom” and HH Rail

HH Rail has served the resource industry despite other cost increases

Cost of transport has actually declined (on a relative basis) during the

mining boom – “Estimated Australian average export thermal coal FOB cash

costs (2006-2012)”

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HH Rail Supply Chains are complex, and constitute inter-related

networks

For these Chains to operate safely and efficiently, there has to

be co-operation, coordination, and integration of purpose

The supply chain is there solely to service the product

Rail and the Australian Economy HH Rail is an Intrinsic part of the Australian Economy

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• Strong demand still exists for

Australia’s resources, and

many are yet to be developed

• The Galilee Basin is a case in

point – an example of where

HH Rail is intrinsic to the

resource solution

• Potentially the largest coal

producing region in Qld, if not

Australia – 14Billion tonnes of

(mainly) high quality thermal

coal - combined export

“projects” of more than

200Mtpa

Rail and the Australian Economy The “End of the Boom” and HH Rail

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The problem is not with the

quality of the resource, nor the

ability or capability to develop

and export it

• The Galilee Basin is being

developed on Hilmer “competition is

good” supply chain arguments

• Despite the significant economies

of scale of a dedicated “Multi-User”

HH Rail line

Rail and the Australian Economy The “End of the Boom” and HH Rail

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HH Rail capacity constraints are changing away from “steel

wheels and steel rail” to the cost of accommodating export

resource development within the community

• Investment in smarter ways of co-existing HH Rail within the

urban environment

Barriers to HH Rail Capacity Growth The Economics of HH Rail is Changing

• HH Rail increasingly

has to evolve and re-

invent itself within the

urban environment

• Unless this can be

achieved, the HH Rail

supply chains will

become more and

more constrained

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In many notable cases the value of existing infrastructure assets

has been eroded over time as urban growth competes with the

resource economy

The capacity limitation is thus not with rail but rather imposed by

the community it seeks to serve

Barriers to HH Rail Capacity Growth The Economics of HH Rail is Changing

• Alternative HH Rail

supply chains

• Tunnels under suburbs

to protect the

community from the

effects of coal dust,

noise, vibration

• A change in the

economics of HH Rail

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Road is not the solution – only HH Rail supply chains provide

the capacity throughput necessary to make many resource

developments commercially viable

Road imposes many of the same problems which HH Rail is

now facing – but often to a much greater degree

Rail and the Australian Economy The “End of the Boom” and HH Rail

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Australian expertise in HH Rail has been a major contributor to

the economic growth of Australian – and Australia’s export

economics are reliant upon HH Rail

• Technology has improved -

longer, heavier, more

powerful, and more cost-

effective trains

• HH Rail serves the resource

industry – hence a downturn

in Australia’s resources sector

is keenly felt in rail

• A downturn in HH Rail – a

move from rail to road – will

have a significant impact

upon the Australian economy

Rail and the Australian Economy HH Rail is an Intrinsic part of the Australian Economy

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China is one of the world’s

largest economies and its growth

is suffering as a result of its

infrastructure -

• China’s rail network spans

93,000km, yet a significant amount

of bulk materials are still transported

by road

• Economic growth has seen start-up

mining firms using existing state

roads to get their product to market

HH Rail expansion cannot keep pace

with resource developments, causing

massive road traffic jams, and

environmental and social issues

Rail and the Australian Economy HH Rail is an Intrinsic part of the Australian Economy

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Constraints to HH Rail productivity

growth -

• Lack of clear Government policy, planning,

and leadership

• Uncertainty in the resources sector

• Inefficiencies in Intermodal (mine-port-

terminal) interfaces

• Asset utilisation, management, and

productivity

• Labour utilisation, education, and training

• Inadequate and aging business and

operational systems

• Availability of investment capital

• “Technology commitment”

Rail and the Australian Economy Issues Affecting HH Rail Productivity

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Thank you,

Questions and Discussion