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Grain storage, handling and transport - Royal Commission of Inquiry (Commissioner - Mr J.C. McColl) - Report, February 1988 - Volume 1 - Report


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Royal Commission into GRAIN STORAGE, HANDLING AND TRANSPORT

Volume 1 - Report

Commonwealth, New South Wales, Victoria Queensland, Western Australia, South Australia

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

VOLUME 1: REPORT

FEBRUARY 1988

Australian Government Publishing Service Canberra

© Commonwealth of Australia 1988

ISBN for set of three volumes: 0 644 07232 6 ISBN for Volume 1: 0 644 07236 9

This Report consists of three volumes:

Volume 1 - Report (ISBN 0 644 07236 9) Volume 2 - Supporting Papers (ISBN 0 644 07740 9) Volume 3 - Supporting Papers (ISBN 0 644 07237 7)

This work is copyright. Apart from any use as permitted under the Copyright Act 19 68. no part may be reproduced by any process without written permission from the Director Publishing and Marketing AGPS. Inquiries should be directed to the Manager, AGPS Press, Australian Government Publishing Service, G.P.O. Box 84, Canberra, A.C.T. 2601.

Time constraints determined by the author department prevented AGPS editorial and design input into this work.

THE PARLIAMENT OF THE COMMONWEAL! H OF A U SiK A llA PARLIAMENTARY PAhER

Mo* 4 0 of 1988 Ordered to be printed by authority ISSN 0727-4181

Printed in Australia by Watson Ferguson and Co.. Brisbane

Royal C ommission into G rain Storage, H andling and T ransport

Cofnirmswner Mr J.C. McColl $[h Floor, Canberra House,

Secretary; Mr H.W. Tys Marcus Clarke Street,

Rnearch Director: Mr B S. Wonder CANBERRA A CT 2600

Please address mail to GPO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008) 02 6119 Facsimile: (062) 48 6588

18 February 1988

His Excellency the Right Hon. Sir Ninian Stephen, ΆΚ, GCMG, GCVO, KBE Governor-General and Commander-in-Chief of Australia Government House CANBERRA ACT 2600

Your Excellency

In accordance with Letters Patent issued to me on 13 October 1986 and subsequently varied on 29 May 1987 and 19 January 1988, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to their Excellencies the Governors of New South Wales, Victoria, Queensland, Western Australia and South Australia.

I return herewith my Letters Patent.

Yours sincerely

S:V)W Royal C ommission into G rain Storage, H andling and T ransport

23 February 1988

His Excellency Air Marshal Sir James Rowland, AC, KBE, DEC, AFC Governor of New South Wales Government House SYDNEY NSW 2000

Your Excellency

In accordance with Letters Patent issued to me on 22 October 1986 and subsequently varied on 6 May 1987 and 27 January 1988, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to his Excellency the Governor-General and to their Excellencies the Governors of Victoria, Queensland, Western Australia and South Australia.

I return herewith my Letters Patent.

Yours sincerely

Commissioner: Mr J.C. McColl Secret ary: M r H.W. TyS

Research Director: Mr B.S. Wonder

8th Floor, Canberra House, Marcus Clarke Street, CANBERRA ACT 2600

Please address mail to: GPO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008)02 6119 Facsimile: (062) 48 6588

/.C. McColl) \oyal Commissioner

jfefijL· Royal C ommission into G rain Storage, H andling and T ransport

Commissioner: M rJ.C . McColI Secretary: Mr H.W. Tys

Research Director: Mr B.S. Wonder

23 February 1988

8th Floor, C anberra House, Marcus Clarke Street, CANBERRA ACT 2600

Please address mail to GPO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008)02 6119 Facsimile: (062) 48 6588

His Excellency Dr Davis McCaughey, RC Governor of Victoria Government House MELBOURNE VIC 3004

Your Excellency

In accordance with Letters Patent issued to me on 28 October 1986 and subsequently varied on 16 June 1987 and 19 January 1988, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to his Excellency the Governor-General and to their Excellencies the Governors of New South Wales, Queensland, Western Australia and South Australia.

I return herewith my Letters Patent.

Yours sincerely

Royal C ommission into G rain Storage, H andling and T ransport J\. AUSTRALIA ,/t-

Commissioner: Mr J.C. McColl Secretary: Mr H.W. Tys

Research Director: Mr B.S. Wonder

Please address mail to GPO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008)02 6119 Facsimile: (062) 48 6588

8th Floor, Canberra House, Marcus Clarke Street, CANBERRA ACT 2600

22 February 1988

His Excellency Sir Walter Campbell, QC Governor of Queensland Government House BRISBANE QLD 4064

Your Excellency

In accordance with Letters Patent issued to me on 20 November 1986, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to his Excellency the Governor-General and to their Excellencies the Governors of New South Wales, Victoria, Western Australia and South Australia.

I return herewith my Letters Patent.

Yours sincerely

(d.c. McColl) Royal Commissioner

JiWi'iL· Royal C ommission into G rain Storage, H andling and T ransport A w / r _______________________________

Commissioner: M r J.C . McColl Secretary: Mr H.W. Tys

Research Director: Mr B.S. Wonder

8th Floor, C anberra House, Marcus Clarke Street, CANBERRA ACT 2600

Please address mail to: G PO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008) 02 6119 Facsimile: (062) 48 6588

19 February 1988

His Excellency Prof. Gordon Reid, AC Governor of Western Australia Government House PERTH WA 6000

Your Excellency

In accordance with Letters Patent issued to me on 4 November 1986, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to his Excellency the Governor-General and to their Excellencies the Governors of New South Wales, Victoria,

Queensland and South Australia.

I return herewith my Letters Patent.

Yours sincerely

'{J.C. McColl) Royal Commissioner

i L· , Royal Commission into Grain Storage, Handling and Transport

Commissioner: Secretary:

Research Director:

Mr J.C . Me Col I M r H.W. Tys Mr B S. Wonder

8th Floor, Canberra House, Marcus Clarke Street, CANBERRA ACT 2600

Please address mail to G PO Box 2199 CANBERRA ACT 2601

Telephone: (062)48 6033, (008) 02 6119 Facsimile: (062) 48 6588

19 February 1988

His Excellency Lieutenant-General Sir Donald Dunstan, KBE, CB Governor of South Australia Government House ADELAIDE SA 5000

Your Excellency

In accordance with Letters Patent issued to me on 28 May 1987, I have the honour to present to you the final report and recommendations of my inquiry. The same report is being provided to his Excellency the Governor-General and to their Excellencies the Governors of New South Wales, Victoria, Queensland and Western Australia.

I return herewith my Letters Patent.

Yours sincerely

/J.C. McColl) Royal Commissioner

COMMISSIONER'S FOREWORD

When the Minister for Primary Industry announced the establishment of the Royal Commission in October 1986, he indicated that the inquiry was to be forward looking and should 'concentrate on identifying and developing the most cost-effective and efficient system for grain handling in the future rather than on any defects there may be in the

existing system'.

Fairly early in the inquiry, I came across what I thought was a very apt quotation from Machiavelli, that master of bureaucratic intrigue:

' It must be remembered that there is nothing more difficult to plan, nor more dangerous to manage than the creation of a new system. For the

initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones.'

The Royal Commission is providing recommendations for change towards a more efficient system with greater capacity to be flexible and responsive to future market requirements, and to exert continuing pressure to keep costs down.

The challenge now is for the respective governments to act positively.

An important influence will be the attitude of growers - the users of the services. The changes proposed provide

significant benefits to most growers, to the grain industry and to the community. They provide growers with greater choice of storage, handling and transport options in determining their least-cost strategy. In supporting the change, growers will need to accept more individual responsibility for addressing off-farm costs, an area traditionally left to the statutory institutions.

The task set for the Royal Commission has been wide-ranging and complex. The outcome has to a large extent been due to the very good co-operation, almost without exception, of all interested parties, and the contribution of a competent and

hard-working staff, three members of which I would like to give some special mention:

Harry Tys, Secretary, for his superb effort in running the administration, in providing support in public hearings, and in contributing to other activities too numerous to mention;

Bernard Wonder, Research Director, who handled a very large and challenging research management and reporting task in a highly competent and dedicated manner; and

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Terrie Bovis, my personal secretary, for her excellent support always provided in an efficient and pleasant manner.

I wish to express my appreciation of the great contribution by all staff involved during the course of the Royal

Commission. Without their high level of commitment and frequent readiness to work long hours, it would not have been possible to complete a task of this magnitude in the time allowed.

It was a stimulating and enjoyable experience.

J.C. McColl

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CONTENTS

Page

EXECUTIVE SUMMARY xxiii

GLOSSARY xxx xx

ABBREVIATIONS xliii

1. ESTABLISHMENT AND CONDUCT OF THE ROYAL 1

COMMISSION

1.1 Background to the Royal Commission 1

1.2 Terms of reference 2

1.3 The Royal Commission's approach to 3

the inquiry

1.4 Conduct of the inquiry 4

1.5 Research program 8

1.6 Publications by the Royal Commission 9

1.7 Overseas visits 9

1.8 Interim report for Queensland 10

1.9 Previous inquiries 10

1.10 Concurrent inquiries 12

1.11 Staffing 12

1.12 Acknowledgments 13

1.13 Report structure 13

2. THE GRAIN DISTRIBUTION SYSTEM: AN OVERVIEW 15

2.1 Introduction 15

2.2 International market environment 15

2.3 Australian grain production 16

2.4 The grain distribution system 19

2.5 Monitoring and scheduling 26

2.6 The industrial environment 27

2.7 Grain hygiene 28

3. ATTITUDES, PROPOSALS AND ISSUES 31

3.1 Introduction 31

3.2 Overview of attitudes and major issues 31

3.3 Key proposals 38

3.4 Key issues 40

4. FRAMEWORK FOR EVALUATING AN EFFICIENT AND 42

COST-EFFECTIVE INTEGRATED SYSTEM

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5. EXISTING INSTITUTIONAL ARRANGEMENTS FOR, 45

AND AN ASSESSMENT OF, THE GRAIN DISTRIBUTION SYSTEM

5.1 Introduction 45

5.2 Existing institutional arrangements 45

5.3 Assessment of the grain distribution system 55

QUANTITATIVE ASSESSMENT OF ALTERNATIVE GRAIN DISTRIBUTION SYSTEMS 66

6.1 Introduction 66

6.2 Key policy options and associated grain distribution systems 66

6.3 Modelling resource costs of alternative grain distribution systems 69 6.4 Results of alternative systems analyses 72

6.5 Distributional impact of a competitive environment 95

COMPETITION AND CONTESTABILITY 101

7.1 Introduction 101

7.2 Factors affecting competitive behaviour in grain storage, handling and transport

101

7.3 Competition and contestability in grain storage and handling 103 7.4 Competition and contestability in land

transport

110

7.5 Marketing reform and its impact on competition and contestability in the storage, handling and transport sector

113

7.6 Overview 116

INDUSTRIAL RELATIONS 118

8.1 Introduction 118

8.2 The industrial relations environment 118

8.3 The costs of restrictive practices and industrial disputes 122 8.4 Factors influencing the industrial

relations environment

124

8.5 Strategies for improvement 125

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9. POLICY OPTIONS FOR AN EFFICIENT AND COST-EFFECTIVE 131 INTEGRATED DISTRIBUTION SYSTEM

9.1 Background 131

9.2 Administered efficiency and 132

deregulatory approaches to provision of grain distribution services 9.3 A combined regulatory/deregulatory 135

approach

9.4 Proposed changes in storage and handling 141 9.5 Proposed changes in land transport 150

9.6 Proposed changes in port services and 167

sea transport

10. RECOMMENDATIONS, EFFECTS AND IMPLEMENTATION 170

10.1 Introduction 170

10.2 Recommendations 170

10.3 Effects 173

10.4 Implementation 174

APPENDICES

A Letters Patent for the inquiry 177

B Visit and discussion program 196

C Submissions to the inquiry 201

D Public hearings 207

E Research consultants and their tasks 208

F Royal Commission publications 209

G Staffing and specialist consultants 210

H Legislative and administrative changes 211

REFERENCES 221

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TABLES

6.1 Estimated average resource costs for 74

fourteen case study areas using cost-budgeting model, 1986-87.

6.2 Tonnage of grain received at eastern 81

State ports in base case reflecting current institutional arrangements and alternative case where restrictions are removed and costs disaggregated.

6.3 Resource cost savings under system D: 82

State level, 1986-87

6.4 Frequency distribution of savings in 99

eastern Australian State production regions

FIGURES

2.1 Grain production: Australia 17

1982-83 to 1986-87

2.2 Schematic model of grain 20

distribution system for export grain

2.3 Bulk handling agency grain storage in 1986 and 23 production 1982-83 to 1986-87: Australia

6.1 Alternative paths for export grain 71

6.2 Case study districts 73

6.3 Frequency distribution of savings 98

to growers

7.1 Average costs for country storage 104

and handling facilities

7.2 Illustrative long-run cost curve 108

for port terminal construction and operating costs

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VOLUME 2

System Overview Supporting Paper

Institutional Arrangements Supporting Paper

Storage and Handling Supporting Paper

Land Transport Supporting Paper

Port Services and Sea Transport Supporting Paper

VOLUME 3

Pricing Practices Supporting Paper

Competition and Contestability Supporting Paper

Alternative Systems Supporting Paper

Grain Hygiene Supporting Paper

Industrial Relations Supporting Paper

1

2

3

4

5

6

7

8

9

10

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EXECUTIVE SUMMARY

Establishment of the Royal Commission

The Commission was established on 13 October 1986, following the agreement of the Commonwealth Government and the governments of all mainland States to participate in an inquiry into the grain distribution system.

The announcement of the inquiry by the Minister for Primary Industry, the Honourable John Kerin, followed the suggestion, six months earlier, in the Commonwealth Government's 'Economic and Rural Policy' statement that an inquiry into

the costs and efficiency of the national grain storage, handling and transport system was necessary.

Terms of reference

Separate terms of reference (Letters Patent) were issued by the Commonwealth and State Governments; they all contained the broad directives to report on the nature of the most efficient and cost-effective integrated system for meeting Australia's future grain distribution needs and to make

recommendations about implementing such a system.

The Commission interpreted 'the nature of the most efficient and cost-effective integrated system' as reflecting the institutional environment, that is, the legislative and administrative arrangements within which grain distribution services are provided. The incentive structures to which

participants in the storage, handling and transport system respond reflect these arrangements.

Existing legislative and administrative arrangements

The legislative and administrative arrangements that underpin the grain storage, handling and transport system have given rise to a distribution system that is highly regulated and dominated by a small number of bulk handling, rail, port and marketing authorities.

In each State, legislation establishes a single bulk handling agency to store and handle in the country and at the seaboard the majority of grain produced. Only in the smaller volume grains is competition permitted.

Most States restrict the majority of the grain transport task to rail. In Victoria and Queensland this is achieved by legislation; in Western Australia by government policy. There are no legislative barriers to road transport in New South Wales and South Australia although in South Australia a surcharge on road movements from rail-served silos diminishes the competitiveness of road transport.

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Port authorities often have legislation defining their charter. Such legislation does not, however, generally impose restrictions on access of the grain industry to port

services.

Commonwealth and State marketing legislation provides a link between the storage, handling and transport system and the marketing function. Wheat marketing legislation requires that most wheat be delivered to the bulk handling agency in each State. Frequently, no such requirement exists for other grains although in Queensland and Victoria the monopoly of the bulk handler to move grain through ports provides the marketer with little choice.

The impact of legislative and administrative arrangements

The central feature of the legislative and administrative arrangements for grain storage, handling and transport is the exclusion of significant competition for most of the organisations involved. Instead of competitive influences, the statutory agencies rely largely on other incentives to stimulate efficiency in their operations.

Such influences include ministerial accountability, progressive management, pressure from growers and, at times, government-initiated inquiries. In contrast to the bulk handling agencies, rail authorities are, in addition, subject to widespread ministerial intervention in their operations.

The Commission's assessment is that under existing legislative and administrative arrangements the incentives for efficiency are inadequate for two main reasons. First, the incentives tend to vary in their duration and intensity and often arise only during periods of adverse economic

conditions. Second, in the case of political involvement and pressure from growers, the influences brought to bear invariably have the aim of achieving outcomes for which the

interest groups do not bear the costs and which are unrelated to efficiency.

The use of agreements

In the absence of a competitive environment, the statutory agencies and other participants in the grain industry have entered into a range of agreements.

The Grain Storage and Handling Agreement between the Australian Wheat Board and the bulk handling agencies is an example of an agreement that attempts to introduce market

forces into a regulated system, primarily through a series of incentive payments or financial penalties. Rail freight agreements exist in most States and are an attempt to improve the overall efficiency of the grain storage, handling and transport system through better co-operation and co-ordination between agencies.

xxiv

The various agreements and their economic effects have been examined in detail by the Commission. While recognising that some efficiency gains can be achieved through agreements within the current institutional environment, the Commission is of the view that it is very difficult to create through such agreements the types of incentive structures found in competitive markets.

Assessment of the current grain distribution system

For the most part, the current system of grain distribution does not meet the criteria of economic efficiency, cost effectiveness and integration, the three assessment criteria provided in the Commission's terms of reference.

Economic efficiency, or making the best use of the community's resources, is not achieved for a number of reasons. Principal amongst these is that most grain is channelled along a restricted number of predetermined paths with minimal scope for using lower cost paths. The outcome

is that the cost of moving the total grain crop is higher than it would otherwise be.

Also of importance are the pricing practices of the main service providers. Rarely do prices charged reflect the economic cost of providing the related services. For example, bulk handling agencies pool costs and charge growers an average price. Hence, inefficient facilities are overutilised, efficient facilities are underutilised, and the cost of undertaking the grain distribution task is again higher than it would otherwise be.

Existing pricing practices also result in an inappropriate basis for investment and disinvestment decisions. Signals reflecting market changes are masked or distorted, and the existing structure of facilities tends to be perpetuated, making the system less capable of responding flexibly to

changing market circumstances. Further, cost pooling results in substantial transfers between growers, the extent of which would be unknown to many growers.

The second criterion, that of cost effectiveness, is about minimising the cost of providing individual services. By operating in an environment which is largely devoid of

competition, it is not surprising that scope for reducing such costs is apparent in many instances. Costs can be reduced not only by improving operating practices but, in many cases, also by adjusting the standard of service and

facilities to more closely reflect the requirements of users. The main exception in this regard is road transport where the present competitive environment results in the provision of a cost-effective service.

Integration, the third criterion, is concerned with how well the many components of the grain distribution system are combined so that grain flows along the least-cost path overall. The current system lacks integration because institutional arrangements prohibit or impede the use of some

xxv

services that may assist the least-cost distribution of grain. Moreover, the current system relies on an administered approach to selection of grain distribution paths, although there is no organisation charged with the responsibility of taking decisions from an overall perspective.

The Commission's conclusions regarding the performance of the grain distribution system should not be seen as being critical of current management efforts. In many instances, management has taken the initiative to improve efficiency and cost effectiveness in the provision of services. Their efforts are, however, hindered by current institutional arrangements which do not contain incentive structures conducive to achieving continuing efficiency and productivity gains.

Assessment of alternative distribution systems

In considering alternative systems, the Commission examined the characteristics of the systems that might evolve under changes to the existing institutional arrangements.

Three basic changes to the current arrangements were considered:

. removal of the requirement that the bulk handling agencies have sole receival rights for the major grains;

. removal of restrictions on the road transport of grain;

. introduction of charges for port services and sea transport which reflect the actual cost of these activities to growers and other participants in the grain distribution system.

On the basis of these fundamental changes, four alternative systems for grain distribution were examined. The alternative systems represent various combinations of the changes and, in essence, result in different degrees of flexibility for service users, and responsibility for meeting associated costs.

The system which provides for greatest choice and flexibility in all aspects of the grain distribution task encompasses all three changes referred to above. A detailed quantitative evaluation suggests that, from a national perspective, resource cost savings of approximately $10 per tonne can potentially be achieved by adoption of this system. At the State level, the estimates of potential savings vary and are $6 per tonne in South Australia, $7 per tonne in Western Australia, $10 per tonne in Victoria, $11 per tonne in New South Wales and $13 per tonne in Queensland.

The estimated savings for this system are significantly higher than those assessed for the other alternative systems. This is not surprising as in the other systems, with the partial removal of restrictions and the continuation

xxvi

of price distortions, choices are based on prices that do not reflect true costs of the entire distribution system and can in some circumstances lead to increases in resource costs.

The estimated saving derives from three principal sources. The most important is new, lower-cost pathways for grain distribution. Further gains are obtained from improvement in the productivity of storage, handling and transport operations and from the removal of restrictive work and management practices. No allowance has been made for

longer-term improvements arising from adjustment in the distribution system's capital stock and infrastructure in a more competitive market environment.

The following developments under a less regulated environment are of particular importance to the estimated resource cost savings:

. There is a considerable increase in the quantity of grain delivered to sub-terminals and central receival points as growers move to take advantage of the relatively lower cost of those facilities for country storage and handling.

. It is often economic for growers to haul grain to a main-line receival point rather than incur the expense of higher-cost branch lines.

. It is economically feasible for some additional grain to be hauled direct from farm to port in order to take advantage of low-cost port facilities and so avoid branch line and country storage and handling costs.

Other features of the results include:

. Although road transport assumes more importance in the country, rail usually maintains its share of the overall grain transport task.

. Longer-term on-farm storage of grain is not an option widely used in any State (although it was sometimes the second-least expensive option).

. Port switching within, rather than between, States is common as growers take advantage of the differentials in port service and sea transport costs.

. Some changes in interstate flows of grain are likely.

Competition and contestability

The extent to which resource cost savings can be realised if restrictions and impediments in grain distribution were to be removed will depend on the degree of market competition that emerges. There are significant differences in market structure within the distribution system - at one extreme,

xxvii

the road transport industry can be regarded as highly competitive; at the other, port terminals exhibit many of the characteristics of a natural monopoly and may not be contestable.

Providing that there are adequate safeguards against anti-competitive behaviour, the Commission is of the view that withdrawal of sole receival rights, removal of transport restrictions and disaggregation of port service and sea transport costs will result in a sufficient degree of competitive pressure to ensure the substantial realisation of potential resource cost savings.

Any reforms to grain marketing, such as those being considered in the case of wheat by the Industries Assistance Commission, may enhance competition in grain storage,

handling and transport. However, the incremental gain in competition may not be significant as long as marketers actively pursue all commercial opportunities to minimise storage, handling and transport costs.

Industrial relations

The Commission's examination focussed on restrictive practices and industrial disputes. It found that considerable scope for improvement exists, although the

extent of this varies. The scope is greatest at port terminals in the heavily industrialised areas, on the waterfront and in most railways.

Of the potential resource cost savings under a more competitive environment, about 15 per cent or $1.50 per tonne is attributable to an improvement in industrial relations. Half of this saving arises from improvements in the activity

where the practices or disputes occur; the remainder arises from savings in areas other than where the practices occur and highlights the need for a system-wide approach to seeking solutions. Examples of these indirect effects are the mismatch of working hours between interdependent activities

and the lack of continuous loading of vessels resulting in increased time and cost of ships in port.

The industrial practices and disruptions which contribute to inefficiency in the distribution system have built up over many years and for a variety of reasons. However, the underlying factor which has allowed this to develop and continue is the shielding from competitive forces of many of the organisations in the distribution system. The introduction of competition into key areas of the system would be the single most important initiative that could be undertaken.

International economic pressures on the grain industry and community recognition of the need for efficiency improvements in industry generally are at present producing a better industrial climate. Such pressures, however, are often transitory and a more permanent incentive structure, such as exposure to competitive forces, is required if a continuing drive for efficiency improvements is to be achieved.

xxviii

Policy options for an efficient and cost-effective integrated distribution system

Three options for achieving resource cost savings were considered by the Commission:

Option 1: an administered efficiency approach;

Option 2: a deregulatory approach;

Option 3: a mixed deregulatory/regulatory approach.

Option 1 An administered efficiency approach would involve retaining the existing or similar institutional arrangements for

storage, handling and transport. It would also be necessary for decision-making to become more centralised, so that decisions concerning least-cost paths for grain could be taken from an overall perspective.

The Commission rejected this approach because it would be unlikely to realise the potential resource cost savings for two reasons. First, centralised decision-making would

require the accumulation of substantial quantities of data in order to identify least-cost grain paths. Such a process would prove expensive and probably not feasible. Second, with the continuation of existing institutional arrangements, many storage, handling and transport options would not be

available because of restrictions on the choice of grain paths.

Option 2 A deregulatory approach would be to allow storage, handling and transport decisions to be taken in an environment largely free of legislative and administrative restrictions. Such an

environment would nevertheless contain a degree of administered efficiency as marketing boards would license receivers, disaggregate port service and sea transport costs and formulate shipping programs.

The Commission sees considerable merit in a deregulatory approach, particularly with respect to its capacity to provide for integration of storage, handling and land transport. However, such an approach entails several problems, including the possible emergence of monopoly power, the maintenance of grain hygiene standards, the accommodation of any external costs such as road damage costs, and inadequate funding of roads.

Option 3 A mixed deregulatory/regulatory approach is the Commission's preferred policy option. It maintains the deregulatory principles of Option 2 but includes a range of mechanisms to

deal with the problems associated with that option.

xxix

The key elements of the preferred approach are:

. marketing authorities would interact with a deregulated distribution system, and have a charter to minimise storage, handling and transport costs;

. sole receival rights for storage and handling of grain would be removed, providing marketing authorities with the flexibility and responsibility to employ those agencies able to provide the required services at least cost;

. all road transport restrictions and impediments would be removed, with the result that grain would no longer be one of the few goods that is, to a significant extent, reserved for rail transport;

. port service and sea transport costs would be disaggregated and marketers of grain would pass back to growers and other market participants the actual costs incurred at Australian ports.

Under this approach marketers and end users would be mainly concerned with such matters as timing, location and quality of specified grain deliveries, leaving the service providers to focus on their areas of comparative advantage. The

marketers' requirements would be negotiated and included in commercial contracts between the parties concerned.

For the Commission's preferred policy approach to achieve an efficient and cost-effective integrated outcome, specific changes will need to be made to the storage and handling, transport and port services areas.

Storage and handling The Governments of New South Wales, Victoria and Queensland should, at the outset, consider whether they wish to retain ownership of their grain handling authorities. There is no

legal doubt that the statutory authorities are owned by the State governments and could be sold off if desired. However, a case may be made on equity grounds that growers should share in the ownership of any future organisation.

Should the agencies remain in government ownership, a central task would be their corporate restructuring. The aim would be to ensure that the agencies are freed of social obligations and can compete on the same terms and conditions

as apply to private storage and handling agents. A suggested approach is outlined in the report.

The co-operative bulk handling agencies in Western Australia and South Australia are already registered under legislation that is applicable to other parts of the economy. The Commission does not propose changes to the co-operatives other than their exposure to competition and removal of non-commercial objectives. In a commercial environment, however, the members of co-operatives may well consider alternative corporate structures.

xxx

The withdrawal of sole receival rights may provide some potential for bulk handling agencies to behave in an anti-competitive manner. In particular, discriminatory pricing at ports may occur when the bulk handling agency

operates both country and seaboard facilities. Also, any monopoly power held by bulk handling agencies could lead to users paying storage and handling prices that do not accord with underlying cost structures.

The Commission believes that a number of initiatives could be taken to modify any anti-competitive behaviour that may emerge. All bulk handling agencies should be subject to the disciplines of trade practices legislation, as are their private sector counterparts. In addition, State governments would need to monitor market behaviour and could, if

necessary, introduce other measures that facilitate competition, such as restrictions on ownership, the establishment of 'common user' facilities at port, and leasing, tendering or contracting of country and port storage and handling facilities.

The removal of sole receival rights may affect the competitive position of several bulk handling agencies in regard to outstanding debts on capital borrowings. Such debts may not be a major problem due to the market advantages conferred by the high level of sunk costs in current infrastructure. Nevertheless, State governments would need to consider the restructuring of bulk handling agency debts within the overall process of consideration of future ownership and corporate structures.

Much concern was expressed about grain hygiene in an environment in which the sole receival rights of bulk handling agencies are withdrawn. The principal problems raised related to insect control, pesticide residues and

increases in pesticide and fumigant resistance levels.

While the Commission does not expect long-term on-farm storage to be used on a wide scale under its preferred approach, it believes that growers are capable of using this technology without exposing the overall distribution system to significant grain hygiene risks. The essential factor is to ensure that growers, like all other participants in the distribution system, are subject to market-related penalties and incentives aimed at ensuring maintenance of designated hygiene standards.

Marketing authorities, under the Commission's preferred approach, play a central role in regard to grain hygiene. In licensing prospective storage and handling agents, marketers

would have regard for the capacity of the agent to maintain satisfactory grain hygiene. Appropriate incentives and penalties for ensuring grain hygiene standards would be encompassed within the commercial arrangements between the marketing boards and the storing and handling agents.

Nevertheless, the Commission believes that, regardless of the institutional environment, developments in grain hygiene will need to be carefully monitored. The Commission has suggested a range of options to deal with future developments.

xxxi

Land transport The removal of road transport restrictions would require the State governments to examine the corporate structure of their rail authorities. In many respects, the structure of Australian National provides a useful model.

Whatever structure is decided upon, rail authorities should be able to focus their resources on those aspects of the grain distribution task where they have comparative advantage. They should be required to achieve a satisfactory rate of cost recovery and automatic funding of operating deficits on freight services should not be continued. Further, they should be unencumbered by non-commercial

objectives. In some cases, outstanding debt would need to be restructured to establish a debt structure more in line with commercial practice.

There has been much debate about the cost recovery of road transport. Rail authorities in particular expressed opposition to deregulation of road transport: they considered, among other things, that rail would be seriously disadvantaged because of the under-recovery of road damage costs imposed by commercial operators.

The Commission's analysis has highlighted the following key points. First, in terms of economic efficiency, sufficient revenues are generated by the various taxes and charges on road transport to cover the costs of any additional road damage. Second, reforms concerning a more efficient system of cost recovery amongst road traffics are currently under way.

Third, grain is one of the few commodities that is in many instances reserved for rail transport and grain growers and marketers are currently required to bear the costs of such discrimination. Finally, the Commission believes that there

is scope for rail authorities to adjust their operations so that they can successfully compete in a deregulated transport environment.

This is not to say that no further steps are necessary in relation to the recovery of road damage costs. In particular, an efficient road user charging system needs to be introduced whereby the costs of road damage are paid for by those road users that create the costs.

It is not necessary, however, to delay the removal of road transport restrictions until such a scheme is introduced. Any long-term additional road damage costs resulting from road deregulation would be more than offset by the taxes and charges incurred by transport operators.

Road funding is a further area of concern in connection with removal of road transport restrictions and impediments. In particular, local government associations are concerned that current road funding arrangements provide no effective mechanism for compensating local councils for increases in road damage costs that may result following transport deregulation.

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The Commission's analysis indicates that under deregulation little additional grain traffic would occur on local roads; most additional traffic would be on rural arterial roads, which are funded by the Commonwealth and the States. Nevertheless, some increased usage of local roads would be

likely and the concerns of local governments are real.

This matter, however, extends beyond grain transport to the whole question of adequate funding for local roads throughout the economy. The current situation is symptomatic of a generally inefficient and ad hoc system of road funding whereby local road funds tend to be allocated on the basis of

road length and population without regard to the issue of efficiency.

The Commission has considered alternative means of road funding and believes it appropriate for governments to strive for a more direct link between road funding on the one hand and road usage and the related maintenance and construction

requirements on the other. The introduction of a comprehensive scheme to establish this link is not possible immediately due to the limited availability of data concerning road usage.

As an interim measure, the Commission considers there is scope to introduce a targeting strategy, the elements of which are already in place in some States. Ultimately, funds for such schemes would be derived from Commonwealth and State

collections of charges levied on the road transport industry following necessary reforms. In the meantime, the Commission suggests that the Commonwealth Government could provide specific funding support, jointly with the States, to such

targeting schemes.

The final problem in the case of land transport is any anti-competitive behaviour by road or rail operators that may arise in an environment in which road transport restrictions

and impediments are removed. One possibility is that rail authorities may charge excessive prices for grain transport, though this is unlikely given the presence of road competition in most areas. A more significant factor is predatory pricing, whereby advantage is taken of an operating position in one market segment to price in a predatory fashion elsewhere. Railway authorities would need to be subject to legislation prohibiting anti-competitive behaviour, and any such behaviour dealt with accordingly.

Port services and sea transport Little change in the corporate structure of port authorities would be necessary to achieve an efficient and cost-effective integrated distribution system. The

Commission's preferred policies should create an environment in which port authorities compete for grain. Port authorities are becoming autonomous units operating under commercial guidelines and it would be appropriate for governments to complete the commercial transformation so that market responsiveness is enhanced.

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Even under the Commission's preferred approach, the market for some port services, such as stevedoring, is likely to remain uncompetitive because of the existing industrial structure. The Commission considers that this matter needs to be considered in the broader context of the current inquiry into the waterfront by the Inter-State Commission.

* * * * * *

The Commission believes that its preferred approach would lead to considerable resource cost savings and is capable of being implemented. Accordingly, it has made a series of recommendations aimed at putting its preferred option in place. The recommendations are listed at the end of this summary.

Effects

The Commission's recommendations are aimed at establishing a competitive environment for grain distribution leading to a more efficient and cost-effective integrated system for grain storage, handling, land transport and port services. It has

estimated that on a national basis savings of some $10 per tonne are achievable in the short term and should be pursued immediately. In the longer term, the changed institutional environment will ensure continuing pressure for productivity gains and cost containment through competition between the service providers and progressive restructuring of the grain distribution system.

A competitive environment would provide the bulk handling agencies and rail authorities with the commercial independence and freedom to make adjustments to operating practices, including pricing structures and service provision. Over the longer term the capital stock and infrastructure of both the bulk handlers and rail authorities would adjust in order to maximise the efficiency of their

respective operations.

It is important to recognise that, while the overall resource cost saving would lead to lower charges for growers on an industry-wide basis, not all growers receive the same reductions, and a minority of growers experience a short-term increase in charges. About ten per cent of growers are estimated to face an increase, but for the most part the increase should be less than $1 per tonne. Growers most affected in this way are in South Australia and Queensland. The increase is a direct result of the removal of the current pooling and associated cross-subsidisation practices, particularly the removal of current pooled port services and sea transport charges.

Implementation

The Commission believes that the recommendations which affect the responsibilities of marketing boards concerning the minimisation of storage, handling and transport costs, the

xxxiv

ability to appoint more than one licensed receiver, and the disaggregation of the costs of port services and sea transport should be undertaken immediately.

Road transport restrictions and impediments should also be removed immediately. The reform of cost recovery arrangements and road funding could proceed in tandem with the termination of the funding of rail operating deficits.

The implementation of the recommendations involves a number of different portfolios in each of the five State governments and the Commonwealth Government. The issues are complex, and the Commission believes that the most expeditious and

efficient method of co-ordinating the implementation process is to establish a small task force in each of the States and the Commonwealth. Those groups would keep in close contact with each other, with the industry, and with their respective governments.

Recommendations

The Commission's recommendations are grouped according to their relevance to marketing boards, storage and handling, land transport, and ports and shipping.

Marketing boards R.l The Commission recommends that Commonwealth and State marketing boards be required (under their enabling legislation) to undertake the following tasks:

. minimise storage, handling and transport costs and reflect in returns to each grower the actual charges incurred by that grower for storage, handling and transport services;

. provide for competition in storage and handling services by not being restricted to only one licensed receiver in each State;

. disaggregate port services and sea transport charges and reflect these in returns to individual growers.

Storage and handling R.2 The Commission recommends that greater competition be encouraged in the provision of grain storage and handling services by the removal of sole receival rights

for all grains and by the 'commercialisation' of the bulk handling agencies.

To implement these changes the Commission recommends as follows:

R.2.1 modify legislation to remove sole receival rights (Commonwealth and all States);

R.2.2 remove port handling monopoly for export grains (Victoria and Queensland);

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R.2.3 remove legislative and other impediments to the commercial operation of the bulk handling agencies (all States);

R.2.4 consider the appropriateness for continuing ownership of bulk handling agencies by State governments (New South Wales, Victoria, Queensland);

R.2.5 undertake corporate restructuring to establish commercial operating structures for the bulk handling agencies (all States);

R.2.6 make bulk handling agencies subject to the provisions of the Trade Practices Act (all States);

R.2.7 discontinue the current storage and handling charges imposed on 'grower-to-buyer' and 'permit' wheat transactions (all States);

R.2.8 the grain industry consider the establishment of a grain hygiene co-ordinating body (Commonwealth and all States).

Land transport R.3 The Commission recommends that greater competition be encouraged in the provision of land transport for grain by the removal of restrictions precluding the use of

road transport for grains and by the 'commercialisation' of rail freight services.

To implement these changes the Commission recommends the following:

R.3.1 remove legislative and administrative arrangements requiring use of rail for grain transport (Victoria, Queensland, Western Australia);

R.3.2 remove the Australian National surcharge on road movements of grain between rail-served silos in South Australia (South Australia);

R.3.3 remove restrictions on the use of alternative types of road vehicle if the restrictions cannot be justified on social cost grounds (Commonwealth and all States);

R.3.4 remove impediments to the railways' commercial operation (Commonwealth and all States);

R.3.5 undertake corporate restructuring of railways to facilitate their commercial operation (Commonwealth and all States);

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R.3.6 ensure that rail authorities are subject to the Trade Practices Act (Commonwealth and all States);

R.3.7 schemes be developed in each State to target specific local roads for additional funding (all States);

R.3.8 as an interim measure the Commonwealth Government contribute specific funds jointly with State governments to road targeting schemes to cover additional road damage arising from implementation of the Commission's recommendations (Commonwealth and all States);

R.3.9 the grain industry implement a system in all States of self-regulation of vehicle mass limits;

R.3.10 current transport policy reforms aimed at establishing a more efficient system of road user charges be expedited (Commonwealth and all States);

R.3.11 transport research and policy development aimed at establishing a more effective and efficient system for allocating road funds be strongly supported by Commonwealth and State governments.

Ports and shipping R.4 The Commission recommends that State governments continue the process of 'commercialising' port authorities with the aim of permitting greater

competition in the provision of port services (all States).

The Commission also recommends that:

R.4.1 its views on the unsatisfactory nature of the institutional environment on the waterfront be brought to the attention of the Inter-State Commission for consideration by that body in its

inquiry on the Government's Waterfront Strategy;

R.4.2 the question of union coverage at the new Port Kembla grain terminal be settled as a matter of urgency.

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GLOSSARY

Avoidable costs: The reduction (increase) in total

costs resulting from the withdrawal (introduction) of a service.

Equivalent to incremental costs.

c . i . f. : Abbreviation used in some

international sales contracts, when the selling price includes all

' costs, insurance and freight' for the goods sold.

Compensation payments: Payments between bulk handling agencies and the Australian Wheat Board as penalties or bonuses for slow or rapid ship-loading times respectively.

Contestable: Derived from 'contestable markets

theory', which postulates that with completely free entry and costless exit of firms a market will not

exhibit monopoly behaviour, even if only a single producing firm is

operating in the market. Such a market is said to be 'contestable'.

Cross-subsidisation: Occurs when price is set outside the range of stand-alone costs and

avoidable costs.

Demurrage: An amount paid as a penalty for

ship-loading times in excess of an agreed level.

Despatch: An amount paid as a bonus for

loading vessels in a time less than that stipulated in the relevant agreement.

Economies of scale: Occur when a given increase in

inputs results in a more than

proportionate increase in output. Hence, the average cost of each unit of output falls as the level of

production is increased.

Economies of scope: Occur when it is possible to produce a service at a lower cost by

producing it in combination with other services rather than as a

single product.

Fixed costs: Costs that do not vary with the

amount of a good or service produced in the short run.

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f.o.b.:

Incremental costs:

Joint & common costs:

Long run:

Marginal costs:

Market driven:

Non-statutory grains:

Pooling:

Predatory pricing:

Abbreviation used in some

international sales contracts, when imports are valued at a designated point, as agreed between buyer and seller, that is considered 'free on board'. The seller is obliged to have the goods packaged and ready for shipment from the agreed point, from which point the buyer assumes all subsequent costs including transportation, handling and

insurance.

see Avoidable costs.

Costs that are created jointly by the production of a number of

services but cannot be directly attributed to any individual

service.

Time period in which all costs are variable with the level of

production.

The change in total costs when there is a one-unit change in the level of production. In some circumstances this will be approximately equal to the incremental (or avoidable) cost.

Market-related price signals are permitted to flow between, and

within, the various markets

representing the interaction between growers, suppliers of services and domestic and overseas grain buyers, thus driving the quantity and

distribution of resources used in the grain distribution system.

Grains that are not controlled by statutory marketing boards and hence can be traded freely.

Occurs when all costs of producing a service are combined, with users paying an average price either

across a number of locations

(spatial pooling) or across a

number of time periods (temporal pooling).

Occurs when prices are set below the marginal cost of producing a

particular service for a given

period of time in order to price

competitors or potential

competitors out of the market.

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Price differentiation: Occurs when prices for services vary for different consumers in order to reflect supply cost differences in servicing those consumers.

Equivalent to price disaggregation.

Price disaggregation: See price differentiation.

Price discrimination: Occurs when different buyers are charged different prices for the same service, where these different prices do not reflect differences in costs of supply. The differences may relate to demand or competitive

conditions.

Radial rating: Occurs where rail rates are based on

the straight line (or 'as the crow flies') distance from the nearest port.

Ramsey pricing: Pricing services at their average

cost where average cost in this

context is defined as the marginal cost plus a component for fixed and joint costs allocated on the basis of demand elasticity.

Restricted grains: Grains that are restricted to

transport by rail with certain

exceptions. These grains are the statutory grains.

Service driven: Where a predetermined level of

service drives the level of

resources applied and their physical disposition in the production

process.

Short run: Time period in which some costs are

fixed irrespective of the level of service produced.

Stand-alone costs: The cost of producing a particular service in isolation; that is, assuming the multi-service firm hypothetically shuts down all other services.

Statutory agencies: Organisations that are established under or supported by legislation.

Statutory grains: Grains that are controlled by

statutory marketing boards.

Unit trains: Train loads that exceed 90 per cent

of the capacity of a single

locomotive or 85 per cent of the

capacity of multiple locomotives.

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ABBREVIATIONS

ABARE

ABB ACIL ACIR AFULE AGAL AGEA AN AMEC APB AQIS ARU ATMMB AWB AWU

BAE BGQ BRS BTCE BTE c. & f. c . i . f . c/ntk CQGSMB CRP CSIRO

DPIE dwt FAO f . o . b .

GEB GHA GCA GPWA

IAC ISC km kt LDP MSB mt NAASRA

N/A n. a. NH&MRC NRFII NSWDA NSWFA ntkm PWA QDPI QGGA

Australian Bureau of Agricultural and Resource Economics Australian Barley Board ACIL Australia Pty Ltd Advisory Council for Inter-government Relations Australian Federated Union of Locomotive Enginemen Australian Government Analytical Laboratories

Australian Grain Exporters Association Australian National Railways Australian Malt Exporters Committee Agriculture Protection Board of Western Australia Australian Quarantine and Inspection Service Australian Railways Union Atherton Tablelands Maize Marketing Board Australian Wheat Board Australian Workers' Union Bureau of Agricultural Economics

Bulk Grains Queensland Bureau of Rural Science Bureau of Transport and Communications Economics Bureau of Transport Economics cost and freight cost, insurance, freight cents per net tonne-kilometre Central Queensland Grain Sorghum Marketing Board Central receival point Commonwealth Scientific and Industrial Research Organisation Department of Primary Industries and Energy deadweight tonnes Food and Agriculture Organisation

free on board Grain Elevators Board of Victoria Grain Handling Authority of New South Wales Grains Council of Australia Grain Pool of Western Australia

Industries Assistance Commission Inter-State Commission kilometres kilotonnes Low Dose Probability Maritime Services Board of New South Wales million tonnes National Association of Australian State Road Authorities Not applicable not available National Health and Medical Research Council National Road Freight Industry Inquiry New South Wales Department of Agriculture New South Wales Farmers' Association net tonne-kilometres Prime Wheat Association Limited Queensland Department of Primary Industries Queensland Graingrowers Association

xliii

QR RICS RMB SACBH SADA SRA SWB t tpa tph TWU UF&S VFF VFGA V/Line VOP WACBH WAFF Westrail wte WHO

Queensland Railways Rolling/stock information control system Rice Marketing Board South Australian Co-operative Bulk Handling South Australian Department of Agriculture State Rail Authority of New South Wales State Wheat Board tonnes tonnes per annum tonnes per hour Transport Workers' Union United Farmers and Stockowners of South Australia Victorian Farmers' Federation Victorian Farmers and Graziers Association

State Transport Authority of Victoria Victorian Oatgrowers Pool & Marketing Co. Limited Co-operative Bulk Handling of Western Australia Western Australian Farmers Federation Western Australian Railway Authority wheat tonne equivalents World Health Organisation

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1 . ESTABLISHMENT AND CONDUCT OF THE ROYAL COMMISSION

1.1 Background to the Royal Commission

On 13 October 1986 the Minister for Primary Industry, the Honourable John Kerin, announced that the Commonwealth Government and the governments of all mainland States had agreed to the establishment of a Royal Commission into Grain

Storage, Handling and Transport.

Six months earlier, in April 1986, the Commonwealth

Government had canvassed the possibility of a Royal

Commission into Australia's grain distribution system in its Economic and Rural Policy statement. In that statement it said, 'grain transport- and handling costs have been a contentious issue for a number of years' (p . 50), and in particular noted the increasing proportion of growers' returns being consumed by storage, handling and transport charges and the likelihood of this trend continuing.

While falls in the world price of wheat and other grains had contributed to this trend, it nevertheless served to highlight the current significance of grain distribution costs and focussed attention on the need to examine whether grain distribution could be made more efficient. Among the factors identified in the statement as adding to costs were the following:

. the provision and maintenance of particular silos and railway branch lines that are not economically

justifiable;

. grain silos sometimes operating without regard to cost;

. management decisions and work practices often not maximising potential productivity improvements;

. poor investment decisions;

. restricted movement of grain between States.

Although there have been a number of ad hoc and State

inquiries into grain handling and transport in recent years, the statement noted that none have examined the system as a whole or on a national basis. Accordingly, the Commonwealth

Government proposed that a broad and intensive inquiry into the entire grain distribution system be conducted.

Because the storage, handling and transport of rural products are primarily State responsibilities, the statement went on to say that if the 'relevant States agree to participate, then the Commonwealth is prepared to meet the cost of a joint Royal Commission, conducted with the relevant States'

(p. 51). The Government considered that the powers and status of a Royal Commission were both necessary and

appropriate to address the very complex and far-reaching

1

issues involved in the storage, handling and transport of grain.

1.2 Terms of reference

In his statement of 13 October 1986, the Minister for Primary Industry announced the appointment of Mr James Carvel McColl as Royal Commissioner for the inquiry.

In broad terms, the task of the inquiry was as follows:

. to report on the nature of the most efficient and

cost-effective integrated system that might be instituted in Australia for the purpose of providing storage, handling, transport and port terminal services for grain marketing authorities and organisations and growers of wheat and other grains;

. to make recommendations, including legislative and administrative changes, that are necessary or desirable to put into effect the most efficient and cost-effective integrated system.

Apart from these broad directives, the inquiry was to give particular attention to a number of specific matters:

. the standard of services required by marketing

organisations and growers and the appropriateness of those standards;

. the present institutional arrangements and possible alternatives to those arrangements;

. the capital and cost structures (including personnel levels and operating procedures), contractual arrangements and accounting and pricing practices of organisations providing grain storage, handling and transport services and the effect of these on marketing organisations and growers;

. the effect of technological developments and the ability of the system to be sufficiently flexible to enable it to easily and quickly adapt to developments and changing requirements.

The forward-looking thrust of the inquiry, implicit in its terms of reference, was reinforced in the Minister's announcement of 13 October 1986. He said that the inquiry would 'concentrate on identifying and developing the most cost-effective and efficient system for grain handling in the future rather than on any defects there may be in the

existing system' .

The formal instruments establishing the Royal Commission are the Letters Patent, issued in the case of the Commonwealth by the Governor-General and in the case of the States by the respective State governors. The Letters Patent, which

2

incorporate the terms of reference for the inquiry, were issued by the Commonwealth on 13 October 1986, by New South Wales on 22 October 1986, by South Australia on 23 October 1986, by Victoria on 28 October 1986, by Western Australia on

4 November 1986, and by Queensland on 20 November 1986.

With the exception of the Letters Patent for Western Australia, which contained no reporting date, those for the Commonwealth and the remaining States required the Commission to report on the nature of the system by no later than

31 July 1987 and on its recommendations by no later than 31 January 1988. Early in the inquiry the Commission formed the view that the requirement for an initial report by 31 July 1987 was inappropriate and at its request the Commonwealth and all participating State governments with the exception of Queensland agreed to waive the requirement for the first report. An interim report for Queensland was presented to His Excellency, the Governor of Queensland on 31 July 1987.

In December 1987 the Commission sought, and all participating governments agreed, to extend to 26 February 1988 the Commission's reporting date for its final report.

The full text of each of the six Letters Patent and, where appropriate, the changes associated with the revised reporting requirements, are set out in Appendix A.

1.3 The Royal Commission's approach to the inquiry

At the outset, the Commission identified two key elements in its approach to the inquiry. The first was that every endeavour should be made to obtain the involvement of relevant parties in the inquiry and to encourage widespread discussion and debate of inquiry issues. The second was that the inquiry should be strongly supported by an extensive and thorough research program to provide a sound basis for the Commission's recommendations.

The first element - maximising interest and participation - was seen as particularly important and has proved to be so for a number of reasons. It established a close rapport with

inquiry participants, which assisted the process of the inquiry. In particular, it helped the Commission to quickly understand the industry and the main issues, it facilitated the collection of information and it encouraged the presentation of views and ideas by participants.

Such an approach also assisted in the progressive release and testing of the Commission's research and tentative findings and conclusions. The vast bulk of the material on which this report is based has been made available for comment either publicly or to appropriate organisations and individuals. There is no doubt that the report has benefited from this

approach.

3

In addition, the continuing interaction with inquiry participants, as well as being educational for the

Commission, also provided impetus for those in the industry to question and review their own operations. Certainly, the level of debate, particularly involving growers, was heightened during the inquiry and a number of worthwhile changes in both the storage and handling and the transport

areas have already been initiated or implemented.

The need for a comprehensive research program, the second key element of the Commission's approach, stemmed mainly · om the nature and scope of the inquiry. The task invox.-ed an examination of alternative ways of doing things, and so a research-oriented approach that would allow alternatives to be evaluated in a consistent and systematic way was

essential. Such an approach was further influenced by the highly interactive nature of the many components of the grain distribution system. Changes in one part of the system have ramifications elsewhere and the use of analytical models to cope with the many interrelationships and volume of data became essential.

In addition, much of the way in which grain storage, handling and transport is undertaken has a long tradition and the views of many associated with those tasks may well be quite entrenched. If the inquiry's findings suggest that benefits can be derived from doing things differently, then the process of gaining acceptance of necessary change is likely to be enhanced if these findings are supported by sound research.

1.4 Conduct of the inquiry

In accordance with the terms of reference and to encourage interest and participation, the Commission conducted its inquiry in an open and informal manner; opportunities for interacting with participants and keeping them informed of progress and developments were keenly pursued.

1.4.1 Inquiry advertisements and information dissemination

The inquiry was advertised nationally at the end of

October 1986, when parties were invited to register their interest. The Commission established a mailing list of about 1400 individuals and organisations.

The main medium of regular communication was a series of information bulletins. Twelve bulletins were issued, covering a range of topics such as inquiry procedures, public hearing arrangements, and release of Commission

publications. In general, these bulletins kept interested parties informed of progress and other matters of relevance to the inquiry.

The Commission also issued media releases in connection with significant events such as public hearings and the release of

4

Commission publications. In addition, the Commission published an information booklet that described how the Commission proposed to conduct its inquiry.

1.4.2 Visits program

The Commission arranged an extensive visits program and had discussions with a considerable number of individuals and organisations, many on more than one occasion. Visits extended to all mainland States and covered both capital city

and rural areas.

Initially, the main purpose of these visits was to establish channels of communication and familiarise the Commission with the industry and inquiry issues. Discussions were held with a range of government and industry leaders, providers of grain distribution services, and with the relevant unions and growers. The physical aspects of the storage and handling

system, including silos, sub-terminals and port terminals, and of the transport system were inspected at many locations in all participating States.

As the inquiry continued, discussions with participants focussed more on particular issues. For example, meetings were held in all participating States to discuss a series of options being considered by the Commission; meetings were

also held to discuss specific issues relevant to particular organisations, such as marketing authorities, trade unions and research organisations.

A summary of the Commission's visits and discussion program is at Appendix B. The Commission also visited a number of overseas countries; information about these visits is provided in Section 1.7.

1.4.3 Sources of information

Information for the research program and the inquiry generally was obtained by various means. Apart from the previously mentioned local and overseas visits, other methods of obtaining information were as described below.

All interested parties were invited to make submissions on matters relevant to the inquiry and to assist in this task the Commission produced its first discussion paper. Issues for the Royal Commission’s Inquiry.

Two hundred and thirty-two organisations or individuals made submissions; they are listed in Appendix C. Many of these parties made several submissions and a total of almost 400 submissions were received from a broad spectrum of interests, including Commonwealth, State and local government organisations, bulk handling agencies, railway authorities, port authorities, marketing organisations, grower organisations, unions and individual growers.

5

More specific information, such as cost and price data, was obtained from the main service providers, either by way of questionnaires or on an ad hoc request basis. The Commission also conducted a survey of private storage and handling

organisations in eastern Australia.

A number of inquiry participants provided the Commission with information about relevant surveys or studies undertaken by them or on their behalf. For example, Bulk Grains Queensland (BGQ) undertook an extensive survey of grower attitudes to aspects of grain storage, handling and transport, the Victorian Government provided feasibility studies of port developments, and the Western Australian Department of Transport submitted reports on shipping issues related to the export of grain from Western Australian ports and on the transport of the Western Australian grain crop.

Further information was obtained during two series of public hearings and from a number of workshops conducted by the Commission.

Overall, the Commission believes that it obtained good and comprehensive information. The only area of information to which access was denied related to the costs of rail

transport in Queensland and the 1986-87 Queensland Rail Freight Agreement: in March 1987 the Queensland Minister for Transport exercised his power under the Queensland Letters

Patent not to release this information.

Although administratively time-consuming, the denial of access to this information did not significantly hamper the Commission in its inquiry. A copy of the Queensland Rail Freight Agreement was obtained from the Australian Wheat Board (AWB); in the case of the rail cost data, the

Commission was able to estimate these costs and it believes that the estimates are sufficiently accurate so as not to detract from the usefulness of the analysis. The recently negotiated Queensland Rail Freight Agreement, although not signed by all parties when this report was written, was provided upon request by Queensland Railways (QR) in January 1988.

The Commission encouraged participants to submit as much information as possible on a public rather than confidential basis. Certain organisations and individuals, however, felt that their future positions in the industry might be

jeopardised if they made their views known publicly and therefore sought to make confidential submissions. Some information was provided inadvertently to the Commission; on other occasions individuals in organisations provided information informally. Because such information could not generally be subjected to public scrutiny, the Commission exercised due care in the degree of importance it attached to that information.

6

1.4.4 Public hearings

Public hearings were used to supplement information in submissions and to allow the Commission to seek clarification and elaboration of such material and to raise inquiry issues. Although it was not essential that submissions be

presented at hearings, participants were encouraged to do so and the majority of submissions were in fact presented in such a way.

The first series of public hearings was held during the period 2 March to 14 May 1987, dealing mainly with

information about the industry and inquiry issues. These hearings were held in capital cities and rural centres.

The second series was held from 2 to 19 November 1987, with the principal purpose of receiving responses to Discussion Paper No. 5, Preliminary Findings and Options. In this case hearings were limited to capital cities of participating States.

A list of hearing dates and locations is at Appendix D.

The Commission heard evidence for a total of 23 days, 2857 pages of transcript were made, and 178 separate

submissions were made at the hearings. Both series of hearings were well attended and, in keeping with the informal approach, formalities were kept to a minimum.

1.4.5 Treatment of evidence

Consistent with the open approach of the inquiry, the Commission made available copies of public submissions and transcripts of evidence for perusal or purchase by interested parties. The Commission is grateful for the co-operation of each State department responsible for agriculture in making facilities available at which copies of public submissions could be viewed. Including the Commission's Canberra office, the viewing service was available at 33 capital city and country locations. The number of locations was reduced after the first series of hearings because the demand for viewing submissions had diminished. The receipt of new submissions was announced periodically in the Commission's information bulletins.

Copies of the transcript of evidence were available for perusal at the Commission's office and for perusal and sale at the capital city locations of the Commonwealth Reporting Service.

Subjecting inquiry information to public scrutiny encouraged a greater balance of information about important issues and the Commission was thus able to have greater confidence in the information submitted.

7

1.5 Research program

Research for the inquiry was undertaken within the

Commission, by commercial and academic consultants, and by other bodies that oriented their own research programs to enable them to contribute to the Commission's requirements.

The Commission also drew on existing literature and research material available both in Australia and abroad.

The broad scope of the research program which the Commission judged to be necessary required a carefully focussed and disciplined approach, particularly in the light of the limited time available. Research areas had to be determined

and priorities established. The Commission was mindful of work being done in other organisations, for example, the Bureau of Agricultural Economics (now part of the Australian Bureau of Agricultural and Resource Economics), and the Bureau of Transport Economics (now part of the Bureau of Transport and Communications Economics), and it was necessary to assess what further work could be undertaken by such organisations as well as by the Commission's in-house researchers.

To assist in this aspect of its inquiry, the Commission held two workshops soon after its establishment. Attendance was by invitation and industry, research, academic and union organisations were widely represented. With the inquiry's terms of reference as the guiding influence, the workshops canvassed inquiry issues, research topics and possible research approaches, data requirements and priorities.

Following these workshops the Commission prepared a comprehensive research program. In the case of work not to be undertaken by in-house staff or other organisations, tenders were invited from appropriate individuals and organisations. These tenders were evaluated and a number of contracts for particular research consultancies were awarded. The successful consultants and a brief description of their area of work are listed in Appendix E.

The Commission acknowledges the contribution of the consultants. It specifically acknowledges the contribution of particular consultants in areas of the report that draw heavily on their work.

The Commission tested research findings in a number of ways. These included the release of discussion papers on which comments were invited, the conduct of workshops, and the circulation to relevant organisations of all or parts of consultants' reports. Discussion papers were released for comment on the following topics:

. the institutional environment (Discussion Paper No. 2 - Institutional Framework for the Australian .Grain Storage, Handling and Transport System - released in June 1987);

8

. pricing practices (Discussion Paper No. 3 - Pricing Practices in the Australian Grain Storage, Handling and Transport System - released in July 1987);

. land transport (Discussion Paper No. 4 - Aspects of Road and Rail Transport of Grain in Australia - released in August 1987); ·

. preliminary findings and options (Discussion Paper No. 5 - Preliminary Findings and Options - released in September 1987).

In addition, in conjunction with Discussion Paper No. 5 the Commission released a series of seven detailed working papers, each dealing with a particular aspect of the inquiry.

During the inquiry, workshops were held to deal with a number of subjects. Apart from the two already mentioned, further workshops were held on the institutional framework and aspects of the current and alternative grain distribution

systems (in June 1987), and pricing practices and aspects of land transport (in August 1987).

Research undertaken in connection with the inquiry by other organisations was generally presented in the form of submissions and was thus available for public scrutiny. For example, the report by the Australian Bureau of Agricultural

and Resource Economics (ABARE) and the South Australian Department of Agriculture on the eastern Australia grain distribution model was publicly released, as was the New South Wales Department of Agriculture's study into grain

contaminant control and on-farm storage.

As noted, certain of the consultants' reports were

circulated, either fully or in part, to relevant parties. For example, the consultant's report on the financial reporting and accounting practices of bulk handling agencies and rail authorities was provided to the organisations concerned for comment. In addition, the entire study on industrial relations was circulated widely for comment.

1.6 Publications by the Royal Commission

As noted, the Commission produced a number of publications during its inquiry. These were intended to inform (bulletins and introductory booklet) or to impart research and other inquiry information (discussion and working papers). A full list of Commission publications is provided in Appendix F.

1.7 Overseas visits

The Commission visited a number of countries during the course of the inquiry to gain a first-hand appreciation of other approaches to the grain distribution task and a number of related matters.

9

In April 1987 the Commission's Research Director visited the United States and Canada for two weeks. The visit focussed on research into grain storage, handling and transport and involved discussions with representatives of industry bodies, government organisations and universities.

The Commissioner and the Commission Secretary visited the United Arab Emirates, the United Kingdom, the Netherlands, Argentina, the United States and Canada between 19 September

and 20 October 1987. They inspected facilities and held discussions on alternative systems for grain storage, handling and transport.

On 14, 15 and 15 December 1987, the Commissioner, accompanied by a Commission principal project analyst, visited New Zealand. Their discussions with government and industry organisations took in the operation of state-owned

enterprises, transport matters and the recent deregulation of wheat marketing in that country.

Further information about these visits abroad is included in Appendix B; particular aspects are discussed in Supporting Paper 1.

1.8 Interim report for Queensland

As mentioned, the Queensland Government did not waive the requirement that the Commission provide an interim report on the nature of a future grain distribution system.

Accordingly, the Commission submitted an interim report to His Excellency, the Governor of Queensland on 31 July 1987.

The Interim Report for Queensland was limited to the

Commission's examination of the Queensland grain storage, handling and transport system. Because of the incomplete nature of the research at that stage, the results were presented as preliminary findings and the examination in some

areas was incomplete. The report did not cover interactions between the States, nor did it make proposals about possible future directions for the industry. Such matters were left

for this final report.

On 6 August 1987 the Queensland Minister for Primary

Industries tabled the report in State Parliament. The Commission subsequently made copies of the report available on request to interested parties.

1.9 Previous inquiries

This is the first inquiry covering all aspects of grain distribution on a national basis. Earlier inquiries were either at a State level or dealt only with certain aspects of the distribution task.

The most recent study dealing specifically with grain storage, handling and transport was a review in 1986 by the

10

Queensland Planning Committee of a 1981 report on the Queensland grain distribution system. The 1981 report provided a detailed outline of the future capital investment and improvements needed in the storage, handling and

transport system to meet expected future production of grain in Queensland to the year 2000.

The 1986 review reported on the extent to which the

recommendations of the 1981 report had been met, updated the production forecasts, and provided recommendations on cost improvements and capital investment required to meet revised

production forecasts. The Commission commented on the appropriateness of the 1981 report and the 1986 review in its Interim Report for Queensland.

In September 1984 a report by CANAC Consultants Ltd (the CANAC report) on the Victorian grain handling system reviewed the operation of grain distribution in Victoria. The recommendations of that report confirmed the viability of the central receival point concept then being developed in the Victorian system and supported the rationalisation of the

rail and road transport task.

An inquiry, chaired by Mr A. Carmichael, into the New South Wales grain handling system reported in February 1981. This report, Final Report of the Grain Handling Enquiry, was highly critical of the board and senior management of the then New South Wales Grain Elevators Board, particularly in regard to problems at the seaboard terminals, inadequate receival rates and poor industrial relations.

Recommendations arising out of the inquiry resulted in the establishment of the Grain Handling Authority of New South Wales (GHA) and were aimed at improving the operational efficiency of the system within the existing institutional

environment.

Another recent report, the Rural Economics Study of 1986 (the Lloyd report), dealt with the Victorian rural sector but also covered aspects of the structure, operation and financial and economic performance of the Victorian Grain Elevators Board

(GEB). Among the principal recommendations of the Lloyd report relating to the efficiency of grain storage, handling and transport were the following:

. road transport restrictions should be removed;

. storage and handling and transport prices should be disaggregated;

. sole receival rights of the GEB should be removed so that other parties can compete in the storage and handling of grain;

. after such deregulation, consideration should be given to changing the structure of the GEB - for example, converting it to one or more co-operatives.

11

1.10 Concurrent inquiries

A number of inquiries having a bearing on the Commission's task proceeded concurrently with this inquiry.

The Industries Assistance Commission is enquiring into whether assistance should be accorded the wheat industry and, if so, its nature, duration and extent. An important element of that inquiry . is the marketing of wheat, Australia's major grain crop. The marketing of wheat, although outside the terms of reference for this inquiry, has implications for grain storage, handling and transport. These implications are discussed in Chapter 7 of this report. The Industries Assistance Commission is to report by the end of February

1988.

Another inquiry, by the Stevedoring Industry Review Committee, is examining the matter of restrictive practices at Australian ports.

An ongoing inquiry is being undertaken by the Inter-State Commission into laws, regulations and practices that may adversely affect the efficiency of interstate land and sea transport arrangements between Australian States. As part of that inquiry the Inter-State Commission is investigating the uniformity between States of road vehicle regulations. The

Inter-State Commission is also currently undertaking a review of the handling, storage and movement of cargo through Australian ports as part of the Government's Waterfront Strategy.

Because of the overlap between the Royal Commission's work and that of the other inquiries, the Royal Commission liaised with the organisations concerned to minimise duplication of effort and to reduce the burden on inquiry participants having an interest in more than one of the inquiries.

1.11 Staffing

Support staff for the inquiry comprised a secretariat and a research group. Following the announcement of the establishment of the Commission in October 1986, the Commission Secretary and the Research Director commenced duty at offices in Canberra City. An intensive recruitment campaign for administrative and research staff began immediately and by the beginning of December 1986 full staffing had been achieved. The complete staffing of the Commission, which varied from time to time and which peaked at eighteen, is included in Appendix G.

In matters of recruitment, administration and finance the Commission was responsible initially to the Department of the Special Minister of State and, following the major restructuring of Commonwealth government departments in July 1987, to the Department of Administrative Services. Although the Commission was able to exercise a certain degree of autonomy in these matters, it believes that its operational

12

efficiency would have been enhanced had it had greater autonomy in these areas. The Commission has advised the responsible department of suggestions in this regard.

1.12 Acknowledgments

The Commission thanks inquiry participants for their thoughtful and constructive contributions, through written submissions, at public hearings, at workshops or during discussions. The co-operation of the providers of grain distribution services - the bulk handling agencies, the railways and the port authorities - is particularly appreciated; these bodies were subjected to considerable demands in order to meet the Commission's information requirements. In addition, the management and staff of these bodies frequently and at short notice made themselves

available to discuss or respond to material about inquiry issues. For this, the Commission is grateful.

The Commission regrets that the Queensland Minister for Transport exercised his power under the Queensland Letters Patent in denying the Commission access to certain information about costs of rail transport and details of the 1986-87 Queensland Rail Freight Agreement.

The Commission also acknowledges the contribution to the inquiry of consultants, research bodies and various individuals, and the Commonwealth Attorney-General's Department for its frequent advice not only on inquiry processes but also on a number of inquiry issues.

1.13 Report structure

The Commission's report is in three volumes. Volume 1 contains the report proper and is complete in that it deals with the Commission's findings, conclusions and

recommendations as required by its various Letters Patent. Volumes 2 and 3 comprise a collection of ten self-contained supporting papers that provide additional detail on particular aspects of the inquiry.

Volume 1 commences with the Commission's Executive Summary; this is followed by introductory material (Chapter 1), an overview of the existing grain distribution system (Chapter 2), and a summary of inquiry participants'

attitudes, proposals and issues (Chapter 3j.

Chapter 4 establishes the framework against which to evaluate the existing and alternative grain distribution systems. This framework is based on a set of criteria developed from the Commission's interpretation of its terms of reference.

The evaluation of the existing and alternative systems and of particular aspects of those systems is undertaken in the following four chapters, using the framework established in Chapter 4. Particular emphasis is placed on the

13

institutional environment since the Commission believes that this plays a major role in shaping the nature of the grain distribution system.

The existing system is evaluated qualitatively in Chapter 5. This is followed by a quantitative assessment of the existing and alternative systems (Chapter 6). The results of this assessment depend on assumptions about the extent of competition and contestability in the system, and so these considerations are examined separately in Chapter 7.

Industrial relations is another important consideration for both the current system and any proposed alternative systems; this subject is examined in Chapter 8.

Having evaluated the current system -and a number of

alternative grain distribution systems, the Commission assesses in Chapter 9 the policy options available for an efficient and cost-effective integrated grain distribution system.

The final chapter contains the Commission's recommendations and judgment about the likely effects of these

recommendations on users and service providers in the grain distribution system. Associated implementation issues such as the legislative and administrative changes that would be required to adopt the Commission's recommendations are also covered.

Volumes 2 and 3 provide an opportunity to examine in more detail the data and analyses supporting the Commission's findings and recommendations in Volume 1.

Some material in Volume 1 is duplicated in Volumes 2 and 3; the Commission considered this duplication necessary for a comprehensive treatment of the topics in Volumes 2 and 3.

14

2 . THE GRAIN DISTRIBUTION SYSTEM: AN OVERVIEW

2.1 Introduction

The grain distribution system provides the physical link between grain produced on the farm and local or overseas customers. It reflects such factors as the market

environment, the range of types of grains, locations and reliability of grain production, and the complex of legislative and administrative arrangements set in place by the various governments. Market conditions and growers' responses to those conditions are highly relevant to the nature of the distribution system; these aspects are

discussed in Sections 2.2 and 2.3 respectively. An overview of the grain distribution system is provided in Section 2.4, and three related matters - monitoring and scheduling, the industrial relations environment, and grain hygiene - are

discussed in Sections 2.5, 2.6 and 2.7 respectively.

Further information about the market environment, grain production, and the storage, handling and transport system is contained in Volumes 2 and 3 of this report. Supporting

Papers 1, 9 and 10 are particularly relevant.

The term 'grain' has been interpreted broadly to include cereal grains, oilseeds and grain legumes. Where the discussion or data do not cover the complete range, the extent of coverage is indicated.

2.2 International market environment

Around 70 per cent of grain produced in Australia is

exported. The grain distribution system is therefore closely linked to the international grain market. Market

fluctuations and developments have the potential to impose considerable pressure on the system to respond effectively.

World trade in wheat and coarse grain fluctuates

significantly from year to year. On occasions, these fluctuations have been particularly severe, as was the case, for example, with the decline in trade in 1985-86 compared with the preceding four years. The composition of trade also

varies from year to year, as does the significance of the buying and selling countries in that trade.

Recent contractions in world trade have arisen for a number of reasons, including production subsidies in some

traditional importing countries (for example, Saudi Arabia) and increased production due to improved efficiency (for example, the Soviet Union and China). The situation has been dramatically aggravated by the impact of United States and European Community farm support programs, leading to world

overproduction, increased stocks among major exporters, and consequent reduced prices. Such reduced prices can affect the relative advantages of producing grain as compared to

15

other agricultural produce and so affect the absolute quantities of grain grown in Australia.

In this changing market environment Australia has largely maintained its proportion of the world market for grain, although there have been significant changes in the relative importance of various markets. According to the AWES, quality requirements of overseas buyers have also become more stringent in relation to insect contamination and levels of chemical residues. The AWB considers it a market advantage that Australia has the reputation of providing high quality white wheat 'renowned for its cleanliness, low moisture content, ease of milling and reliability of supply'. (AWB

submission, April 1987, p. 15)

2.3 Australian grain production

Grain is produced in all mainland States, essentially within a belt stretching from central Queensland, through New South Wales, Victoria and South Australia, to the south-west region of Western Australia. The diversity of climatic and other growing conditions within this geographic spread leads to considerable variation in growing seasons, grain types and

production yields. In regard to the latter, the yield per hectare as well as the intensity of grain production in Australia is quite low in comparison with many overseas grain production areas.

Other aspects of grain production that have implications for the storage, handling and transport task include the size of the grain crop, the number of varieties and segregations, and

quality considerations such as susceptibility to weather damage, insect infestation and moisture content.

Australian grain production in the five years to 1986-87 averaged 25 million tonnes, but this figure masks

considerable annual fluctuations (see Figure 2.1). For example, in 1982-83 (a drought year in the eastern States) grain production fell to just under 14 million tonnes, while in the following year it rose to almost 33 million tonnes.

New South Wales accounts for around 30 per cent of Australian grain production, followed by Western Australia at approximately 25 per cent, with Queensland, Victoria and South Australia each accounting for around 15 per cent. Significant fluctuations in annual production over the last

five years have occurred in all States, although variations in Western Australia have tended to be less severe than those in other States.

Wheat is by far the dominant crop grown in Australia; it accounted for around 65 per cent of total grain production over the five years to 1986-87. The next-ranked crop is barley (16 per cent), followed by oats and sorghum (5 per cent each) and oilseeds, lupins, maize, rice and peas (less than 5 per cent each). Although significant fluctuations in

16

24 000 η

Ε3 Wheat El Barley E Oats

H Sorghum

□ Oilseeds

ϋ Other

22 000 -

20 000 -

18 0 0 0 -

16 000 -

14 0 0 0 -

10 0 0 0 -

8 000-

6 000-

4 000 -

2 000 -

1982-83 1983-84 1984-85 1985-86 1986-87

YEAR

FIGURE 2.1 GRAIN PRODUCTION: AUSTRALIA, 1 9 8 2 -8 3 TO 1 9 8 6 -8 7

Source: BAE 1987.

Notes: Oilseeds’ includes rapeseed, linseed, safflower, sunflowerseed and soybeans. Other’ includes legumes, maize and rice.

annual production for most crops make it difficult to discern underlying trends, the 'smaller' crops such as peas, lupins and oilseeds have shown substantial increases in production (albeit starting from a low base).

Wheat is also the dominant crop in each of the States. Each State also produces substantial quantities of barley; further significant crops by State are sorghum in Queensland,

rice and oats in New South Wales, oats in Victoria, and oats and lupins in Western Australia.

The greater the range of crops, the greater the demand on the grain distribution system to make provision for segregating the various types of grain. This demand is magnified by the requirement of marketing bodies that individual grain types be segregated in order to enhance marketing prospects. For example, in the case of wheat there are seven major classes based on variety, protein content and other criteria, but

even within these classes, further segregations are established. A number of summer crops such as sorghum, maize and sunflower seeds, while single-grade grains, are frequently received as either dry grain or high moisture grain resulting in two segregations.

Grain is susceptible to deterioration for a number of reasons. Damage from adverse weather conditions can cause the quality and value of crops to be downgraded. Grain is also prone to insect infestation which, rf present, imposes additional costs of treatment or results in downgrading and consequent revenue loss. While the potential for insect infestation exists in all grain growing areas in Australia, the temperature and humidity conditions of Queensland and northern New South Wales are particularly conducive to the growth of insect populations. Factors such as these place particular demands on the storage, handling and transport

system, especially on the ability to receive grain quickly and to operate effective quality control measures.

A further significant influence on the grain distribution system in Australia arises from the marketing arrangements for grain. The major crop, wheat, is marketed by the AWB which, with minor exceptions, has the exclusive right to acquire the crop. The AWB is required by legislation to appoint a sole receiver of wheat in each State. The initial payments to growers are triggered by the delivery of wheat to the sole receiver.

Similar arrangements exist for a number of other grains in certain States. For example, most barley in Queensland, Victoria and South Australia, and sorghum grown in central Queensland, is compulsorily acquired by the respective marketing boards. While in most cases there is no direct legislative requirement for the marketing boards to appoint sole receivers, other circumstances may nevertheless dictate such an outcome. For example, the port monopoly for export grain held by BGQ, the Queensland bulk handler, would make it difficult for marketing boards in that State to employ a

18

receiver other than the bulk handler in their country operations.

Hence, the continued use by growers of the central receival system is underpinned by legislative or administrative arrangements. These arrangements are discussed in Chapter 5.

2.4 The grain distribution system

The grain distribution system extends from the farm to the domestic or overseas customer (see Figure 2.2). It contains elements of storage, handling, transport (both land and sea) and port services. Apart from how well the individual elements operate, crucial to the efficient operation of the distribution system is the integration of the various elements, particularly the scheduling and monitoring of the grain flow and the industrial relations climate. An

important associated outcome is that not only should the appropriate grain be available when and where required, but that the market's requirements in terms of grain hygiene is able to be accommodated.

Before discussing the various elements of the grain storage, handling and transport system, it is useful to relate the charges for these services to the returns from grain sales, thus obtaining a perspective on the significance of the various components. It should be recognised that this

significance can vary not only because of changes in the storage, handling and transport charges themselves but also because of fluctuations in export prices.

For wheat, the significance of storage, handling and transport costs can be gauged from an examination of off-farm costs. In 1986-87, the average free on board (f.o.b.) price for wheat was $159.00 per tonne of which storage and handling charges were $14.94 (9 per cent of the f.o.b. price), transport to port $17.88 (11 per cent), AWB administration

and interest costs $17.94 (11 per cent), and charges for wharfage, wheat research and Ceres Houses $1.62 (1 per cent). The cost of sea freight is additional to the f.o.b. price and varies depending on the origin and destination of

the grain. As an illustration, sea freight for a voyage from the east coast of Australia to the Middle East in November 1986 was approximately $28 per tonne (18 per cent of the f.o.b. price).

The level of charges for storage, handling and transport levied by the bulk handling agencies and rail authorities varies considerably between States. For 1987-88, storage and handling charges range from $11.76 per tonne in South Australia to $17.00 per tonne in Queensland while average

rail freight charges range from $12.96 per tonne in South Australia to $25.83 per tonne in New South Wales. The

combined storage, handling and rail transport charge for each State is $24.72 per tonne in South Australia, $27.94 in Western Australia, $33.13 in Queensland, $38.06 in Victoria,

19

ACTIVITY UNDERTAKEN BY

Storage at port and ship loading

Storage and handling at country receival point

Transport to port terminal

Storage and handling at country terminal

Transport to overseas buyers

Crop harvesting

Transport to country receival point

Transport to country terminal

Grower or contract harvester

Exclusively by road, by grower or contractor

Mainly bulk handling agencies, some private organisations

Mainly by State railways, some contract road transport

Bulk handling agencies

Mainly by State railways, some by growers and contract road transport

Bulk handling agencies

Charter vessels or purchasers’ vessels

FIGURE 2 .2 SCHEM ATIC M O D EL O F GRAIN D ISTR IB U TIO N SYSTEM FOR E X P O R T GRAIN

Source: Royal Commission into Grain Storage, Handling and Transport.

and $42.53 in New South Wales. It should be noted that the combined charges are not directly comparable because the task to be performed varies between States (for example, New South Wales has longer distances to transport grain to port), some

rail authorities subsidise grain haulage, and the

co-operative bulk handlers also levy tolls on growers.

2.4.1 Storage and handling

Grain storage and handling in Australia is undertaken largely by five bulk handling agencies, one in each mainland State. Although on-farm storage and private organisations also play a role, the Commission estimates that at least 75 per cent of

annual grain production is handled within the bulk handling system. The bulk handling agencies, or central receivers, are the GHA in New South Wales, the GEB in Victoria, BGQ in Queensland, Western Australian Co-operative Bulk Handling

(WACBH), and South Australian Co-operative Bulk Handling (SACBH). Each of these agencies operates under legislation outlining its objectives and responsibilities; the co-operatives have both legislation and articles of

association governing their operations. Relevant details are provided in Supporting Paper 2.

Because a high proportion of grain is eventually exported, each bulk handling agency has a network of country receival facilities connected by transport links to several seaboard

terminals. In the case of New South Wales these links are through a number of regional terminals used to accumulate grain into relatively large parcels for more efficient transport. In total, the bulk handling agencies have

908 country receival facilities scattered throughout the growing areas, five regional terminals (all in New South Wales), and 20 port terminal facilities. In Victoria, some 42 of the State's country storages are designated as central

receival points. The central receival points handle overflow grain from other silos in the area, accept grain under deferred delivery arrangements and usually have fast road in-loading and rail out-loading facilities. Unlike regional

terminals in New South Wales, central receival points do not normally assemble grain from surrounding silos in order to load unit trains. Regional terminals and port terminals

often also perform the role of a country receival facility for growers located nearby.

The storage capacity of the five central systems totals some 36 million tonnes. Of this, 50 per cent is in the form of permanent country storage, 15 per cent is permanent port storage, and the remaining 35 per cent is temporary storage both at port and in the country. Permanent storage in Western Australia is mainly in the form of horizontal sheds;

in South Australia it is mainly in the form of vertical silos. In the remaining States a mixture of horizontal and vertical storage is used.

21

As shown in Figure 2.3, having regard to both permanent and temporary storage of the bulk handling agencies, capacity exceeds grain production levels for both the five-year average to 1986-87 and the record 1983-84 year. Considering

only permanent storage, capacity represents 90 per cent of average production and 70 per cent of production in the record year.

Similar comparisons for each of the State systems provide varying results. Considering both permanent and temporary storage, the capacity of each State matches or is greater than average grain production levels. Considering only permanent storage and the five-year average production level, capacity is around 55 per cent of production in Queensland, 80 per cent in New South Wales, 100 per cent in Western

Australia, and 115 per cent in Victoria and South Australia.

These figures should be regarded as purely indicative because annual storage capacity can be considerably reduced through the requirement for grain segregations (both in terms of grain types and qualities) and grain carryover from the previous year. In addition, the composition of the crop can be a factor: for example, a tonne of barley occupies 16 per cent more space than a tonne of wheat.

A probable explanation for the considerably lower proportion of permanent storage capacity to average production for Queensland and New South Wales as compared with the other States is that both States make extensive use of temporary storages. In addition, grain production in Queensland and parts of New South Wales involves both summer and winter crops and hence grain is harvested over two periods of the year. Consequently, grain harvested in one period can be at

least partly cleared before grain is harvested in the following period. The harvest in other States is mainly confined to one period of the year, which puts pressure on the system to provide sufficient capacity for the whole of the harvest. In addition, in New South Wales, the GHA has until recently been required to give preference to the storage and handling of wheat. Hence, private storage and handling agents have played a significant role with respect to other grains.

As noted, a significant proportion of permanent storage is located at the ports, although this varies substantially across States. South Australia has the highest proportion (about 45 per cent) of permanent storage capacity at port, followed by Victoria and Western Australia (each about 25 per cent), Queensland (about 15 per cent), and New South Wales

(5 per cent). The substantial permanent storage capacity at port in South Australia reflects the State's geography: the grain growing areas are close to the long coastline and this results in substantial receivals direct from growers at port.

22

36 000

33 000

30 000

27 000 -

24 000

21 000

S 18 000

15 000

12 000

9 000

6 000 -

3 0 0 0 -

NSW Μ Australia

FIGURE 2 .3 BULK HANDLING A G EN C Y GRAIN STORAGE IN 1986 AND PRODUCTION 1 9 8 2 -8 3 TO 1 9 8 6 -8 7 : AUSTRALIA

Sources: BAE 1987; Bulk handling agency submissions.

EH Storage capacity in 1986.

r n Highest production LLd 1982-83 to 1986-87. V7?I Five-year average of production ν Ά 1982-83 to 1986-87.

The different approaches among the States in regard to the proportion of storage at port, as against that in the

country, have implications for other aspects of the

distribution task, particularly transport.

2.4.2 Transport

Land transport plays a critical role in the grain

distribution system. Typically, the task comprises two stages: the first is from farm to a country receival point and is undertaken by road; the second is from a country

receival point to a seaboard terminal and is generally undertaken by rail. There are of course departures from this general model. For example, some deliveries go direct from farm to domestic customers, grain merchants or receival

facilities at port. Similarly, a small proportion of grain from country receival points finds its way into the domestic market and some movements of grain from country to port are undertaken by road.

The first transport stage, from farm to country receival point, has traditionally been undertaken by growers in their own trucks, although contract haulage also plays a

significant role. The distance travelled depends upon the distribution of receival points in the grain growing area. The Australian average is 17 kilometres but this varies among the States, ranging from an average of 8 kilometres in Victoria to 28 kilometres in Queensland.

The country receival point to port terminal phase is the more substantial part of the land transport task. Within each State, most country sites and all ports (except Port Giles and Ardrossan in South Australia) are served by rail links and in these situations rail is the commonly used means of haulage. The average length of haul from receival point to export terminal for Australia is 350 kilometres. Again, this varies considerably among the States and ranges from an

average of 160 kilometres in South Australia to

500 kilometres in New South Wales. Some country receival points (for example, in the south-east of Western Australia and in western Victoria) are not served by rail and in these instances road haulage, either direct to port or to an alternate rail-served country receival point, is the only option.

In most States significant legislative, administrative or physical restrictions apply to the road movement of grain from local receival point to port. The need for efficient rail operations is critical in those States where storage capacity at port is relatively small and road transport restrictions apply. In these situations, port storage is used to accumulate export cargoes for designated shipments,

so that considerable reliance is placed on the rail transport system to replenish stocks.

24

2.4.3 Ports

There are currently 18 operative grain ports around the Australian coast. In Queensland these are at Mackay, Gladstone and Brisbane (the Port of Brisbane has three grain

terminals: Fisherman Islands, Pinkenba 1 and Pinkenba 2); in New South Wales, at Newcastle and Sydney; in Victoria, at Geelong and Portland; in South Australia, at Adelaide, Ardrossan, Wallaroo, Port Pirie, Port Giles, Port Lincoln and Thevenard; and, in Western Australia, at Esperance, Albany, Kwinana and Geraldton. A fifth port in Western Australia at Bunbury has shipped only minimal quantities of grain in recent years. A new grain terminal is currently being built

at Port Kembla in New South Wales and its commissioning in 1989 is expected to result in the closure of the grain

loading facilities in the Port of Sydney.

The capacity of ports to accommodate vessels of a particular size varies substantially. Seven ports - Brisbane (Fisherman Islands terminal), Newcastle, Sydney, Port Kembla (when

completed), Portland, Port Lincoln and Kwinana - are able to fully load vessels of 'Panamax' size (55 000 to

80 000 deadweight tonnes (dwt)) or larger. A number of other ports are able to accommodate vessels of this size but the vessels cannot be loaded fully because of depth of water limitations, with the result that they are ' topped up' at a

deeper port. Such ports are Geelong in Victoria, Port Giles and Wallaroo in South Australia, and Albany in Western Australia.

The capacity of each port to out-load grain onto vessels also varies considerably. In terms of technical capacity, out-loading rates of up to 5000 tonnes per hour exist, but in practice rates fall well short of this for a number of

reasons. These include unproductive time associated with vessels coming onto and off the berth, and current operating practices during loading. Rarely does continuous loading occur, and a double or extended single shift is the norm.

Nevertheless, it appears that out-loading capacity at Australian grain terminals is more than sufficient given the crop size. For example, an export crop of 20 million tonnes would require each of the 20 terminals currently in use to out-load an annual average of 1 million tonnes. At an

average out-loading rate of 1000 tonnes per hour, over a double shift and working six days per week, the entire crop could be out-loaded in the space of a little over ten weeks. This assumes, of course, the availability of vessels,

favourable loading weather and available grain.

2.4.4 Sea transport

The majority of Australia's grain sales are made on an f.o.b. basis, with overseas customers making arrangements for shipping. This is largely a reflection of the high

proportion of Australian grain sales that are made on a

25

government-to-government basis and the wish of overseas governments to utilise their national flag vessels.

Matters such as vessel size, port of loading and loading rates, and other shipping arrangements, are handled by the marketing boards in consultation with purchasers, ship operators and the local bulk handling agencies. Both the AWB

and the Australian Barley Board have standard contracts for the carriage of grain between Australia and overseas buyers. The contracts cover items at both loading and discharge ports (such as loading rates) as well as general shipping items

(such as war risks and bunkering).

At the time of finalising overseas sales and negotiating shipping, purchasers and vessel owners are not generally aware of the Australian port of loading. In the case of

wheat, the AWB advises of the actual loading port (or ports in the case of two-port loading) after receiving advice of the vessel's proximity to Australia. This arrangement is designed to assist the AWB in allocating ship movements between ports and States. On the other hand, the lack of

knowledge of the actual loading port could result in sea freights being higher than would be the case if the loading port was designated. Before vessels can be loaded, they are required to pass the customary government and underwriter surveys for safety and hygiene.

The majority of Australian grain exports are transported in vessels in the 25 000 to 45 000 dwt range. Nevertheless, an increased use of Panamax vessels is evident.

2.5 Monitoring and scheduling

Timely information about the characteristics of the crop and its physical disposition within the system is essential to assist marketing agencies to sell the crop as well as to

direct the actual movement of grain in preparation for its shipment to domestic or overseas customers. Similar

information is also essential to other service providers, such as the bulk handling agencies and railway authorities, to enable them to plan their operational arrangements.

Marketing agencies play a major role in the scheduling and monitoring task, although obviously the co-operation of many parties is required. For the statutory grains, the process

begins with growers registering crop plantings. This allows the marketing agencies to estimate the potential crop

available for marketing and allows bulk handling agencies to plan their storage strategies.

As actual deliveries of grain commence, quality sampling and a better indication of yields allow the marketing agencies to refine earlier estimates of crop characteristics. Bulk handling agencies also have the opportunity to revise

operating practices such as opening hours, level of labour and provision for segregations in the light of growers' deliveries.

26

On the basis of actual and projected sales, marketing agencies discuss with bulk handling agencies and transport authorities the necessary movements of grain to either domestic or overseas customers. The planning of movements requires the bulk handling agencies to maintain comprehensive stock control systems, given the geographic dispersion of receival facilities and the many types of grains and grades stored. The uncertainty associated with the quantities and qualities of grain held on farms constitutes a difficulty for marketers.

Historically, the AWB has allocated shipping to ports on the basis of the 'fair share' principle. Shipping was assigned to States according to the export availability of wheat as a proportion of Australia's total export availability. The aim of the fair-share principle was to treat the States as

equitably as possible. In recent years, however, the AWB has moved away from the fair-share principle because of the increased complexity of its task.

The scheduling and monitoring of the extensive grain flows is a complex task. The Commission notes recent progress in the more extensive use of computers, both within and between the organisations involved.

2.6 The industrial environment

The industrial environment of the grain distribution system is characterised by a geographically dispersed and skill-fragmented workforce, the existence of a large number of unions and an even larger number of industrial awards, both Federal and State. Because of the inter-relationships between the many activities in the grain distribution system, this complex industrial structure makes the management of

industrial relations particularly important.

Over thirty unions have members employed across the range of grain distribution tasks. There is no union whose sole or principal interest is in all or part of the grain

distribution system. The main unions involved are the Australian Workers' Union in regard to storage and handling, the Australian Railways Union and the Transport Workers' Union in relation to rail and road transport respectively,

the Waterside Workers' Federation, the Australian Stevedoring Supervisors' Association and the Australian Foremen Stevedores' Association in relation to vessel loading and various public service unions in regard to a number of areas,

including the inspection of export grain.

In most cases the same union provides coverage for employees undertaking similar activities regardless of the location in Australia. For example, stevedoring activities at all grain ports are undertaken by members of the Waterside Workers'

Federation. Similarly, national unions tend to cover workers engaged in transporting grain.

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This is not the case, however, with storage and handling, particularly at ports. The principal union involved at port terminals in New South Wales, Queensland and South Australia is the Australian Workers' Union. This union also covers employment at all terminals in Western Australia except for Kwinana where employee coverage is provided by the Waterside Workers' Federation. Employment at the two terminals in Victoria is covered principally by the Federated Storemen and

Packers' Union.

Employment in the grain distribution system is covered by a large number of industrial awards, the majority of which fall within State jurisdictions. Where Federal awards exist, they may only apply to particular workplaces, as is the case with

the Grain Handling (Kwinana Terminal) Award 1933 and the Australian Workers' Union - Grain Elevators Board Victoria Award 1981.

Wide differences exist in award rates of pay and working conditions for largely similar activities across the system. For example, the minimum award rate for country storage and

handling employees in New South Wales is about 25 per cent higher than their counterparts in Victoria. At port

terminals, the difference is even larger with the New South Wales rate being about 30 per cent above that of Queensland. In terms of award hours of work, New South Wales has a

35 hour week, South Australia a 40 hour week and remaining States a 38 hour week.

Non-award conditions and practices also vary markedly across sites. The prevalence of these is likely to be influenced by the industrial relations environment at particular sites which, as might be expected, tends to be more volatile in the heavily populated and industrial centres as compared with rural areas and smaller ports. Industrial disputes have been of concern to the industry in recent years, particularly at NSW ports.

General awareness of restrictive practices has been raised over the last few years and the Commission notes developments aimed at improving operating efficiencies. In particular, negotiations concerning the removal of restrictive practices are taking place throughout industry generally, including the grain distribution system, under the restructuring and efficiency principle of the wage system's second-tier. In many cases, negotiations have been concluded and agreements have been ratified.

2.7 Grain hygiene

Marketers of Australian grain regard as highly important the need to safeguard Australia's international reputation as a supplier of grain which, amongst other things, is clean in terms of freedom from insects and minimum levels of chemical

residues. In view of the susceptibility of the Australian crop to insect infestation, achieving this objective is a major task.

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Grain sold on domestic and overseas markets is required to meet certain hygiene standards established by various governments as well as the usual requirements set down in the purchase contract. Australia has a ' nil tolerance' standard

for insects in grain exported from Australia. ' Nil

tolerance' refers to the requirement that samples drawn from loads of grain for export inspection purposes be completely free of live insects.

Standards also apply for chemical residues in grain. The setting of maximum residue limits on chemicals in

internationally traded goods is determined by the joint Food and Agriculture Organisation/World Health Organisation Codex Alimentarius Commission. In addition, individual importing countries also set their own limits (for example, the Soviet Union and China limit residues from the use of Carbaryl).

Within Australia, food laws prohibit the presence of a noxious substance in food unless it is specifically

permitted. The National Health and Medical Research Council is the body that establishes maximum residue limits in grain in Australia. Marketing boards and end-users set various standards on a number of other contaminants based on market requirements.

Within the current centralised storage and handling system the overall strategy for maintaining grain hygiene is to encourage delivery of grain into the central receival system, either directly upon harvesting or shortly thereafter. The

aim of this strategy is to minimise the extent to which grain is held on farm and to confine responsibility for hygiene control within the hands of the single bulk handling agency in each State.

The bulk handling agencies employ a variety of techniques to control insects. The three main categories of control are contact chemicals, fumigants and physical means. The first involves a number of chemical protectants that are sprayed

directly onto the grain. The second technique, fumigation, is used extensively in bunker storages as well as in

permanent sealed storages. Whereas care must be exercised with the use of chemical protectants, due to the potential for harmful residues, phosphine fumigation does not have risks in this regard. The third category, physical methods,

is based on changes in grain temperature or changes in the balance of atmospheric gases within the grain storage.

Before receival into the central system, grain deliveries are sampled and tested by the bulk handling agency for, among other things, insect infestations. Contaminated loads are turned away. Once grain is in the system, sampling for insect infestation occurs in storage, at out-loading from

storage for transport to port or the domestic market, and prior to loading onto ships for export.

All grain exported from Australia is inspected for insects and visible contaminants during loading. This inspection is

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carried out by the Australian Quarantine and Inspection Service which also inspects ships and containers to ensure that grain is not contaminated en route to the importing country. In addition, export terminals are inspected to ensure that infestation does not occur during storage or loading. Fifty per cent of the costs of carrying out

inspections, including central office costs, are recovered from industry through charges on grain exports.

At present, testing for chemical residues is far less

extensive than testing for insects, for a number of reasons. These include the difficulties and time involved and the lack of market pressure in the past for such testing. With the recent increased emphasis on minimising levels of chemical residues in food, however, the demand for residue testing is likely to increase.

Although problems have existed in the past in controlling grain insects, in recent years the central system has been relatively successful in controlling grain hygiene. According to the Bureau of Rural Science, before the

introduction of Malathion in the early 1960s, over 80 per cent of wheat shipments from Australia to the United Kingdom were found to have insect infestations. The detection of infestations declined to less than 5 per cent of shipments by

1970. Problems with pesticide resistance in insects during the mid 1970s resulted in increased levels of detection before alternative chemical protectants were introduced. According to the New South Wales Department of Agriculture, more recently, less than two per cent of grain loaded at ports each year have been found to contain insects, and around the same percentage of detections have been made by importing countries. There has been little evidence of contamination or damage by rodents of grain exports in recent years.

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3. ATTITUDES, PROPOSALS AND ISSUES

3.1 Introduction

In this chapter the general attitudes of the major groups that made submissions to the Commission are reviewed, the more significant proposals put forward are outlined, and the main issues raised are identified. More specific discussion of proposals and issues is contained in subsequent chapters

and in the Supporting Papers in Volumes 2 and 3.

The attitudes, proposals and issues described in this chapter are limited mainly to those with national and State

perspectives. The Commission has not ignored regional matters: it believes that, where necessary, regional issues can be addressed within the overall national and State framework.

Comments in this chapter are attributed to various

organisations and individuals. The listing of organisations and individuals is not intended to be exhaustive; rather, it provides an indication of the bodies or individuals that supported ideas or presented particular points of view.

3.2 Overview of attitudes and major issues

The majority of submissions expressed attitudes and raised issues concerning the impact of possible changes to the existing system for storage, handling and transport.

Generally, attention was focussed on the impact of change on individual organisations, users and other individuals with an interest in grain storage, handling and transport. However, some inquiry participants took a broader view and considered

the impact of change on the overall storage, handling and transport system. The following sections outline the attitudes expressed and the major issues raised.

3.2.1 Storage and handling

The Commission received a number of submissions calling for the removal of sole receival rights. Participants who supported the removal of sole receival rights included individual growers (J . Crosby, A. Austin, R . Carrigan), grower organisations (NSWFA, UF&S), a private grain handler

(VOP), government bodies (Commonwealth Attorney-General1s Department, South Australian Government) and the AWB. However, a number of organisations opposed the removal of sole receival rights. As might be expected, the strongest opposition to the removal of sole receival rights came from the bulk handling agencies.

With regard to the main users of storage and handling

services, grower organisations were generally positive in their desire for improved efficiency. In some cases this involved deregulation of storage and handling (NSWFA, UF&S, GCA), while in other cases it involved an administered

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efficiency approach (VFF, WAFF). An exception to these views was that of the Queensland Graingrowers Association, which expressed satisfaction with the performance of BGQ.

The executive level of grower organisations and district groups of these organisations seemed to have divergent views about possible improvements. The district groups quite naturally took a local approach to the effects of possible changes such as closure of rail lines or silos. A divergence of view was also apparent in most States between grower

organisations and the bulk handling agencies. For example, in South Australia, SACBH opposed the deregulation of storage and handling and advocated a continuation of pooling, while

the United Farmers and Stockowners supported deregulation of storage and handling.

In recent years there seems to have been a significant change in the attitude of grower organisations, which does not appear to have been recognised fully by the boards of bulk handling agencies, particularly the co-operatives in South Australia and Western Australia. Indeed, they suggested that

their policies more accurately reflected grower attitudes than do the official policies of the grower organisations.

Views expressed by individual growers also differed. A number of growers strongly supported changes to the current system which would increase storage, handling and transport options (J. Crosby, R . Carrigan). However, a significant

number of growers preferred continuation of existing

arrangements with a silo close at hand for immediate delivery during harvest, although they frequently criticised the level of cost of services (H. Jenyns, B. Harvey). In many cases, growers tended to associate 'orderly' marketing arrangements with regulated storage and handling.

The attitudes of marketing authorities varied somewhat. The AWB referred to its inability to significantly influence storage and handling costs in order to maximise grower returns. In its November 1987 submission it supported the removal of sole receival rights and the appointing of more than one licensed receiver in each State. The Australian Barley Board preferred an administered efficiency approach to storage and handling while Queensland marketing boards tended to support a centralised storage and handling system. In general, marketing boards expressed concern over the maintenance of grain hygiene standards in a deregulated

storage and handling environment.

Private storage and handling operators, in many cases also involved in marketing of non-statutory grains, considered that they are competitive against the bulk handling agencies and could expand if they were given reasonable access to statutory grains. There was support for the deregulation of transport as well as of storage and handling (Riverina Grain Handlers). Private operators currently providing storage and handling services to some bulk handling agencies expressed concern to the Commission about the lack of longer term

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security of access to grain and difficulties relating to financial arrangements.

In the case of government bodies, attitudes differed between States. For example, the Victorian Government expressed some reticence about deregulating the storage, handling and transport system. Many government bodies merely presented

factual information without expressing clear opinions or attitudes. Some exceptions to this were the Commonwealth Department of Primary Industries and Energy, which emphasised

the need for rigorous grain inspection controls to ensure continued high quality exports, and the Commonwealth Attorney-General's Department which supported the deregulation of storage, handling and transport.

The attitudes of the bulk handling agencies ranged from some surprise that the efficiency of the particular operation should even be in question (WACBH) through to an acceptance that, although past performance may not have been

particularly impressive, positive steps are being taken to improve the situation (GHA). The general position, particularly among the co-operatives, is that the system was developed and managed according to the wishes of growers, as reflected in the grower-dominated boards.

All bulk handling agencies initially said they would oppose the removal of sole receival rights. In its October 1987 submission the GHA modified its earlier position by stating that it would not, in principle, oppose the removal of sole receival rights provided it was given the commercial and

legislative flexibility to develop a corporate structure to facilitate a commercial operation. All bulk handling agencies indicated that they could, if necessary, compete in a deregulated storage and handling environment. In fact, the bulk handling agencies generally believed that they could compete quite effectively, particularly given their substantial storage and handling infrastructure already in place.

The bulk handling agencies stated that the storage and handling of grain exhibits significant economies of scale and any reduced throughput resulting from diversion of grain to private handlers would increase costs to those growers

continuing to use the central system (GHA, GEB). Despite this, several bulk handling agencies expressed the view that grain should flow along the least-cost path (BGQ, GHA, GEB), even though this may decrease the volume of grain handled by the agencies.

Under circumstances where a competitive storage and handling environment resulted in increased interstate movement of grain, the bulk handling agencies indicated that they would not continue to operate sites where the provision of services is not economically justified. Nevertheless, BGQ suggested that the removal of sole receival rights may result in over-capitalisation within the industry leading to a waste of resources.

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The bulk handling agencies suggested that private storage and handling operators would find it difficult to compete, given the large amounts of sunk capital, expertise and efficiency in the central bulk handling system. However, despite this suggestion the bulk handling agencies also expressed concern about the possible development of private monopolies. In addition, they did not wish to see changes to the system that would simply pass costs back to growers and produce no

overall net benefit.

With regard to increasing competition in grain storage and handling, the issues of pricing practices and contestability were raised. Some organisations (SACBH, VF F ) claimed that pooling was preferable on the grounds of equity (due to

historical investments having been funded by all growers), and reflected grower preferences and could not be achieved under competition. Others (NSWFA, ACIL, GCA) preferred disaggregation on the basis of the 'user pays' principle or to prevent distortions in the provision and use of

facilities. Similarly, organisations opposing the withdrawal of sole receival rights raised the issue of contestability of components of the storage and handling system. They

suggested that storage and handling (particularly at ports) is not contestable and deregulation would result in excessive profits being extracted from growers.

Other issues raised by the bulk handling agencies included the appropriateness of public authority dividends (GEB, VFF, GHA), the requirement to pursue non-commercial objectives in some cases (for example, establishing facilities in a

particular area), and the impact on costs to growers if

government-guaranteed loans cannot be secured for

infrastructure development in a deregulated environment (WACBH). Concern was also expressed about the ownership of assets of bulk handling agencies should their business structure be altered (UF&S), and the possible loss of income tax exemption status (SACBH).

The bulk handling agencies considered that, monitoring and scheduling problems aside, a storage and handling system comprising a number of receivers and possibly increased on-farm storage would probably be incapable of maintaining the current high standard of grain hygiene. Their views on the matter were supported by a number of other organisations, including the Prime Wheat Association, the Australian Workers' Union and Wellcome Australia. Wellcome Australia, in expressing a reluctance to depart from a centralised handling system maintained that insect resistance to

pesticides would develop more rapidly as a result of

excessive use of chemicals by growers treating grain on farm.

Several organisations (GEB, PWA) raised the issue of the number of grain segregations required, the costs of

segregation and the method by which these costs are shared between growers.

Many organisations identified changes or improvements recently implemented in the storage and handling of grain.

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These included greater accountability (GEB), better management and work practices (GHA), improved transport co-ordination (V/Line, Queensland Government), attention to

cost containment (GHA, BGQ, WACBH), and in some cases a more flexible approach to service provision and charges (GHA, BGQ). During the second series of public hearings several bulk handling agencies agreed that even greater savings could be achieved through improved operating efficiency (GHA,

SACBH, GEB). In the case of Western Australia, WACBH

submitted that it could reduce costs if marketing authorities and growers were prepared to accept a lower standard of service.

3.2.2 Transport

A large number of submissions supported competition between road and rail transport. Proponents of transport

deregulation included growers (J. Crosby, A. Austin), grower organisations (UF&S, VFF), marketers (ABB, AWB), road hauliers (OD Transport, Queensland Road Transport

Association), private handlers (VOP, Riverina Grain Handlers), end users (AGEA, AMEC) and other interested bodies (ACIL). The main opponents to the deregulation of transport were local governments (Cabonne Shire Council, Wagga Wagga City Council), community groups (Community

Transport Concern, Residents for Environmental Protection), railways (V/Line, Westrail) and railway unions (ARU, AFULE).

Supporters of transport deregulation suggested that the overall cost of the transport task would be lower in a

deregulated environment. They argued that the cost of road haulage, in some areas, was lower than the cost of rail, particularly on low volume branch lines. Furthermore, it was suggested that road haulage allows greater flexibility to growers in selecting alternative paths, especially in areas where delivery to one or more ports is possible. Proponents of deregulation also expressed the view that road competition would force railways to improve their efficiency in order to become more competitive.

Whilst generally accepting the need for improved efficiency, the rail authorities pointed to the gains already made through the use of new technology (new wagons, unit trains), improved operating practices and manning levels, and improved co-ordination between bulk handling agencies and railways.

Rail authorities and rail unions (ARU, SRA) argued that there are economies of scale in the provision of railway services and unit costs would, therefore, rise if some grain

currently transported by rail shifted to road. They also said that growers would be best off if all grain travelled by rail because unit costs decline with higher grain volumes. As a result, rail authorities in those States where

restrictions on road transport currently exist opposed any deregulation and supported an administered efficiency approach.

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Numerous organisations (railways, local governments and community groups) stressed the 'external' effects of increased road transport of grain, particularly road damage,

road accidents, pollution and congestion, if increased deliveries of grain from the country to the seaboard occur. Several organisations expressed the view that regulation was needed to counter potential external costs associated with deregulation. For example, the Bureau of Transport Economics cited road safety, congestion and pollution problems as possible reasons for continued regulation. Some rail authorities also argued for retention of regulation as a means of covering these social costs in the absence of 'full' cost recovery by road. Alternatively, they would be prepared to accept deregulation provided a 'level playing field' is established in which road transport achieved full cost recovery, including recovery of external costs. It was also suggested that there are significant economies of density in rail operations and that the grain market is too 'thin' to be deregulated (Westrail).

Road transport operators expressed a desire to compete with rail for grain (OD Transport, Queensland Road Transport Association) and considered that a more efficient modal balance could be achieved using the respective strengths of

each transport mode. With regard to the notion of a 'level playing field', the Queensland Road Transport Association expressed the view that rail, as well as road, should have to

achieve full cost recovery.

Local government authorities (Cabonne Shire Council, Griffith Shire Council, Municipal Association of Victoria) expressed concern about the possible closure of rail lines and about

road damage that could result from increased movement of grain by road transport. They emphasised that under current road funding arrangements they are unable to service the

existing road maintenance needs, let alone cope with a significant increase in road transport of grain. It became apparent to the Commission that the attitude of local governments was more a reflection of the inadequacies of current road funding than a fundamental objection to increased road movements. For example, the Local Government and Shires Association of New South Wales agreed that if the road funding issue could be resolved, then its basic objection to the road haulage of grain would be overcome.

Some participants (AFULE, National Union of Rail Workers of Australia) also suggested increasing the investment in rail systems, particularly gauge standardisation associated with improved interstate links and the possible extension of State systems across borders. The Australian Federated Union of Locomotive Enginemen expressed the view that rail's competitiveness has diminished as a result of inadequate investment by governments over the last 20 years. The union suggested that if rail received funding levels similar to road, the inadequacies of rail transport could be overcome.

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Many participants (UF&S, VFGA) also requested the removal of the excise on diesel fuel for rail operations, particularly the amounts levied for road development purposes.

A number of organisations (GEB, MSB, South Australian Department of Marine and Harbors) mentioned inefficiencies caused by the AWB's approach to ship scheduling (including two-port loading). They argued that uncertainty over ship

arrival patterns and vessel sizes made efficient management of port terminal facilities difficult, causing problems for the country-to-port transport systems in assembling cargoes quickly and in the correct order. The AWB indicated that it cannot control ship arrival patterns or vessel size because most sales are made on an f.o.b. basis, and it received only

short notice of the impending arrival of a particular vessel.

The South Australian Department of Marine and Harbors considered that two-port loading would continue in South Australia because it is more cost-effective than using rail or road to transport grain to a deep-water port. The

Department also suggested that the efficiency of South Australian ports could be improved if the AWB sent larger ships. In particular, the Department noted that the average size of vessels for barley shipments is greater than that for

wheat.

Several organisations, mostly grower organisations, called for disaggregation of port service and sea transport costs (WAFF, UF&S). In its November 1987 submission, the AWB also

supported, where possible, the disaggregation of port service and sea transport costs and the reflection of these costs to users of the respective ports.

3.2.3 System related attitudes and issues

A number of other matters that do not relate specifically to either storage and handling or transport were raised during the inquiry.

The Commission received considerable comment on industrial relations issues, particularly overmanning and work practices. Bulk handling agencies, railway authorities, port authorities, growers, grower organisations and marketers all

said that industrial practices in storage, handling and transport caused costs to be higher than necessary. There was union acknowledgement of the need to review work and management practices for their appropriateness (AWU, ARU) but opposition to change for 'change's sake' (AWU).

The final group of issues concerned the implementation of any proposed changes. In particular, the distributional effect of changes was raised by a number of participants (WACBH, SRA). They said that while savings across the system may be

achievable, not all growers will benefit and, in fact, some may lose. The State Rail Authority of New South Wales (SRA) emphasised that the Commission needed to highlight the distributional effects because there were 'too many instances of worthwhile proposals resulting in overall industry savings

37

[being] abandoned because of the creation of "winners" and "losers" by the proposal' (SRA submission, 3 November 1987, p. 2). Another participant emphasised the view that

deregulation of storage, handling and transport will be a 'positive sum game' and that change should not, therefore, be delayed by the argument that everyone should benefit equally (ACIL).

3.3 Key proposals

The main proposals put forward by various participants involved either improved administered efficiency, without any changes to existing institutional arrangements, or suggestions aimed at reducing regulation and hence potentially increasing competition. It should be noted that the proposals listed below are not necessarily applicable to all States or organisations as some have been, or are being, adopted.

Among the suggestions for improved administered efficiency were the following:

. altering pricing practices (for example, disaggregation by site, time of delivery and extension of AWB State accounting to include ports and shipping) of suppliers of services (AWB, WAFF, Queensland Government);

. improved co-ordination between suppliers of services, particularly bulk handling agencies and railway authorities, to achieve integration savings (V/Line, H. Jenyns, BTE, New South Wales Grain Sorghum Marketing Board);

. better co-ordination of grain flows between States to permit the use of least-cost paths (GEB, BGQ);

. improved ship scheduling by the AWB (MSB, GEB);

. changes in bulk handling agency board membership, particularly to introduce more business skills (CQGSMB, WAFF, J. Ridley, Moura Graingrowers group);

. leasing/tendering management and operation of bulk handling agency country receival sites (Riverina Grain Handlers, AGEA, Laharum Bulk Handling Company);

. improved work and management practices in the bulk handling agencies, railways and at ports - suggestions covered items such as overmanning, absenteeism, multi-skilling, 'job and finish' , continuous running of

loaders, and the overcentralisation of management (QGGA, AWB, GCA, AWU, V. Anderson, VFF, Orroroo Silo

Committee);

. reduction in the debt burdens of bulk handling agencies and rail authorities (WAFF Hyden Branch, Queensland Government);

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. increased investment in rail systems in areas such as

rolling stock, electrification, line upgrading and gauge standardisation to improve efficiency, as well as construction of interstate links (Queensland Government, AFULE, ARU, Tocumwal/Mangalore/Geelong Railway League);

. investment in development of certain ports, especially deep-water ports (AWB, Wallaroo Deep Sea Port Committee, Sceale Bay Deep Sea Port);

. the use of 'watchdog' groups to oversee bulk handling

agencies and railways and to perform management audits (V/Line, VFF, AWB);

. implementation of a tendering system for branch line rail maintenance (Tootool Silo Committee).

Suggested changes to institutional arrangements included the following:

. removal of all legislation restricting competition (R. Carrigan, ACIL, GCA, VOP);

. deregulation of transport (Queensland Road Transport Association, OD Transport, VFF, AGFA, A. Austin);

. removal of sole receival rights of bulk handling

agencies where applicable (WAFF, South Australian Government);

. removal of the port monopoly of bulk handling agencies where applicable (M. Nitschke);

. deregulation of the domestic grain market (ACIL,

J . Ridley);

. deregulation of grain marketing, where applicable (ACIL, VOP).

In order to further encourage competition, to improve system efficiency, or to reduce grower costs, other suggestions were put forward, including the following:

. converting statutory bulk handling agencies into

corporations and selling shares (NSW Farmers

Association, GHA, J . Wyld, R. Carrigan);

. selling parts of the bulk handling country storage and handling system (AGEA, A. Austin);

. facilitating competition between ports (WAFF, UF&S, Jerilderie Shire Council);

. the implementation of 'common user1 port terminals

(V O P );

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increased investment in road receival facilities at ports (B . Staggs);

increased public accountability of organisations in the storage, handling and transport industries (Moura Graingrowers group, GCA);

exemption of grain trains and grain drying facilities from fuel excise and taxes, particularly those levied for road construction funds (VFGA, B. Wakelin, Moura Graingrowers group);

enforcement of legal vehicle loading limits by grain receivers (TWU Newcastle branch);

support for amending s. 51 of the Income Tax Assessment Act to allow growers to treat amounts that are deducted by or on behalf of recognised grain handling agencies by way of revolving or repayable levies as allowable

deductions in the year in which the deduction is made (BGQ);

exempting bulk handling agencies from paying existing or proposed public authority dividends (VFF, GHA);

3.4 Key issues

A large number of issues were put to the Commission, some of which were more central to its inquiry than others. Those that the Commission considered to be key issues include the following;

. the costs of services are too high (growers);

. the requirement to pay for services regardless of

whether they are used or wanted - for example, bulk handling agency charges under the grower-to-buyer arrangements and permit wheat sales (growers);

. inadequate choice and flexibility in the storage,

handling and transport system (growers);

. economies of scale in the storage and handling

industries (GHA, GEB) and in railway operations (V/Line, AR U ) ;

. maintenance of grain hygiene standards in a deregulated storage and handling system (bulk handling agencies, Wellcome Australia);

. the contestability of the storage, handling and

transport industries (BTE, ARU, bulk handling agencies);

. the possibility of a private monopoly arising in a

deregulated environment and the effect this may have on grower costs, especially pricing practices at ports (bulk handling agencies, BTE);

40

the appropriateness of bulk handling agencies paying public authority dividends (VFF, GHA, GEB) ;

the potential loss of income tax exemption status by co-operative bulk handling agencies (SACBH, WACBH);

ownership of bulk handling agency assets in a different institutional setting (VFF);

the role of non-commercial objectives'that exist in some legislation pertaining to bulk handling agencies and railways (GEB);

road cost recovery, including external costs associated with road safety, congestion and pollution (BTE,

P . Laird, railway authorities);

inadequate road funding to local governments, especially in relation to increased road haulage of grain (Cabonne Shire Council, Moree Plains Shire Council);

the need to establish a 1 level playing field' before competition between road and rail can be 'fair' (SRA, Westrail, V/Line, Queensland Road Transport

Association) ;

whether the excise on diesel fuels should be payable by railway authorities (VFGA, UF&S);

the efficiency of AWB ship scheduling (GEB, MSB);

whether port costs should be disaggregated (WAFF, AWB);

the existence of overmanning and inefficient work practices in storage, handling and transport (grower organisations, growers, bulk handling agencies);

the distributional effects of any proposed changes (SRA).

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4. FRAMEWORK FOR EVALUATING AN EFFICIENT AND COST-EFFECTIVE INTEGRATED SYSTEM

Before evaluating the current and alternative systems for grain storage, handling and transport it is necessary to develop a framework of criteria against which the relative merits of various systems can be assessed. The Letters

Patent issued by the Commonwealth and State governments require the Commission to '... inquire into the nature of the most efficient and cost-effective integrated system of providing storage, handling and transport services and port terminal services'.

The Commission has interpreted the 'nature' of the system as referring to the institutional environment, represented by the legislative and administrative arrangements associated with the provision of storage, handling, transport and port services. The institutional environment has a major

influence on the physical and technical characteristics of the system.

It is important to note that the Commission has not

interpreted its task as being a management audit, or some similar process involving detailed examination of each agency providing storage, handling, transport or port services. Moreover, the Commission did not approach its task with a view to making specific recommendations concerning new or existing storage, handling, transport or port facilities. Rather, the Commission believes that an efficient and

cost-effective integrated system for grain distribution will follow from appropriate institutional arrangements which will determine market behaviour.

The principal criteria adopted by the Commission in its assessment of the current and alternative systems are those of 'efficiency', 'cost effectiveness' and 'integration', as provided in the terms of reference. It is important that the meaning of these concepts be clearly understood and their interpretation by the Commission is as outlined below.

An integrated system is one in which storage, handling, transport and port services are combined such that grain flows along the least-cost path for the system overall. This

requires that decisions regarding alternative paths for storage, handling and transport of grain must be made in full recognition of the associated costs and benefits and not be constrained by artificial barriers such as State borders.

Cost-effectiveness in the distribution system requires that users and suppliers minimise their costs and that inputs and services are combined and provided in a technically efficient manner. This requirement can apply to both existing or

alternative technologies and practices for storage, handling and transport systems. In either case, cost-effectiveness implies that no more inputs than necessary are used to

provide a particular service.

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Cost-effectiveness is also concerned with dynamic changes that occur in the provision of storage, handling, transport and port services. In particular, the costs of firms (and the industry overall) providing these services can vary in response to first, changes in the size of the task (for example, the amount of grain stored or transported) and second, changes in the cost of providing a service,

regardless of the size of the task. The latter represents a change in the firm's underlying cost structure (i.e. a shift in its average cost curve) whereas this is not the case with the former (i.e. it represents a shift along the average cost curve). Both these concepts are referred to in Chapter 6.

The concept of economic efficiency embraces

cost-effectiveness and integration but also requires that maximum benefit be obtained from use of the community's resources in the provision of grain storage, handling,

transport and port services. That is, efficiency is achieved when no further reallocation of resources would be more beneficial to the community and when use is made of the most appropriate technology and storage, handling and transport practices.

In addition to being cost-effective and integrated, as defined, an efficient grain distribution system should also have a number of other features.

First, both users and suppliers of storage, handling and transport services should face prices that reflect the true economic costs of their decisions. In using the phrase 'true

economic costs' the Commission is referring to resource or social costs. This implies, for example, that any costs or penalties imposed by buyers for delivery of grain that is damaged or insect infested should be directly borne by the

seller of that grain. Where such costs cannot be charged directly to the seller there may be a case for some quality regulation. Similarly, users of services in the grain distribution system should bear the full social cost of using those services.

Second, decisions to invest or disinvest should meet the market's requirements and reflect changes in technology and the cost-effectiveness of such technology. Again, such

decisions should be made on the basis of true economic costs. In the event that these costs are not reflected in price signals passed on to market participants, there may be a case for intervention to ensure that price signals are consistent with the social rather than private costs and benefits of service provision.

Third, suppliers should be sufficiently flexible to meet changes in demand from international and domestic markets due, for example, to new uses for grain, changed requirements for grain quality, and short- and long-term fluctuations in market demand for individual grain types.

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Fourth, an efficient system should be responsive to grower requirements, reflecting changes in production regions, grain types, delivery patterns, seasonal fluctuations, and service

level demands.

Finally, the system should be responsive to technological changes that lead to improvements in efficiency.

The requirements for an efficient and cost-effective integrated system embrace many of the issues brought to the attention of the Commission in submissions. These include the issues of service demands of growers, institutional arrangements, grain hygiene, segregation requirements, levels and relativities of prices, capital and cost

structures, and operating, scheduling and monitoring practices. Furthermore, the criteria for an efficient and cost-effective integrated system can be applied to both existing and alternative methods for using and supplying storage, handling and transport services; they are adopted in Chapters 5, 6, 7 and 8 of this report.

The framework and criteria outlined in this chapter make no reference to the distributional impact of any changes to the current storage, handling and transport system. The Commission has addressed this in Chapter 6 and has taken it into account in formulating recommendations, and in the consideration of an implementation strategy.

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5. EXISTING INSTITUTIONAL ARRANGEMENTS FOR, AND AN ASSESSMENT OF, THE GRAIN DISTRIBUTION SYSTEM

5.1 Introduction

In this chapter the main institutional arrangements for the storage, handling and transport of grain are outlined. In addition, the impact of these arrangements on the

distribution system is examined from an overall viewpoint and the extent to which the arrangements provide for efficiency, cost effectiveness and integration, as defined in Chapter 4,

is evaluated.

Although there are some similarities in institutional arrangements between the States, there are also significant differences. It follows therefore that any appraisal of the current distribution system must take into account the key differences between States in order to obtain an accurate overview of the institutional arrangements and their effects.

The remainder of the chapter is presented in three sections. In Section 5.2 the legislative framework and the principal agreements for storage, handling and transport are outlined and evaluated from an overall perspective. Much of the discussion in Section 5.2 is based on the analysis presented in Supporting Paper 2. A more detailed assessment of the storage, handling and transport system in each State is provided in Section 5.3. This is based on the efficiency and

cost-effectiveness criteria outlined in Chapter 4. Finally, consideration is given in Section 5.3 to the integration of storage, handling and transport under current institutional arrangements.

5.2 Existing institutional arrangements

5.2.1 Background

The grain storage, handling and transport system is highly regulated and dominated by a number of national and State marketing, bulk handling, rail and port authorities. Many of these organisations have underlying legislation that defines their objectives and responsibilities; others, such as the grower co-operative bulk handling agencies, have both

legislation and articles of association governing their operations.

In general, the storage and handling, rail and marketing organisations defined in legislation have sole responsibility for their respective statutory grains. Statutory grains differ between States but generally include the majority of winter cereal production and some summer crops.

Non-statutory grains are frequently stored, handled or transported by the statutory bulk handling agencies. This is supplemented by private storage and handling, which occurs to some degree in all States, and road transport, which is

45

frequently constrained by State legislation or administrative arrangements.

In each State there is considerable interaction between the bulk handling agencies and rail and marketing authorities. Furthermore, these organisations interact with growers and other participants providing services to the grains industry. There are two noteworthy points concerning interactions between participants in the grain distribution system. First, where these interactions are with other organisations, the arrangements are frequently set out in the

form of agreements of a formal or informal nature. Second, where growers are involved, the nature of the relationship is usually set out in the form of administrative arrangements, pricing policies and operational procedures. In some cases grower organisations have entered into agreements on their members' behalf. The details of interactions between participants in the grain distribution system are described

in Supporting Paper 2.

5.2.2 Legislation affecting grain storage, handling, transport and marketing

Bulk handling The legislation permitting the formation of a bulk handling agency in each State defines the powers and functions of the agency, specifies the composition of the board, and indicates the extent to which the minister responsible may direct the

agency. It is evident from examining the composition of the boards of the major bulk handling and marketing organisations that one person could be on several boards at the same time. This may aid communication between the organisations and provide other benefits, but it is also conceivable that it could generate a conflict of interest.

A particularly important aspect of bulk handling legislation is the social obligations placed on agencies. Such social obligations can impose costs that would not usually be incurred in a purely commercial environment and these costs are ultimately borne by growers. The extent of social obligations required by legislation varies between States and involves items such as non-discrimination between growers

(South Australia and Western Australia), a requirement to follow ministerial directives (New South Wales, and South Australia and Western Australia in certain circumstances), and the need to provide satisfactory service levels and

secure and satisfying employment (New South Wales). Only in Queensland is there no legislative requirement to pursue non-commercial objectives.

Bulk handling agencies are sometimes restricted from undertaking a wider scope of activities than is provided for in their legislation. For example, the GEB has suggested that it could achieve improved operating efficiencies if it were permitted to offer an on-farm grain pick-up service.

The GEB believes that it is unable to offer such a service

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because the legislation requires it to provide storage and handling services but not transport services. Similarly, it believes that it is unable to purchase or lease motor trucks for the cartage of grain from bunkers to silos or from silo

to silo for consolidation.

A further problem with bulk handling legislation is that it is sometimes ambiguous. SACBH is required not to give preferential treatment to its clients, although it is unclear whether this requirement implies pooling of costs or charging

for storage and handling services according to a 'user pays' system. In New South Wales, the GHA must undertake its tasks at minimum cost but must provide a satisfactory level of service to its clients and satisfying and secure employment for its employees: the legislation does not define a

'satisfactory level of service' or 'satisfying and secure employment' and both growers and unions could therefore seek a storage and handling system that may not be economically justified.

In regard to legislative provisions concerning the

accountability of bulk handling agencies, all agencies are required to submit annual reports of their operations to the relevant minister. The Commission engaged Peat, Marwick, Mitchell Services to assess the adequacy of these annual

reports and the consultant reached the conclusion that, in comparison to private sector firms operating large

businesses, the financial and accounting detail reported by the bulk handling agencies is generally satisfactory. Further details on the financial reporting and accounting of the bulk handling agencies is provided in Supporting Paper 2.

While it appears that bulk handling agencies produce annual reports of a standard at least equal to, if not better than, firms in the private sector, the Commission is of the view that these reports are in some respects unsatisfactory given the monopoly position of the bulk handling agencies under the current institutional arrangements. In particular, bulk handling agencies have failed to fully disclose costs

incurred for storage and handling services. Although many private firms in the grains industry and elsewhere do not provide such detail in their annual reports, they are operating in a competitive environment, and have adopted reporting procedures that are appropriate for such an

environment.

The bulk handling agencies are generally subject to the scrutiny of ministers in regard to the efficiency of their operations, but the Commission is of the view that this is an inadequate mechanism for accountability in a regulated environment. In general, ministers will not be in a position to gauge whether or not the prices and costs of bulk handling

agencies are efficient and must rely on advice received from bulk handling agencies rather than from an independent source.

The bulk handling agencies have argued that their legislation does provide for accountability with respect to prices and

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costs of storage and handling services because their boards include grower members. The Commission's view is that this is also an inadequate mechanism to achieve accountability: growers are generally unaware of the costs of storage and handling services provided at various sites.

Transport The extent to which transport legislation affects the haulage of grain varies between States. Victoria and Queensland use legislation as the means of ensuring that the majority of grain is hauled by rail. In Victoria it is unlawful to

transport statutory grains further than 60 kilometres by road unless the vehicle is owned by the grain grower, or, in the case of a road haulier, a permit is obtained. The

Government's policy has been to refuse to issue such

permits. However, the Supreme Court of Victoria recently ruled that the 1981 directive of the then Minister for Transport, which effectively prevented the issue of such permits, was invalid.

In Queensland, wheat, barley and central Queensland sorghum are classified as restricted goods and cannot be transported by road from BGQ facilities any distance in excess of

120 kilometres. These grains may be transported from farm by road for a distance not exceeding 40 kilometres; if there are no receival facilities within that distance, grain must be taken to the nearest BGQ silo.

In both South Australia and New South Wales there is no legislation regulating grain to rail though, in the case of South Australia, there is a $2.50 per tonne surcharge, levied by Australian National (AN), on road movements between rail-served silos. In Western Australia, the Western Australian Railway Authority (Westrail) has a monopoly over the haulage of most grain, although this is by virtue of government policy rather than legislation. Road hauliers are licensed to carry grain only in areas not served by Westrail.

The BAE (Spriggs et al. 1987) has noted the social

obligations of the various State rail authorities. In general, rail authorities are required to comply with directions from the responsible transport minister. Ministerial approval must be sought by QR, AN and Westrail before lines can be closed. In all States except South Australia ministerial approval is required prior to any increase in charges. A further non-commercial objective imposed on the SRA and Westrail is 'common carrier' status, which requires these rail authorities to provide a transport service to all customers.

The Commission engaged Peat, Marwick, Mitchell Services to assess the financial reporting and accounting practices of the rail authorities. The consultant concluded that while

overall the reporting and accounting practices could be regarded as satisfactory, scope for improvement exists in a number of areas. These and the financial and reporting

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practices generally of the rail authorities are outlined in Supporting Paper 2.

All rail authorities are required by legislation to produce annual reports summarising their physical and financial operations. On the basis of the consultant's report, the Commission is of the view that the annual reports of all rail authorities are satisfactory, except for QR, which does not appear to adhere to generally accepted accounting practices such as the production of an annual balance sheet. The annual reports of Westrail and AN appear to be the most advanced so far as the use of performance indicators is concerned.

In addition to annual reports there are several other mechanisms that bear on the accountability of rail

authorities.

First, ministers responsible for rail authorities frequently have the power to intervene in the price determination process. However, such intervention is, in the Commission's view, more likely to be related to political considerations

rather than the achievement of efficiency and cost

effectiveness in rail operations.

Second, rail authorities in some States or areas of States have differing degrees of competition from road transport. In these situations there would be significant pressure on the rail authorities to have regard to costs, although even in these circumstances inefficiencies in such operations could be subsidised from areas of operations where there is

little or no competition, or from government revenue.

Third, all States except Victoria have rail freight

agreements to which the bulk handling agencies, rail authorities and other interested parties (for example, marketers and grower organisations) are signatories. These agreements provide some means by which clients of the rail authorities can influence and obtain information on the determination of rail freight rates.

While these factors assist in making rail authorities accountable for their operations, the Commission is of the view that users of the rail transport system for grain often remain ignorant of the costs of rail services under current

institutional arrangements. The Commission accepts that it is often difficult to identify the grain industry's share of joint and common costs incurred for the provision of

passenger, freight and other services, although all authorities (except QR) have supplied such information to the Commission.

Furthermore, the Commission would be less concerned about the provision to users of information regarding costs if rail transport were conducted in a competitive environment. Moreover, rail authorities are frequently required to meet

social obligations and the general community should, in the Commission's opinion, be aware of the costs of such service

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provision, as is the case with AN. Nevertheless, disclosure of costs for rail transport, while facilitating

accountability, is unlikely to achieve efficiency where services are provided in other than a competitive

environment.

Marketing The Commonwealth Wheat Marketing Act 1984 in conjunction with the various State Wheat and Marketing Acts grants the AWB a monopoly over the marketing of wheat, both internationally

and domestically (with the exception of wheat sold under the permit system, direct grower-to-buyer arrangements, and in Queensland, where the State Wheat Board exercises certain powers over feed wheat and the control of premiums).

The AWB's charter is defined as maximizing the return to growers from the marketing of wheat' (s. 5(1) of the Wheat Marketing Act). Apart from permit wheat and wheat sold under direct grower-to-buyer arrangements, all wheat must be delivered to the AWB or one of its authorised receivers, of which, as noted in Chapter 2, there is only one in each

State.

Although the wheat marketing legislation does not specify whether returns are to be net of storage, handling and transport costs, the AWB has informed the Commission, and it is stated in the Grain Storage and Handling Agreement, that

maximisation of net returns to growers is the objective. This position has been supported by grower organisations. However, the AWB points out that realisation of its objective is prevented by the State autonomy of bulk handling and transport organisations. Consequently, the AWB's role is

limited to consulting with, or making recommendations to, the various grain storage, handling and transport authorities.

The bulk handling agencies argue that autonomy is essential because the AWB is only one of their customers and decisions taken by them must recognise the needs of all their

customers. If the AWB had the power to direct the bulk

handling agencies to perform certain functions or to undertake particular investments, the bulk handling agencies' ability to plan operations and fulfil commitments to other customers could be hindered.

The marketing of grains other than wheat varies according to State. In most cases legislation enables marketing

authorities to be established and grants those authorities a monopoly over the marketing of certain grains. The extent of non-statutory marketing of grains also varies between States.

The various pieces of legislation usually grant a marketing monopoly over particular grains, but the marketing authority is not always required to use the central bulk handling

agency. For example, in New South Wales there is no

requirement for grain marketing authorities established under the Marketing of Primary Products Act to use the GHA for storage and handling. However, in most cases GHA storage is

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used together with private storage, particularly for export grain, as there is only one bulk handler other than the GHA (Toll-Chadwick at Newcastle) with port terminal loading capacity.

5.2.3 Overall assessment of grains industry legislation

The most direct impact of the various legislative

arrangements encompassing the grain storage, handling and transport industries is the absence of significant competition for most of the organisations involved. This has meant that the bulk handling and transport monopolies have

not been exposed to the economic pressures that would apply in a more competitive environment.

Rather than rely on competition to stimulate efficiency, the statutory agencies face other performance incentives, some of which are self-imposed while others are derived from external sources.

Bulk handling agencies face pressures from progressive management as well as growers. Furthermore, as noted in Chapter 1, they have at times been the subject of

government-initiated inquiries such as those in New South Wales in 1981, Queensland in 1981 and 1986, and Victoria in 1984 and 1986.

Rail authorities have also on occasions been the subject of government-initiated inquiries and are subject to pressures from progressive management, growers and ministerial intervention. In contrast to the bulk handling agencies, ministerial intervention has been widespread in the

operations of rail authorities. In this regard, Spriggs et al. (1987, p. 21) noted that transport ministers have used their powers of direction in at least three areas relevant to

wheat transport. These include the limiting of proposed increases in rail freight rates in Queensland, Victoria and Western Australia, the operation of uneconomic branch lines, and the provision of subsidised transport services.

The Commission is of the view that the various pressures on bulk handling agencies and rail authorities, as outlined, may be inadequate for two reasons. First, they tend to vary in

their duration and intensity and often .arise only during periods of adverse economic conditions. Second, in the case of political involvement and pressure from growers, the pressures brought to bear on statutory agencies may not lead

to the most efficient outcome. Indeed, this latter pressure sometimes involves particular groups attempting to maximise their benefits from the system without bearing the true cost

of generating those benefits.

Some inquiry participants suggested that in the absence of competition sufficient pressure for efficiency could nevertheless be brought to bear. In the case of some bulk handling agencies, particularly co-operatives, growers felt

that the organisation is ' theirs' and should be able to be

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made to behave more efficiently. In other cases, the

statutory authorities have suggested that 'consumer watchdogs' could check their costs to verify that the authority is operating efficiently. V/Line, for example, encouraged this approach:

V/Line is an open book, and as indicated earlier, an invitation has been extended to the VFF (and has been accepted) to inspect our costs in detail, both actual and planned. This will ensure V/Line's honesty. (V/Line submission, February 1987, p. 63)

There are two difficulties with the 'watchdog' approach. First, to guard against 'creative accounting', a consumer watchdog may well have to monitor a significant number of the activities of the organisation concerned, which could be a very expensive or perhaps even an impossible task. Second,

there is the problem of defining the benchmarks for

acceptable performance.

The extent to which an organisation operating in a

monopolistic environment can continually be encouraged by its clientele to behave in an optimally efficient manner is clearly very important. As a general observation, there is less incentive for such an organisation to continually and critically examine all of its activities to ensure that it is minimising its costs than would be the case in a more

competitive environment.

Most bulk handling agencies appear to have had difficulty determining the optimal balance between level of service and cost. After all, since costs can be passed on to customers in the form of pooled prices and without significant impact

on market share, the need to minimise those costs is

reduced. It follows, therefore, that consumer watchdogs or other administrative bodies would face a difficult task in ensuring that statutory bulk handling agencies and transport

authorities operate efficiently in an environment largely devoid of competition.

5.2.4 The use of agreements in grain storage, handling and transport

In Supporting Paper 2 the major agreements between

participants in the grain distribution system and their economic effects are outlined. The most significant is the Grain Storage and Handling Agreement between the AWB and its authorised receivers covering receival, storage, handling

and out-turn of wheat. For grains other than wheat there are numerous agreements between marketing authorities and private and public handling organisations. Among the agreements between participants in the grain distribution system are the

following:

. Rail freight agreements - in all mainland States except Victoria there is a formal agreement between the rail authority, the bulk handling agency and other interested

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parties. In each case the agreement seeks to direct grain traffic to rail instead of road. For example, in South Australia this involves, as mentioned earlier, SACBH paying AN a surcharge of $2.50 per tonne for grain

hauled by road between rail-served silos. In Victoria there is no such agreement, although V/Line does produce an annual operating plan for grain transport.

The Australian Wheat Charter - the AWB has a standard- contract for the carriage of wheat between Australia and overseas destinations. It covers specific items (for example, loading rates) at both loading and discharge ports as well as general shipping items (for example, war risks, bunkering and collision clauses) and is an

agreement between the AWB and the ship owner or

operator. Similar charter agreements are in place for other grains; for example, most barley shipments are undertaken through the 'AUSBAR 1986' Charter Party.

The Flour Millers Agreement - the AWB has a standard agreement for flour millers. Once signed, the agreement remains in force until either party gives three months' notice of termination, the miller goes bankrupt, or the miller violates his obligations under the agreement. There is no sunset clause in the agreement.

Other agreements - the statutory monopolies in the grain storage, handling and transport system have a large number of contracts with private organisations. In general, the agreements simply set a particular charge

for the service to be performed. For example, road haulage agreements usually set a rate per tonne or journey. As such, they do not affect the structure of the industry or impose limitations as do some of the

agreements between statutory monopolies.

5.2.5 Overall assessment of agreements

Examination of the many agreements in operation in the grain storage, handling and transport system suggests that there are three main categories of interest:

. agreements that are primarily concerned with market power;

. agreements that attempt to introduce market forces into a regulated system, primarily through a series of incentive payments or financial penalties;

. agreements that attempt to improve the overall

efficiency of the grain storage, handling and transport system through better co-operation and co-ordination between authorities.

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Agreements to extend market power Although there is already significant overall monopoly power provided to grain industry organisations through legislation,

some organisations have sought to use agreements to extend their market power because they believe they can achieve economies of scale, reduce the market's contestability, or achieve integration with complementary activities. Examples of such agreements include the extension of BGQ's monopoly powers through negotiation of agreements with the major marketing boards (which in effect make it the sole licensed

receiver of a number of statutory grains in country areas of Queensland) and the surcharge of $2.50 per tonne payable to AN for grain moved by road between rail based silos.

Overall, the Commission believes that, while the

organisations concerned may be attempting to use such agreements with a view to maximising their efficiency, the extension of market power, either by granting monopoly rights or by restricting competition, is likely to lead to fewer alternatives for users and reduced responsiveness to the market pressures that normally govern commercial

decision-making.

Agreements that are proxies for market forces Some agreements have endeavoured to approximate competitive market behaviour by introducing a structured set of rewards and penalties to promote more efficient operations. While these financial incentives do not have the same flexibility

as market prices, they may encourage economic efficiency through organisations taking advantage of the incentives to minimise their own costs and thus benefiting other parties to

the agreement. The most important agreement of this type is the Grain Storage and Handling Agreement between the AWB and the various State bulk handlers.

Such agreements display several characteristics that concern the Commission. First, the clients of the system (the growers) are not directly involved in setting the level of rewards and penalties and hence the agreement may not accurately reflect their requirements or priorities. Some bulk handling agencies, however, consider that grower representative boards ensure these aspects are appropriately handled. Second, if the recipient of a penalty is simply

able to pass on that penalty, costs may merely be transferred within the system without any reduction in their overall level. Third, if performance criteria are set at easily attained levels, or if the rewards and penalties can be set at levels that have little impact on the organisations concerned, the agreement will not provide strong incentives to achieve increased economic efficiency.

Agreements to improve co-operation and co-ordination Agreements to improve co-operation and co-ordination are usually less formal than agreements that are proxies for market forces, and they reflect the interdependence of the various components of the storage, handling and transport

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system. Examples of such agreements are those between rail authorities and bulk handling agencies for moving grain from the country to the seaboard. The main difficulty with agreements of this nature is that individual organisations are often unable to appropriate all the benefits of

investment or operational changes that may lead to lower system-wide costs. For example, improving rail out-loading facilities imposes a cost on the handling organisation while the benefits accrue to the railways. In such cases some form of compensation payment would be likely to enhance

co-operation.

Overall, the Commission believes that the type of incentive structures to be found in competitive markets and the resultant pressures for efficient decision-making are very difficult to create through agreements or other

administrative methods. In the current institutional environment agreements may enable some efficiency gains to be achieved, but these gains may not be as great as could be the case if the organisations concerned operated in a more competitive environment.

5.3 Assessment of the grain distribution system

5.3.1 Background

In this section the provision of storage and handling, land transport, port services and sea transport is assessed. The purpose of this assessment is to provide an evaluation of the

extent to which these services are supplied in an efficient, cost-effective and integrated manner. To this end the criteria developed in Chapter 4 are used as a basis for the assessment.

The assessment of the current system deals first with the major segments of the distribution system and second with the overall system. In particular, the evaluation of the

individual storage and handling, transport and port service activities is concerned with pricing and investment behaviour, cost effectiveness and responsiveness to market requirements, and production and technology changes; consideration of the overall system is concerned primarily with the integration of the system components.

In the Commission's assessment of the current system, no distinction is made between statutory and non-statutory agencies. The Commission acknowledges that the statutory and non-statutory agencies may employ different approaches to storage, handling and transport, but it is likely that the market behaviour of the two groups will be interdependent.

For example, it could be expected that the prices charged by private storage and handling agents will be determined by those posted in the market place by the statutory bulk handling agencies. Thus, the pricing behaviour of private

storage and handling agents will, in part, be determined by the institutional arrangements applying to the bulk handling

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agencies, even though their unit costs may (as noted in Supporting Paper 3) be significantly lower than those of the bulk handling agencies.

5.3.2 Storage and handling

Pricing and investment behaviour Bulk handling agencies generally require total cost recovery for their overall business. However, the allocation of costs to individual users is not generally determined by either the

actual cost of providing the service or by other

market-related factors such as the price that the market will bear. Rather, storage and handling prices are based on the concept of cost pooling, whereby costs are pooled and growers are charged an average price.

In some cases, charges are levied even though storage and handling services are not used. This is the case for permit and grower-to-buyer sales of wheat. The IAC (1987, p. 120) has noted that inefficiency of such arrangements and has suggested that these charges be removed.

The extent of cost pooling varies between the States. The highest degree of pooling occurs in South Australia and Western Australia, the two States with grower co-operative bulk handling agencies. The greatest degree of price

differentiation occurs in Queensland, while in Victoria and New South Wales costs are generally pooled, although there are minor exceptions (see Supporting Paper 6 for details of pricing practices). Pooling of costs occurs across sites, within a particular year and between seasons in order to minimise variations in charges that would result from

production fluctuations.

The pooling of storage and handling costs means that users and suppliers of these services do not generally observe true economic costs. This results in financial transfers from producers who deliver to low cost facilities to those who deliver to high cost facilities. The size of these transfers varies between States depending on the variation in

individual country and port storage and handling costs. In general, the Commission is of the view that growers are unaware of the size and direction of transfers in the storage

and handling system.

In addition to its distributional consequences, pooling has some significant efficiency effects, and there appears to be a general lack of awareness of the resource misallocation cost that may arise. In particular, the Commission is concerned that production and investment/disinvestment decisions by both bulk handling agencies and growers are not based on accurate price signals. In any specific area, the

absence of accurate price signals to users and suppliers of storage and handling services will lead to the over- or under-utilisation of certain inputs and services and the over- or under-production of particular farm products.

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The longer term effect of price pooling is that the current pattern of storage and handling in all States is perpetuated through the masking of accurate price signals. Furthermore, the Commission is of the view that bulk handling agencies

have in the past failed to appraise prospective investments through the application of strict economic criteria, although it notes that financial evaluation has tended to be used more frequently in New South Wales, Victoria and Queensland in recent times.

These evaluations have not, however, always addressed the system-wide economic costs and benefits that would result from investment in storage and handling facilities and have

not usually been made available for public comment.

Cost effectiveness It is likely that the pre-1980 national cost pooling and the current State cost pooling, the emphasis on equality and level of service, and the ability to pass on higher costs in a non-competitive environment during periods of buoyant grain

prices have all led to excess storage capacity in the bulk handling system. Such over-capitalisation in storage and handling is reflected in the relatively high levels of storage and ship-loading capacity compared to average grain production.

In total, Australia now has approximately 36 million tonnes of permanent and temporary storage capacity, compared with 25 million tonnes of annual average grain production. In addition, on-farm storage capacity has grown significantly in recent years; it was estimated by the BAE to total some 9.5 million tonnes in 1984-85. With such large storage capacity

and continued pooling of prices, the bulk handling system has been unable to fully realise identified economies of scale (see Supporting Paper 3).

Research undertaken by the Commission suggests that there may also be scope for lower storage and handling costs through improved productivity. It is difficult to be precise in

regard to the extent of such savings, although most bulk handling agencies indicated in public hearings that there is scope for cost reductions. The nature and size of these productivity gains are discussed in Supporting Papers 3 and

10. The Commission considers that these unit cost reductions should be achievable in the short term.

The scope for productivity gains in the storage and handling system should not be regarded as a criticism of current management of bulk handling agencies. Indeed, the Commission is aware of a number of initiatives that have been taken by

the management of bulk handling agencies in all States to reduce storage and handling costs. These efforts are, however, hindered by current institutional arrangements, which do not in general contain incentive structures conducive to achieving continuing productivity gains.

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Responsiveness to market requirements and production and technology changes In many respects the storage and handling system is

responsive to fluctuations in market requirements and production and technology changes. In regard to market requirements, which include factors such as grain quality and type, the bulk handling agencies have, in recent times, provided grain of a high quality to meet standards required by marketing boards.

However, the flexibility of the bulk handling agencies is to a significant extent hampered by the necessity to meet non-commercial objectives such as those outlined in Section 5.2.2 and Supporting Paper 2. In particular, the Commission is of the view that bulk handling agencies are subject to continuing pressure to provide services to growers, which reduces their capacity to devote scarce resources to areas that may have superior commercial prospects. Moreover, bulk handling agencies are also expected to meet the quality standards and segregation requirements of marketing boards, particularly the AWB, which they have little power to influence, let alone reject, on the basis of excessive cost.

Overall, the bulk handling agencies appear to have been able to contribute significantly to Australia's grain marketing efforts, although the storage and handling costs incurred have most likely been increased by growers' and marketers' demands and the institutional arrangements in operation.

The mix of permanent and temporary (bunker) storage provides the bulk handling agencies with considerable flexibility in the country. Bunker and horizontal storage can be used to

store large quantities of a single grain type; vertical storage can be used for segregations of smaller volumes, including segregations of non-statutory grains.

Flexibility in the country is not always matched with flexibility at port. Some States (for example, Victoria, South Australia and Western Australia) have large port storages and are therefore able to readily assemble loads for

export; other States (for example, Queensland and New South Wales) have considerably less storage capacity at port and rely heavily on a well-functioning land transport system and high turnover of grain at the seaboard to achieve out-turn

requirements. In recent times, there have been difficulties, particularly in New South Wales, in achieving desired levels of out-turn at the seaboard; the GHA has taken a number of

initiatives to address these problems.

Finally, in relation to flexibility to meet changes in technology, the bulk handling agencies have been quite responsive to the use of technology to meet their

requirements and appear to be in the forefront in some areas. In recent years this has been particularly so with temporary storage and ancillary equipment- and grain hygiene control.

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5.3.3 Land transport

Pricing and investment behaviour Historically, users and suppliers of rail services have been unable to make decisions on the basis of true economic costs because prices have not in general been determined in this way. In more recent years rail prices have continued to be

distance related although there has been some move towards more commercially based and efficient pricing practices that account for both costs and actual or potential competition from road transport.

Rail rates in Queensland and New South Wales are based on rail distance covered, although the New South Wales

Government is currently moving towards cost-based pricing. AN bases its rates on road distance from port, while V/Line and Westrail adopt a radial rating approach whereby rates accord with straight-line distance from receival point to the

nearest port (which is not necessarily the port to which the grain is eventually railed). Further details on pricing practices used by the various rail authorities are provided in Supporting Paper 6.

Most rail authorities supplied the Commission with data on revenue and costs derived from their grain operations. Examination of the revenue data in conjunction with the information on costs suggests that only AN and Westrail are achieving avoidable cost recovery from grain haulage. If corridor fixed costs are removed and only short-run variable costs are considered then it appears that all systems, except the SRA, recover costs.

The lack of alignment between freight rates and costs is also reflected in cross-subsidisation between traffic types and between general rail revenue and general taxation revenue. Information submitted by the Federal Department of Transport

indicates that, in total, Commonwealth and State government subsidies to overall railway operations were in excess of $1.6 billion in 1985-86.

With respect to efficiency of resource use,

cross-subsidisation has the effect of encouraging the use of high cost services in some areas and under-utilisation of efficient alternatives in other areas. Of particular significance is the subsidisation of some high cost branch

lines under circumstances where road transport may be available at a lower resource cost.

While prices for rail transport are not in general closely aligned to the costs of supplying services, rail authorities have used pricing policies in some areas of their operations to encourage efficient use of rail infrastructure. For example, V/Line, QR and AN have all offered concessions to clients wishing to transport grain in unit trains, although it is interesting to note that in Queensland the concession

59

has not been passed directly back to growers by BGQ and in Victoria growers have rejected reductions in rates for grain received by V/Line from central receival points.

In the case of road transport of grain, freight rates are primarily determined by competitive pressures and are likely to closely reflect the operators' costs. The extent to which social costs of road transport, such as road damage, are reflected in freight rates depends on the effectiveness of current road user charging mechanisms. This issue is addressed in Chapter 9 and Supporting Paper 4.

Whatever the level of cost recovery of various heavy

vehicles, there is the question of the efficiency of current taxation policies in collecting road damage contributions. The fact that road damage is not highly correlated with fuel usage suggests that fuel excises and taxes may not be an

appropriate means of collecting road damage contributions. This problem has been recognised in a wide range of transport inquiries and studies and applies to all road transport rather than grain transport in particular. The Commission notes the Industries Assistance Commission's conclusion that the best approach to road damage and other external costs would be to 'pursue charging devices which accurately reflect

the damage and congestion costs arising from road use' (IAC 1986, p. xii). The policy issues concerning the recovery of costs from road transport are discussed in detail in

Chapter 9 and in Supporting Paper 4.

In regard to investment behaviour, the institutional environment in which railway authorities have operated has not generally encouraged thorough appraisal of alternative

transport investment options. For example, little

consideration has been given in many instances to the complementary role of road transport in accumulating volumes of grain onto rail and in providing flexibility in

accumulating specific cargoes at high throughput port terminals. It is, however, also important to recognise that rail authorities have been constrained by governments and local interests with respect to disinvestment decisions

concerning branch line closures.

The reliance upon rail to meet periods of peak grain

shipments could be expected to have resulted (with the possible exception of South Australia) in railways

over-investing in rolling stock.

One final point concerning investment behaviour of railway authorities relates to the appraisal of prospective investments on the basis of strict economic criteria. The

Commission found that while most railway authorities undertake economic evaluations of investment proposals they do not necessarily adhere to the fixed financial criteria established for such analyses. In particular, exceptions are made for community, political and industrial relations

reasons. The Commission's main concern is that management decision making in a regulated transport environment is not subject to the discipline of a competitive market and that

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the economic measures, such as those generated by

cost-benefit analysis, should be fundamental to appraisals of rail projects funded by the community.

Cost effectiveness During the Commission's inguiry all rail authorities indicated that they have plans to improve the efficiency of their operations through operational and administrative changes. Some changes have already been introduced in all rail systems, including reduction in wagon turnaround times, the introduction of two-man crewing, and upgrading of lines to facilitate use of unit trains.

With the assistance of its consultants, the Commission investigated the scope for further reductions in train operating costs using data supplied by the rail authorities. This analysis is reported in Supporting Papers 4 and 10. The principal result to emerge from the analysis is that there is scope for further cost reductions in rail operations. Some rail authorities have recognised the potential for further cost reductions by developing estimates of 'efficient' costs,

which they are attempting to achieve.

In regard to road transport of grain, as noted in Supporting Paper 4, the industry is highly competitive and this has led to cost effectiveness in the provision of services. There are, however, some restrictions placed on road transport inhibiting greater efficiency gains. In particular, the restrictions on the use of larger trucks, such as B-doubles, constrains road transports' efficiency.

Responsiveness to market requirements and production and technology changes In recent years, rail authorities have entered into informal agreements with bulk handling agencies with a view to enhancing the flexibility of the combined bulk handling and transport systems. As mentioned in Section 5.2.5 and in Supporting Paper 2, these agreements have met with mixed success and have worked most effectively where there is provision for financial compensation for capital expenditure and improved operating practices.

Concerning flexibility within the various rail systems, there is at present limited scope for railways to divert wagons from one traffic to another in accordance with fluctuations in production, although the Commission is aware of some use

of sugar wagons in Queensland for transport of grain. To a significant extent, flexibility is limited by the different technology embodied in grain and other wagons. Under these circumstances it would appear that the transport sector could be made significantly more flexible by allowing for increased

use of road transport.

Flexibility between rail systems has been constrained by the differing gauges of the various State networks and a tendency to keep grain in the State in which it is produced. There

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is, however, significant use of road transport for haulage of grain across State borders for delivery to a receival point.

The Commission notes that preliminary discussions have taken place concerning the integration of part, or all, of

Westrail's operations with AN. The options under

consideration are the integration of AN and all Westrail operations, integration of AN and Westrail's non-metropolitan operations and integration of AN and Westfalls's intersystem freight and passenger operations.

With respect to road transport, some inquiry participants expressed the view that the industry is unstable as it has a high turnover of road transport operators. The Commission agrees that there is a high level of entry to and exit from the industry, but it is apparent that this feature has not

limited the industry's capacity to provide a reliable service which is responsive to market requirements as well as changes in the level of grain production and technology.

5.3.4 Port services and sea transport

Pricing and investment behaviour Port services are provided by a combination of public and private bodies. The private bodies provide towage and stevedoring services at each port; the port authorities provide a number of services relating mainly to development and maintenance of port infrastructure. Some port charges such as wharfage are levied on the marketing organisations; others such as stevedoring, light dues, towage and pilotage are levied on the ship owner and are reflected in the price obtained for Australian grain.

As outlined in Supporting Papers 5 and 6, port services charges are pooled either within States or on a national basis.

Port service charges borne by ship owners are reflected in sea transport costs and because these are pooled (either nationally in the case of wheat or on a State basis in the case of certain other grains), this effectively results in the pooling of these service charges.

Wharfage is the main port-related charge that is levied directly on marketing organisations rather than ship owners. In Queensland and Western Australia the rates differ between

ports; in New South Wales, Victoria and South Australia a common rate is levied for all ports. Even where there are different wharfage charges for ports (that is, in Queensland and Western Australia), pooling is practised by marketing boards such that growers are generally unaware of actual price differentials between ports.

Overall, it appears that prices charged to growers for port services are not based on actual costs. The responsibility for this pricing practice frequently does not, however, lie

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with the port authorities as the costs of many port services are either pooled by the Commonwealth and State governments or, on occasions, by grain marketing authorities.

In regard to shipping costs, the bulk of Australian grain is sold on an f.o.b. basis and national pooling of receipts results in shipping costs being reflected in the price obtained for grain. Exceptions to this occur: in the case of wheat with two-port loading, where the expected cost is

charged against the particular State; and in the case of grain exported from Western Australia, where proximity to some markets leads to reduced freight costs that are reflected back to growers in that State.

The pooling of port service and sea transport costs results in transfers of income from growers supplying grain to low- cost ports to those using high-cost ports. Similarly, significant transfers also result from pooling of two-port loading charges across all growers within a State, regardless

of whether or not they deliver to a shallow port.

From a resource-use efficiency viewpoint, the pooling of port service and sea tranport costs means that the use of

efficient low-cost ports will be discouraged. Consequently, efficient production, storage and handling and transport options are bypassed at a cost to the grain industry and to

the economy in general.

In regard to investment in Australian port services, it is apparent that decisions to develop specific ports have not always recognised the capacity of other intrastate or interstate ports to provide an efficient and cost-effective service. The pooling of port services and sea transport costs combined with, in some cases, strong regional pressures, has distorted the port investment decision making process and appears to have led to some overinvestment in port facilities. However, the Commission notes that in recent years there has been a significant trend towards autonomy of port authority operations which has resulted in port authorities operating on a more commercial basis.

Cost effectiveness and responsiveness to market requirements and production and technology changes While is is evident that Australian port authorities have responded to changes in market requirements, grain production

and technology, the Commission has reservations about the cost effectiveness of at least some port services. Since many port service costs are pooled on either a State or national basis, the incentive structure in operation is unlikely to result in provision of services at minimum cost. Even without pooling, competition in some services such as stevedoring is

largely absent because of the industrial structure. The Commission has been able to quantitatively assess the impact of a range of restrictive management and work practices that feature in the provision of port services. These results indicate that there is scope for achieving cost reductions in the provision of stevedoring and other services. Details of

63

the results are provided in Chapter 8 and Supporting

Paper 10.

5.3.5 Integration of grain storage, handling, transport and port services

In addition to assessing the efficiency and cost

effectiveness of individual components of the grain distribution system, the Commission is required by its Letters Patent to consider the integration of the overall system. It is apparent from the system overview presented in Chapter 2 that there are many elements in the grain

distribution network to be integrated. These include on-farm storage of grain following harvest, transport from farm to receival point, storage and handling at country receival points and sub-terminals, rail or road transport to domestic

markets or ports, storage and out-loading into vessels and, finally, shipping to export markets.

In order to achieve a least-cost flow of grain throughout the system, decisions concerning any individual element cannot be taken in isolation from other parts of the system; that is, alternative paths for storage, handling and transport of grain must be evaluated in full recognition of the associated

costs and benefits. The extent to which existing

institutional arrangements for grain distribution facilitate integration is of fundamental importance. Current

participants in the system rely largely on an administered approach to integration, whereby formal and informal agreements operate at the points of contact between the various storage, handling and transport activities.

Under an administered approach, private individuals have little influence or choice in the determination of least-cost paths for grain flows. In fact, the current institutional arrangements rule out a number of potential grain paths that growers and others may wish to use. For example, road

transport is frequently not permitted and limitations are placed on the storage and handling services that can be

offered.

It could be argued that current participants in the grain distribution system have assessed the potential grain paths and reached the conclusion that existing paths offer the

least-cost integrated solution. This appears unlikely to be the case because the detailed information on storage,

handling and transport costs required by users and providers of services to make such an assessment has not generally been available.

Even if such information were available, an administered efficiency approach would require an organisation charged with the responsibility for achieving an overall least-cost flow of grain. The Commission's view is that no such

organisation exists and the current institutional

arrangements for grain storage, handling and transport do not provide for least-cost integrated grain paths. The question

64

of whether or not it would be desirable to modify the current approach, or alternatively to introduce other arrangements for grain distribution, is considered in Chapter 9.

65

6. QUANTITATIVE ASSESSMENT OF ALTERNATIVE GRAIN DISTRIBUTION SYSTEMS

6.1 Introduction

The grain distribution system in Australia is made up of many storage, handling and transport links which interact to perform the task of conveying grain from the farm paddock to domestic and overseas consumers. Included in the system are various types of storage (on farm and in the private and bulk handling systems), rail and road transport, port services, and shipping from a range of ports with different

characteristics.

The various components of the distribution system can be combined into a variety of storage, handling and transport options, some of which are more expensive, in terms of resource costs to the community, than others. The purpose of this chapter is to compare the cost of alternative

distribution paths with a view to identifying least-cost options. To this end, use is made of several quantitative models of the grain distribution system which are designed to give insight into the complex interactions between storage, handling and transport activities. Particular emphasis is given to evaluating the costs of the current and alternative systems for grain distribution. The analysis presented in this chapter draws upon the description of models and results reported in Supporting Paper 8.

The remainder of the chapter is presented in four sections. In Section 6.2, the key policy options that might form the basis for alternative grain distribution systems are outlined. The Commission's approach to estimating the costs and benefits of alternative grain distribution systems is discussed in Section 6.3. This is followed, in Section 6.4,

with a description of the results obtained from application of three models which are used to estimate the costs of existing and alternative grain distribution systems. Attention is given to both Australia-wide and State responses to the various policy options. In addition, comment is provided on other estimates of cost savings put forward to the Commission. Finally, in Section 6.5 the distributional implications of changing from the current system to an alternative system for grain storage, handling and transport are considered.

6.2 Key policy options and associated grain distribution systems

As outlined in Chapter 5, the current system for storage, handling and transport of statutory grains and, to a lesser extent, non-statutory grains is highly regulated. While there are important State differences, from an overall viewpoint it is clear that storage and handling is restricted

largely to the bulk handling agencies, road transport operators are either excluded from or subject to

66

disincentives for participation in the land transport task, and the real costs of port services and sea transport are not transmitted to growers providing for little competition between ports. In general, the current institutional arrangements deny participants in the distribution system the opportunity to select from a full range of storage, handling and transport options and mask, through the pricing practices in operation, the resource costs of those paths that are currently used.

Given the current institutional arrangements, it is not surprising that the main policy proposals concerning changes to the distribution system have the aim of increasing competition in storage and handling and in land transport.

In particular, the two key policy changes put forward in submissions (see Chapter 3) are:

. the removal of sole receival rights for all grains from bulk handling agencies or, in the case of Queensland, the State Wheat Board;

. removal of restrictions on the road transport of grain.

Proposals that go beyond the land-based components of the grain distribution system were also raised. In particular, it was suggested that the varying cost of port services and sea transport from Australian ports be reflected back to market participants. It was argued that this approach to pricing of port services and sea transport should ensure an

efficient and cost-effective use of Australia's port resources.

On the basis of these policy proposals, the Commission has developed four alternative systems for grain distribution, the resource costs of which can be compared with the current system. These alternatives are as follows:

. System A - removal of sole receival rights for storage and handling but retention of current institutional arrangements for land transport, port services and sea transport;

. System B - removal of restrictions on road transport but retention of current institutional arrangements for storage and handling, port services and sea transport;

. System C - removal of sole receival rights for storage and handling and restrictions on road transport but retention of current institutional arrangements for port services and sea transport;

. System D - removal of sole receival rights for storage and handling and restrictions on road transport, and introduction of charges for port services and sea transport which reflect the actual cost of these activities to growers and other participants in the grain distribution system.

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By comparing the resource costs of the alternatives with the resource costs of the current distribution system, it is possible to quantify potential resource cost savings in storage, handling and transport of grain. The question of

whether or not any such savings could be achieved by

administrative rather than competitive means is discussed in Chapter 9.

Under System A, bulk handling agencies would no longer have sole receival rights at country silos and ports, and private storage and handling operators would be able to receive grains currently restricted to the bulk handlers. In addition, System A allows for on-farm storage of grain either on a short-term or long-term basis.

The significance of System A for the various States is likely to differ according to the institutional arrangements in place for land transport. In New South Wales, as there are no regulations restricting the use of six-axle articulated vehicles for grain transport, withdrawal of sole receival rights for bulk storage and handling is equivalent to System C. In South Australia, although transport is largely deregulated, road transport operators would, under System A, continue to be subject to the $2.50 per tonne surcharge that applies to grain moved by road from rail-served silos. In Western Australia, the impact of removal of sole receival rights will vary between those areas where rail currently has a monopoly on grain transport (except for haulage direct from farm by growers using their own vehicles) and other areas where road transport (including vehicles operated by contractors as well as growers) is permitted to operate. In Queensland and Victoria it could be expected that there will be little additional road transport following the

introduction of System A due to the restrictions in place in these two States (see Chapter 5).

Under System B, there would be no restrictions on the choice of transport mode for grain haulage. Growers and others would be able to choose between road and rail transport on the basis of each mode's resource costs, including, in the case of road transport, any road damage costs generated as a

result of use of arterial and secondary roads. The impact of this system would vary between States. As mentioned, growers in some States are, to varying degrees, already able to choose between transport modes. The key feature of System B is that all restrictions that prevent road and rail transport from competing will be removed. This would include the $2.50 per tonne surcharge on grain transported by road from rail-served inland silos in South Australia.

System C combines the key features of Systems A and B . Under System C it could be expected that market participants would have more opportunities to minimise storage, handling and land transport costs (relative to Systems A and B ), although their decisions as to how grain is distributed will continue to be affected by the pooling of port service and sea

transport costs.

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System D would require the greatest amount of change to current institutional arrangements for storage, handling and transport. The bulk handling agencies would no longer have

sole receival rights, transport restrictions would be removed, and the pooling practices for provision of port services and sea transport would be replaced by a pricing regime that passed signals reflecting actual costs to market participants. Thus, System D would enable participants in

the grain distribution system to make decisions on the basis of competitive prices throughout the distribution system. They would also benefit from any reduction in the unit costs of storage, handling and transport that may occur in a more

competitive environment.

6.3 Modelling resource costs of alternative grain distribution systems

6.3.1 Background

Changes to the current institutional arrangements for grain storage, handling and transport, such as those outlined in Systems A, B, C and D, imply new incentive structures for those involved in the grain distribution task and it can be expected that revised incentives will alter market

behaviour. While it is likely that growers and others will endeavour to minimise costs in response to the market environment, changes envisaged in Systems A, B, C and D will expand the feasible range of storage, handling and transport

options and alter prices faced by users. This is likely to result in different preferred solutions to the distribution task, which will vary with individual circumstances such that, at any time, a number of storage, handling and

transport combinations are likely to be used. Moreover, the solutions may change over time in response to market developments such as the demand for new segregations, changes in the costs of storage, handling and transport, and fluctuations in the volume of, and variations in the mix of grain production.

In order to obtain a detailed understanding of the impact of introducing any of the systems considered in the previous section, the Commission adopted a quantitative modelling

approach. There are two major objectives of the Commission's modelling efforts. First, modelling the various storage, handling and transport activities enables a system-wide perspective of Systems A, B, C and D to be taken; that is,

the various interactions between individual system components can be considered. Furthermore, it is possible to examine the impact of changes in one part of the system (for example, storage and handling) on other parts (for example, land transport and port services). Second, modelling the distribution system facilitates quantitative estimation of the benefits and costs of altering the current institutional

arrangements. In particular, the resource costs of current and alternative systems for storage, handling and transport can be compared with a view to estimating potential resource

69

cost savings or losses following adoption of Systems A, B, C or D .

It is important to appreciate that estimates of changes in resource costs generated from such studies can only be regarded as potential savings. The extent to which estimated resource cost savings, for example, would be realised in practice would depend upon the market behaviour of the principal participants in the grain distribution system. Thus, the approach adopted in the Commission's research has been to estimate potential resource cost savings and then to examine the likely market behaviour of storage, handling and transport agencies in a deregulated setting. This latter issue is addressed in Chapter 7.

6.3.2 Relevant grain paths for modelling storage, handling and transport

Given the current storage, handling and transport

infrastructure in Australia, it is possible for grain to follow a number of paths as it is taken from the farm to the end user. The major paths for export grain are illustrated in Figure 6.1. Grain destined for the domestic market could theoretically be represented in the same way as export grain, although it is unlikely that grain would be loaded onto ships for domestic market distribution (except in the case of Tasmania, which imports grain from the mainland).

In total, there are 12 grain paths in Figure 6.1. In

practice, however, there are likely to be many more paths because of choices that can be made between silos,

sub-terminals or central receival points, and ports. Furthermore, there is the possibility of receival facilities being used as points of storage or alternatively as assembly centres where grain is received and immediately outturned for shipment to port or end-users.

In order to examine the resource costs of the range of paths available for grain distribution, the Commission made use of three models:

. a cost-budgeting model, developed for the Commission by Travers Morgan Pty Ltd - this model examines the flow of grain from particular case study districts in each State to seaboard destinations before subsequent shipment to export market destinations;

. a programming model of a northern New South Wales region developed for the Commission by a group of consultants led by Professor Brian Fisher of the University of Sydney - this model is again concerned with the flow of grain along alternative paths to the seaboard and ultimately export destinations but also includes the distribution of grain to the domestic market and includes interactions between farms supplying grain and other rural products and the storage, handling and transport system;

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Paddock

FIGURE 6.1 ALTERNATIVE PATHS FOR EXPORT GRAIN

Source: Royal Commission into Grain Storage, Handling and Transport.

a model of grain distribution in eastern Australia developed jointly by ABARE and the South Australian Department of Agriculture (see Blyth, Noble and Mayers (1987)) - this model covers approximately 70 per cent of Australian grain production and is concerned with

alternative systems for distributing grain from farm to domestic and export markets in New South Wales,

Victoria, Queensland and eastern South Australia.

Details of the models are provided in Supporting Paper 8.

While the models vary with respect to their geographical coverage and methodology used to identify least-cost options for grain distribution, they all have the same objective - to

quantify the incremental costs and benefits of moving from a storage, handling and transport system based on current institutional arrangements to alternative systems that reflect a less regulated environment.

The Commission considers that the three models provide a complementary and balanced perspective of the complex issues involved in the inquiry.

6.4 Results of alternative systems analyses

6.4.1 Background

In this section the results of the Commission's assessment of the resource costs of the current and alternative Systems A, B, C and D are presented. The results are presented first

from an overall national perspective and second on a State basis. At the national level the results obtained from application of the cost-budgeting and eastern Australia models are relevant, while at the State level, these models

and the northern New South Wales programming model are of interest.

6.4.2 Overall national results

At the national level, the cost-budgeting model has been used to analyse Systems A, B, C and D. The model has been applied to case study areas throughout Australia (see Figure 6.2). In total, some 2 million tonnes of a range of crops are grown in these areas. The case study areas are broadly

representative of grain production and storage, handling and transport options in the States concerned.

The eastern Australia model is used exclusively to examine the potential resource cost savings or losses that may arise under System D.

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BRISBANE Fisherman Islands

t o c u m w a l / SYD N EY

J

_ Port Kembla

'Ί.

Cost-budgeting model The estimated resource costs for the least-cost path under current institutional arrangements for grain distribution and each of the alternative Systems A, B, C and D are presented in Table 6.1. The estimates presented in Table 6.1 have been calculated as a weighted average of the 14 case studies conducted using the cost-budgeting model.

TABLE 6.1: ESTIMATED AVERAGE RESOURCE COSTS FOR FOURTEEN CASE STUDY AREAS USING COST-BUDGETING MODEL, 1986-87 ($ per tonne)

Item Current System System System System

system A B C D

Current resource costs

58.00 N/A N/A N/A N/A

Resource costs of least-cost path

N/A 53.00 52.00 50.00 49.00

Resource cost savings

N/A 5.00 6.00 8.00 9.00

N/A Not applicable.

Note: System A - withdrawal of sole receival rights, with all other institutional arrangements remaining unchanged; System B - removal of road transport restrictions, with all other institutional

arrangements remaining unchanged; System C - withdrawal of sole receival rights and removal of road transport restrictions, with all other institutional arrangements remaining unchanged; System D - withdrawal of sole receival rights, removal of transport restrictions, and disaggregation of costs for port services and sea transport.

Source: Royal Commission into Grain Storage, Handling and Transport.

The results reported in Table 6.1 suggest that resource cost savings ranging from $5 per tonne to $9 per tonne were available in 1986-87, depending on the system under consideration. There are several features of the results that are of particular interest.

First, the results for each of the systems are not additive. That is, the $9 per tonne estimated resource cost saving

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obtained for System D is less than the sum of the estimated resource cost savings for Systems A and B. This outcome is due to the interaction of the components within each system.

Second, the results reflect a long-term perspective in that the full annuitised value of capital in all storage and handling activities, including on-farm storage, has been included.

Third, allowance has been made in the results reported in Table 6.1 for reductions in the unit costs of storage, handling and transport that may be achieved when restrictions are removed. These efficiency gains are small relative to

the savings from the availability and economic feasibility of new distribution paths that come about as a result of introducing a competitive system. In total the savings which arise from these gains amount to $2 per tonne of the

estimated $9 per tonne resource cost saving obtained for System D. Of the $2 per tonne, some 60 per cent or $1.20 per tonne is accounted for by projected savings in rail costs. A further 25 per cent or $0.50 per tonne is accounted for by unit cost reductions in the storage and handling sector, while approximately 15 per cent or $0.30 per tonne is represented by efficiency gains to be achieved in the provision of port services. It should be noted that the estimated reductions in unit costs differ between States; these differences are discussed in Supporting Paper 8.

Further details on the nature of the unit cost reductions are provided in Supporting Papers 3 and 4.

The Commission recognises that it is not possible to precisely predict changes in unit costs of storage, handling and transport that may occur in a competitive environment and

that the estimates derived can therefore be regarded as only indicative of potential cost reductions. However, the estimates obtained reflect best estimates of likely short-term cost reductions derived from detailed research undertaken by the Commission. In the longer term, further productivity gains could be expected in response to capital stock and infrastructure adjustment that would occur in a competitive environment.

Withdrawal of sole receival rights (System A) With the withdrawal of sole receival rights (and all other institutional arrangements remaining unchanged), the principal distribution paths are (i) direct transport of grain from farm to sub-terminal or silo and subsequent movement to port by rail and (ii) direct transport of grain

from farm to port. The key factor underlying the choice of paths is that growers are able, where transport conditions permit, to take advantage of disaggregated storage and handling charges which are expected to prevail under this System.

Overall, the choice of more efficient paths and the

reductions in unit costs of storage and handling result in

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estimated weighted average resource cost savings across all case study areas of $5 per tonne under System A.

Removal of road transport restrictions (System B) When road transport restrictions are removed such that road and rail are permitted to compete on an equal basis, the most

frequently chosen path is delivery of grain from farm to sub-terminals or central receival points by road transport and subsequent transport to port by rail. The choice of this path provides growers with the opportunity to avoid the costs of branch lines. Furthermore, growers are able, under System B, to more generally obtain a freight rate for rail transport

equal to the efficient cost of this service due to the

competition for grain traffic that would Tnost likely emerge in a deregulated transport environment. This is in contrast to System A, where growers incur the current (1986-87) charge for rail transport except in those States (for example, New South Wales) where the withdrawal of sole receival rights would act as a catalyst to the use of

deregulated road transport of grain to efficient receival sites.

Overall, the choice of more efficient paths and the reduction in unit costs of rail transport result in estimated weighted average resource cost savings across all case study areas of

$6 per tonne under System B .

Withdrawal of sole receival rights and removal of transport restrictions (System C) With the withdrawal of sole receival rights and the removal of road transport restrictions, the most common path used in the case study areas is the delivery of grain from farm to sub-terminal by road and subsequent transport of grain to the seaboard using efficient rail transport. This outcome is similar to that obtained under System B .

The key factors leading growers away from using existing paths are the opportunity to avoid those branch lines that are expensive due to high maintenance costs and relatively

low tonnage, and the financial advantages of delivering to the most suitable site for bulk storage and handling without having to bear the overall pooled charge for use of the entire system. In addition, it is of interest to note that, while road transport plays a significant role in the delivery

of grain to sub-terminals or central receival points, the majority of case study areas have grain transferred to the port by rail. This suggests that the most significant losses of grain traffic by rail authorities would occur in branch

line situations and that rail would continue to be the dominant mode for transfer of grain from a main line position to the seaboard.

Overall, the estimated weighted average resource cost saving across all case study areas considered in the cost-budgeting analysis is $8 per tonne under System C.

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Withdrawal of sole receival rights, removal of road transport restrictions, and disaggregation of port service and sea transport costs (System D) The selection of distribution paths under System D is similar to that identified for System C. That is, the most

frequently used path is the transfer by road of grain from farm to sub-terminal or central receival point for subsequent delivery to port using rail transport. The principal factors underlying the choice of distribution paths under this system are essentially the same as those outlined for System C.

However, there are two important differences between Systems C and D so far as the choices available to growers and other market participants are concerned.

First, the costs of port services and sea transport faced by growers and others are disaggregated so that the real costs to the grain industry of loading and shipping from individual

ports are revealed. In practice, such disaggregation would mean that growers delivering to a particular port would face a charge for port services and sea transport that reflects costs of shipping grain to those markets for which the port

is most competitive. This charge, in turn, would reflect the location of the port, the vessel size that can be loaded at the port, and the loading rate that can be achieved.

Second, the cost of port services could be expected to be lower under System D compared to System C as ports compete for grain and lower their costs accordingly to enhance their

competitive position. The Commission's results obtained from its industrial relations research indicate that cost reductions of $0.10 to $0.50 per tonne may be achievable in the provision of port services (see Chapter 8 and Supporting Paper 10).

While the cost-budgeting model is not as strong as other models in terms of its capacity to analyse the extent of port switching that may occur under System D, it is of interest to note that there are case study areas where the seaboard

destination changes as a result of disaggregation of port service and sea transport costs and reductions in the cost of port services. For example, in the Narrogin (Western Australia) and Gladstone (South Australia) case studies, grain is delivered to ports that differ from those to which

it is delivered under System C. Port switching is examined further in the discussion of the eastern Australia model.

One final comment concerning the results obtained from application of the cost-budgeting model relates to the treatment of grain hygiene costs. The Commission has made allowance for additional grain hygiene costs that may be incurred in any of the systems where withdrawal of sole

receival rights occurs. For those paths where long-term on-farm storage is used an additional cost of $0.43 per tonne has been included to represent the cost of random inspections of grain upon receival, which may be regarded by marketers as being an appropriate strategy in a competitive environment.

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It is doubtful, however, whether such costs will be incurred by growers on a large scale as paths involving the use of long-term on-farm storage are not the first preference in any of Systems A, B, C or D and would not be chosen even if

random inspection costs are excluded from the model. The costs of random inspection and other grain hygiene options are discussed in detail in Supporting Paper 9.

Overall, the estimated weighted average resource cost saving across all case study areas considered in the cost-budgeting analysis is $9 per tonne under System D.

Eastern Australia model The results obtained from application of the eastern Australia model by ABARE and the South Australian Department of Agriculture have been reported recently in Blyth et al.

(1987). The Commission has also used the eastern Australia model to undertake some additional simulations. These simulations align more closely with the assumptions that have been used in the Commission's other modelling efforts.

In general terms, Blyth et al. compare the system costs of a base case, where it is assumed that Australian grain supply and demand are in equilibrium under the current institutional arrangements, and the costs of alternative distribution systems. The alternative of particular interest is that closest to the Commission's System D, where Blyth et al. accounted for disaggregation of the costs of storage and handling, port services and sea transport and also removed road transport restrictions. In addition, this simulation

allows for grain to be received at a range of ports in New South Wales, Victoria, Queensland and South Australia, including Port Kembla and Fisherman Islands - options that are also included in the Commission's cost-budgeting model.

Blyth et al. summarise the results of this simulation compared with the base run, as follows:

. increased road movements relative to rail (although not necessarily increased road movements from farms to port terminals);

. greater utilisation of sub-terminals;

. increased interstate rail movements of grain, but a reduction in total movements between the States (especially from New South Wales to Queensland and Victoria to South Australia) due to differences in

shipping costs from the ports;

. reorganisation of grain shipments from port terminals (especially in New South Wales, Victoria, and South Australia) in favour of the lower cost ports, (p. 54)

Blyth et al. describe the results obtained from application of the eastern Australia model as being representative of responses that may arise in the short term following removal

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of transport restrictions and disaggregation of the costs of storage and handling, port services and sea transport. The short-term nature of the model is reflected in the grain receival capacity constraints that are assumed for storage

and handling. When these constraints are relaxed, Blyth et al. found that there is '... a greater consolidation of grain receivals into fewer and larger storage facilities located on main lines' (p. 54), although no provision is made in the analysis for the capital cost of additional capacity to facilitate this consolidation.

Overall, Blyth et al. estimate that, for the alternative distribution system in which grain terminals at Port Kembla and Fisherman Islands are included, costs could be reduced by an estimated $6.89 per tonne as a result of disaggregating costs and removing transport restrictions.

In addition to the application of the eastern Australia model by Blyth et al ., the Commission has undertaken (with the assistance of ABARE) some further simulations with a view to obtaining results based on model assumptions similar to those

adopted by the Commission in its cost-budgeting and northern New South Wales programming models. In particular, the Commission has distinguished between unit costs in the base run and the alternative distribution system simulations, an

approach similar to that used for the cost-budgeting model.

The results obtained from the Commission's additional simulations are broadly similar to those reported by Blyth et al., although the overall level of estimated cost savings is $9.66 per tonne, some $2.77 per tonne higher than reported by Blyth et al. The higher level of cost savings is due

primarily to the reductions in the unit costs of storage, handling and transport that could be expected to arise in a competitive environment. The $2.77 per tonne benefit is slightly higher than the competitive benefit identified in

the cost-budgeting model. However, like the cost-budgeting model the size of the unit cost reduction due to the

introduction of competition in the distribution system is small relative to the benefits of using distribution paths based on competitive prices that reflect actual costs of storage, handling and transport.

There are two further differences between the results obtained by the Commission and those reported by Blyth et al. First, in contrast to Blyth et al., the Commission found only small changes in the total quantities of grain transported by road and rail, though there is some variation within and between States. The capacity of rail to maintain its market

share is due primarily to the efficiency gains that are assumed to be made in a competitive environment. Second, the Commission found that while overall interstate movements of

grain declined relative to the base run, a significant increase occurred for movements from New South Wales to Queensland.

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In both the results reported by Blyth et al. and those

obtained from the Commission's additional simulations of the eastern Australia model, port switching accounts for a significant share of the overall estimated cost savings. Of the $6.89 per tonne cost savings esimated by Blyth et al., approximately 26 per cent is directly attributable to lower shipping costs.

The extent of port switching that may occur in an alternative distribution system that is free of transport restrictions and where storage and handling, port service and sea

transport costs are disaggregated is illustrated in Table 6.2, which reports the results on tonnage of grain received at various eastern State ports in the Commission's

additional simulations of the eastern Australia model.

Table 6.2 indicates that very significant port switching occurs on an intrastate basis. In particular, Port Kembla expands its receivals, at the expense of Sydney and

Newcastle, to become the major grain exporting port in New South Wales. New South Wales ports also lose some grain to Queensland, although this loss is offset by reduced shipments of New South Wales grain through Victorian ports. In

Victoria, Geelong expands its shipments at the expense of Portland and overall shipments from Victorian ports increase due to the shipment of grain previously shipped through ports in South Australia.

Further inspection of Table 6.2 suggests that significant changes in grain shipments will occur at Queensland and South Australian ports. Of particular interest in Queensland is the increased tonnage likely to be received at Fisherman

Islands, largely at the expense of Pinkenba, but also due to reduced shipments at Gladstone and the attraction of some 100 000 additional tonnes of grain grown in New South Wales. In South Australia, Wallaroo increases its export of grain in the alternative setting, while Port Pirie records lower levels of exports. South Australia also exports some 200 000 tonnes less grain in total.

6.4.3 State results

The results reported in this section focus mainly on the application of the three models to System D. The results from each model are discussed in turn.

Cost-budgeting model While the potential for resource cost savings was identified in all case study areas and all States under System D, the size of the potential savings was found to differ on both interstate and intrastate bases.

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TABLE 6.2 TONNAGE OF GRAIN RECEIVED AT EASTERN STATE PORTS IN BASE CASE REFLECTING CURRENT INSTITUTIONAL ARRANGEMENTS AND ALTERNATIVE CASE WHERE RESTRICTIONS ARE REMOVED AND COSTS DISAGGREGATED

('000 wheat tonne equivalent)

State and port Base

Case

Alternative Case

New South Wales Newcastle 2 073 1 081

Sydney 310 86

Port Kembla 1 661 2 887

Total 4 044 4 045

Victoria Portland 578 135

Geelong 2 503 3 070

Total 3 081 3 205

Queensland Mackay 0 0

Gladstone 735 707

Pinkenba 2 034a 34 Fisherman Islands 2 133

Total 2 769 2 874

South Australia Port Adelaide . 734 726

Ardrossan/Port Giles0 275 275

Wallaroo 384 703

Port Pirie 608 68

Total 2 001 1 772

Total 11 896 11 896

a. Combined receivals for Pinkenba and Fisherman Islands in base case. b. Ardrossan and Port Giles combined as they are served by one production region in the eastern Australia model.

Note: Results were obtained from the Commission's

additional simulations of the eastern Australia model.

Source: Royal Commission into Grain Storage, Handling and Transport using eastern Australia model.

Table 6.3 indicates that the greatest scope for reductions in resource costs is in Queensland and New South Wales. The case study areas in these States exhibited average resource

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cost savings of approximately $11 per tonne and $10 per tonne respectively.

TABLE 6.3 RESOURCE COST SAVINGS UNDER SYSTEM D: STATE LEVEL, 1986-87 ($ per tonne)

State Savings

New South Wales 10

Victoria 7

Queensland 11

Western Australia 7

South Australia 6

Australia 9

Source: Royal Commission into Grain Storage, Handling and Transport.

In Victoria, Western Australia and South Australia, similar potential resource cost savings were identified, with case studies in the first two States displaying average resource cost savings of $7 per tonne and the case study areas in South Australia averaging resource cost savings of $6 per tonne.

New South Wales In New South Wales, the least-cost distribution path for all four case study areas (Moree, Tottenham, Tocumwal North and

Tocumwal South ) is the delivery by road of grain from the farm to a sub-terminal where it is stored prior to delivery by rail to a port terminal.

Overall, the estimated weighted average resource cost saving in the New South Wales case study areas for System D is $10 per tonne. These savings are due primarily to the use of sub-terminals rather than local silos and the reduced transport costs that can be achieved through use of road transport rather than branch lines. This latter factor has been identified by the SRA in its recent program of rail line rationalisation. Port switching is also significant in three

of the four New South Wales study areas.

Victoria As in New South Wales, the least-cost distribution path under System D in all four of the Victorian case studies (Ouyen West, Ouyen East, Ouyen South and Quambatook) is the delivery by road of grain from farm to a sub-terminal or central

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receival point, where it is stored prior to delivery by rail to a port terminal.

In recent years, the system for storage, handling and transport in Victoria has moved towards the use of central receival points located on main lines. On the basis of the results obtained from the Victorian case studies, this would

appear to be a sound strategy.

Overall, the estimated average cost saving for the Victorian case study areas is $7 per tonne. The case study results indicate that the removal of road transport regulations which, under current institutional arrangements, restrict growers to using their own trucks for hauling grain over a maximum distance of 60 kilometres, would provide significant benefits. In addition, a distribution system based on System D would provide clear incentives for an efficient pattern of

grain storage and handling.

Queensland The two case study areas examined in Queensland are Emerald and Miles. In the Emerald case study area, grain is

currently delivered to a country silo before being

transported by rail to Gladstone and Mackay. With the introduction of System D, grain is transported by road from farm to Mackay. The use of this distribution path is

estimated to result in resource cost savings of $6 per tonne.

In the Miles case study area, grain is taken, under current institutional arrangements, to a country silo before being transported by rail to Fisherman Islands. Under System D, however, the least-cost option is to transport grain direct

from the farm to Gladstone.

The main reason that Gladstone is chosen as the seaboard destination is its relatively low sea transport cost. The sea transport cost from Gladstone (and all other ports) is based on historical patterns of shipping and as Gladstone has shipped most of its grain to nearby Asian markets it has particularly low sea transport costs. In practice, however, the receival of larger tonnages of grain at Gladstone would most likely see the export of grain to a number of Middle East and other markets with a commensurately higher average cost of sea transport.

Further inspection of the Miles case study results indicates that the overall distribution cost would need only rise by approximately $2 per tonne before an alternative path was chosen from farm to the seaboard. In particular, the second

least expensive path is delivery of grain direct from the farm to a new sub-terminal and rail transport to Fisherman Islands. This latter path is a more likely outcome for the Miles case study area under System D and would result in resource cost savings of approximately $15 per tonne. This saving would accrue primarily from avoiding higher cost country silos and being able to make use of road transport

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for delivery of grain to a main line sub-terminal before it is railed by unit trains to Fisherman Islands.

Overall, the estimated weighted average resource cost saving for the Queensland case studies under System D is $11 per tonne, after allowance is made for grain going to Fisherman Islands rather than Gladstone from the Miles case study area.

Western Australia In Western Australia, both case study areas (Narrogin and Wongan Hills) are located in regions of the State where road transport of grain in contractors' vehicles is not currently permitted. In the Narrogin area, grain is currently

delivered to local silos before being transported by rail to Kwinana. In the Wongan Hills area 60 per cent of grain is delivered to a local silo and then railed to a transfer station before being railed to Kwinana. The remaining 40 per cent of grain is transported directly by rail from local silos to Kwinana.

Under System D, the preferred least-cost path in the Narrogin case study area is delivery of grain direct from the farm to Kwinana which provides for resource cost savings of

approximately $3 per tonne. Selection of this pathway enables storage and handling at country silos to be avoided, although additional costs for road receival facilities and

storage, which are incorporated in the model, are incurred at the seaboard. Of particular interest in the Narrogin case study results is the use of road transport under System D , an option that can be pursued under current institutional arrangements only by growers using their own vehicles.

The least-cost path for grain distribution in the Wongan Hills case study area is road transport from farm to a

sub-terminal at Avon, where grain is stored prior to being railed to Kwinana. This distribution path provides for resource cost savings of approximately $7 per tonne which are attributable mainly to growers avoiding the use of branch

lines and some reduced handling of grain at country silos.

Overall, the estimated weighted average resource cost saving in Western Australia is slightly less than $7.00 per tonne under System D. This reflects the significantly greater tonnage of grain included in the Wongan Hills case study compared to the Narrogin case study.

The two case studies in Western Australia are drawn from areas where grain transport is largely reserved to rail. While there are some areas of Western Australia where contract road operators are permitted to participate in the grain transport task, this is only relevant to approximately one quarter of Western Australian grain production. It follows, therefore, that while the Western Australian results may slightly overstate the estimated potential resource cost savings, the effect is likely to be minimal.

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South Australia In both South Australian case study areas (Gladstone North and Gladstone South) a little over half the grain produced

is currently delivered to local silos before being railed to the seaboard. For Gladstone North, the current seaboard destination for grain is Port Pirie, while grain from the Gladstone South case study area is currently railed to Wallaroo. The remaining grain from both case study areas is delivered by growers direct to the port terminal at Port Pirie.

Under System D, the least-cost distribution path for both case study areas is delivery of grain direct from the farm to the port terminal located at Wallaroo. This strategy is estimated to result in resource cost savings of $6.50 per tonne in the Gladstone North case study area and $6.00 per tonne in the Gladstone South case study area. Adoption of this strategy enables growers in both areas to avoid costs of storage and handling in the country, although, as in Western Australia, additional storage and, to a lesser extent, road receival costs which are incorporated in the model are

incurred at the seaboard. This saving, together with the reduced unit costs for storage and handling and port services that may be expected in a competitive environment, are the principal sources of resource cost savings for grain being

distributed from the two case study areas. In addition, growers in the Gladstone North case study area have access, under System D, to the lower port service and sea transport costs available at Wallaroo relative to Port Pirie.

Overall, the estimated weighted average resource cost saving for the South Australian case studies is approximately $6 per tonne.

Northern New South Wales Programming Model Like the cost-budgeting model, the northern New South Wales programming model has a base case that reflects current institutional arrangements and against which the costs and benefits of alternative distribution systems can be compared.

In the alternative institutional setting, grain is assumed to be stored, handled and transported at efficient resource costs, growers face prices for distribution services which reflect these efficient cost levels and there is competition between the ports to optimise their respective levels of exports. In general, the alternative institutional setting is similar to System D.

The results obtained from application of the northern New South Wales programming model feature the simultaneous use of a number of paths under the alternative institutional setting. Aspects of the storage, handling and transport pattern under the alternative institutional setting that are of particular significance include:

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. Some silos in the study region no longer receive grain due largely to their relatively high storage and handling costs.

. Receivals at the Moree sub-terminal direct from the farm increase markedly compared to the quantity received under current institutional arrangements.

. Longer term on-farm storage of grain is not widely used, although this may reflect, in part, the cost to growers, under current marketing arrangements, of foregoing payment for grain produced until it is received by the bulk handling agency.

. It is commercially feasible for some growers to

transport grain direct to Brisbane from the study region rather than deliver it to Goondiwindi for subsequent shipment by rail to port.

A further feature of the results obtained with the northern New South Wales programming model is that rail is used exclusively for transport of grain to Newcastle following its receival at a country silo or sub-terminal. However, the choice of Newcastle or Brisbane as the seaboard destination for grain is particularly sensitive to relative

transportation charges and storage and handling prices incurred en route to the two ports, as well as port service and sea transport costs of grain shipments from the two ports. In practice, the prices charged for the various distribution services will be critical, under alternative institutional arrangements, to the relative capacity of the two ports to attract grain.

At the farm level, it was found that the alternative

institutional setting would, on average, reduce growers costs by nearly $12 per tonne compared to current

institutional arrangements. Farm incomes in the region were also projected to increase by an average of approximately 8 per cent.

Eastern Australia model In Section 6.4.2, it is noted that Blyth et al. (1987) have estimated that cost savings of nearly $7 per tonne may be achievable through the disaggregation of storage and handling, port service and sea transport costs and the removal of transport restrictions. Further resource cost savings of almost $3 per tonne were identified in the

Commission's additional simulations of the eastern Australian model, which put the results of the model on a conceptual basis similar to that outlined for System D .

In conjunction with the additional simulations carried out by the Commission, cost savings for each of the four States included in the model were estimated. These estimates are outlined below.

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New South Wales In aggregate, the costs of the alternative system in New South Wales are estimated to be $8 per tonne less than the

base case. Of particular interest in the New South Wales results are the following factors:

. Deliveries direct from the farm to sub-terminals

increased by 600 kilotonnes.

. Deliveries from silos to sub-terminals by road transport increased to 218 kilotonnes.

. In aggregate, the tonnage hauled by rail increased by 9 per cent, while that hauled by road declined by 2 per cent.

. Rail hauled less grain from silos to port but this was compensated for by an increase in the number of tonnes hauled from sub-terminals to port.

. As with the results obtained in the cost-budgeting and northern New South Wales programming models, no grain was transported to port terminals in New South Wales by road transport.

. The flow of grain from New South Wales to Queensland increased by 69 per cent.

. Total grain shipments from New South Wales remained constant but exports from Port Kembla increased markedly, while shipments from Sydney and Newcastle fell significantly.

. There is some switching between regions which supply grain for export and the domestic market as growers take advantage of proximity to domestic demand centres.

Victoria In aggregate, the cost savings in Victoria were estimated to be almost $11 per tonne. Of particular interest in the Victorian results are the following factors:

. Deliveries direct from the farm to the three

sub-terminals specified in the model increased by 141 kilotonnes.

. Deliveries direct from the farm to port increased by 16 kilotonnes.

. Road transport increased its participation in the transport of grain from branch line silos to

sub-terminals and main line facilities.

. Overall, the quantity of grain transported by both road and rail in Victoria increased because less grain was transported out of the State to South Australia.

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The quantity of grain hauled by rail from sub-terminals to port increased markedly to 438 kilotonnes in the alternative institutional setting.

Transport of grain by rail from New South Wales to Victoria increased but this is more than offset by a reduction in road movements of grain in the same

direction.

There is a significant increase in the tonnage of grain delivered to Geelong, largely at the expense of

Portland.

Queensland In aggregate, it is estimated that cost savings of $15 per tonne could be achieved. The following are key features of the Queensland results:

. The quantity of grain transported by road direct from farm to port increases by 107 kilotonnes.

. There is no significant overall change in the quantity of grain hauled by road or rail transport.

. The quantity of grain delivered from farms in New South Wales to silos in Queensland increases significantly.

. There is a marked increase in the quantity of grain

shipped from Fisherman Islands, largely at the expense of Pinkenba.

South Australia In aggregate, it is estimated that the cost savings for grain in eastern South Australia would be $4 per tonne. The following are key features of the South Australian results:

. There is a significant increase of 376 kilotonnes in the quantity of grain delivered by road from silos to port.

. A slight decline occurs in the quantity of grain

transported direct from farm to port.

. The quantity of grain delivered from farm to the

sub-terminal, which is assumed to operate at Tailem Bend, increases slightly .

. The quantity of grain hauled by road transport increases by 19 per cent and there is a commensurate decrease in the quantity of grain hauled by rail. However, rail hauls grain over longer distances such that there is

little change in the number of tonne-kilometres between the base case and System D.

. There is significant switching of grain between the South Australian ports, with a marked increase in export

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shipments from Wallaroo and a decrease in shipments from Port Pirie.

6.4.4 Discussion of results

While the three models used differ with respect to their geographical coverage and methodology, the results have in common several features that are worthy of comment:

. There is a considerable increase in the quantity of grain received at sub-terminals and central receival points as growers move to take advantage of the

relatively lower cost of those facilities for country storage and handling.

. The increased use of sub-terminals and central receival points is also a result of the removal of road transport restrictions because it is often economic for growers to deliver grain to a main line facility rather than incur the expense of those branch lines with high unit costs

as a result of low volume and significant maintenance requirements.

. The removal of road transport restrictions also makes it economically feasible for some additional grain to be delivered direct from the farm to port.

. Although road transport assumes more importance in the country distribution task, rail usually maintains its share of the tonnage of grain moved to the seaboard from main line locations. Only in South Australia does rail

lose a significant volume of grain to road transport for the country to seaboard transport task, although this reduction in tonnage is largely offset by an increase in the average distance grain is hauled such that there is

little change in total tonne-kilometres. Furthermore, in the long term, adjustment of the rail network in that State may reduce the tonnage of grain lost to road transport.

. Longer-term on-farm storage of grain is not an option that is widely used in any State in the competitive environment, although it was sometimes the second least expensive option in the cost-budgeting model results (in combination with road transport to a sub-terminal or port).

. Although allowance was made for short-term reductions in the unit costs of storage, handling, transport and port services that may be achieved in a competitive environment, these gains were usually small compared to the resource cost savings that would potentially be achieved as a result of using different distribution paths.

. Port switching within, rather than between, States is common as growers take advantage of the differentials in

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port service and sea transport costs that exist between ports.

. There are some changes in interstate flows of grain in the competitive environment but they are not usually large. However, it is clear that the pricing practices of participants in the storage, handling and transport system are of fundamental importance to the quantity of grain that crosses State borders.

. In all States it is common for distribution paths used under current institutional arrangements to be avoided under competitive conditions. In particular, growers frequently make use of road rather than rail transport in the country, of sub-terminals or central receival points rather than local silos, and of different seaboard port terminals. The difference in resource costs of alternative pathways is often very small, suggesting that pricing practices in any alternative environment for storage, handling and transport will be important.

Based on the results reported in the previous section, the estimated State average savings range from $8 per tonne to $12 per tonne in New South Wales, $7 per tonne to $11 per tonne in Victoria, $11 per tonne to $15 per tonne in

Queensland, $4 per tonne to $6 per tonne in South Australia and are an estimated $7 per tonne in Western Australia. The range of results within any individual State reflects the different estimates obtained from application of the three models, although it is apparent that all three models have yielded similar estimates. Overall, it is clear that

significant savings are potentially available in all States and are of the order of $10 per tonne in New South Wales, $9 per tonne in Victoria, $13 per tonne in Queensland, $5 per tonne in South Australia and $7 per tonne in Western

Australia.

When the individual State savings are weighted by the level of grain production in each State, an estimated saving of $9 per tonne for Australia is obtained. That is, approximately $9 per tonne can potentially be achieved by moving from the current institutional arrangements for grain distribution to an alternative environment in which sole receival rights for storage and handling of grain are withdrawn, road transport restrictions are removed, and the costs of port services and sea transport are disaggregated such that growers and other market participants face the real costs of shipping grain

from individual seaboard locations.

The Commission emphasises that it would not be appropriate to interpret the results as suggesting that every grower in Australia can potentially reduce storage, handling and transport costs by $9 per tonne. Rather, the estimates are

average resource cost savings and it could be expected that in a competitive environment Australian grain growers would, on an industry basis, achieve lower distribution costs of $9 per tonne.

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Where possible, the Commission has addressed the impact of economies of scale in grain storage, handling and transport on the benefits and costs of a move to System D. This impact is referred to in Chapter 4 as a movement along the average cost curve and must be considered in conjunction with shifts of the average cost curve in response to a competitive environment.

For the storage and handling system, the eastern Australia and northern New South Wales programming models incorporate movements along the cost curves for country receival points and ports in response to revised patterns of grain

distribution. In the short term, given current cost

conditions and receivals of grain, facilities which lose grain would, if they remain open, have a higher unit cost for storage and handling while those which attract additional grain could be expected to have lower costs relative to the base case. Any cost increases due to a decrease in

throughput would, however, be partially or totally offset by unit cost reductions through revised operating practices that could be expected by bulk handling agencies operating

existing facilities in a competitive environment (that is, a downward shift of the cost curve).

It is not possible, however, to determine the number of new entrants into storage and handling that may occur under System D, nor the quantity of grain they may store and

handle. Nevertheless, it is noted that the existing storage and handling system has ample capacity. It is likely, therefore, that in the short term, a significant proportion

of any grain lost by a bulk handling agency would be to an alternate supplier operating existing country facilities, some of which may be relinquished by the bulk handling agency, or to another bulk handling agency operating in a

neighbouring State.

In the longer term, additional investment in storage and handling infrastructure may occur, at the same time as disinvestment in inefficient sites takes place. Furthermore, it is possible that because the size of the country network of any individual bulk handling agency may contract to the operation of its most competitive sites, unit costs may even

fall with a reduction in the quantity of grain received. Such cost reductions would also result in a downward shift of the cost curve and would be additional to those discussed

above.

Concerning grain transport, the Commission's analysis incorporated reductions in the cost of rail transport that may occur in a competitive environment. These reductions, together with additional economies achieved from branch line closures, would lead to downward shifts of the cost curve.

In regard to shifts along the cost curves for rail and road transport, it is apparent that while the 'composition of the transport task changes (that is, through road substituting for rail in some branch line situations), the overall tonnage

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and the number of tonne kilometres hauled by rail and road does not significantly change in System D relative to current institutional arrangements. Only in South Australia does it

appear likely that, at least in the short to medium term, the volume of grain carried by rail may decrease, though the distance grain is hauled in that State is higher for System D than under current arrangements. Overall, there is little change in the number of tonne kilometres hauled by rail.

While the models used have their limitations, the Commission believes that its estimates of resource cost savings are conservative with respect to likely long-term developments in a competitive environment. The reasons underlying this view include:

. In the Commission's cost-budgeting model growers are restricted to using one of the many specified grain paths. In practice, however, it is likely that multiple grain paths will be used simultaneously in a competitive environment as indicated in the results reported for the northern New South Wales programming and eastern Australia models. The use of multiple paths could be expected to reduce the demand for and investment costs of storage, handling and transport infrastructure on any single grain path.

. No allowance has been made for the dynamic changes to storage, handling and transport that may emerge in a competitive environment. The Western Australian Department of Transport has addressed this point in the

following terms:

The sunk investment in the capital of the existing system influences greatly the short term optimum but, ultimately, that capital will reguire replacement. This obviously will not occur at one point in time. If these are taken in the context of a regulated system, it is questionable whether the optimum long term result will emerge. Under competition, such investment decisions would be taken in light of the full range of competing alternatives. (Brindal & Dumas 1987, p. ix)

. No allowance is made for any extra grain that may be

produced in response to lower storage, handling and transport costs, nor the subsequent impact of this additional grain on distribution costs due to the presence of economies of scale.

. While the unit cost reductions incorporated in the models include the benefits of improved industrial relations within components of the storage, handling and transport system, no allowance has been made for the

system-wide impact of removing restrictive work and management practices. In particular, there are likely to be improvements in specific work and management practices which add to costs in one segment of the distribution system (for example, storage and handling)

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and reduce costs elsewhere in the system (for example, loading times of ships at port). Such system-wide net benefits are estimated to be approximately $0.75 per tonne and are discussed further in Chapter 8.

A number of submissions, including many from individual growers, provided estimates of cost savings which could result from changing the institutional environment for grain distribution. Most of these are concerned with individual segments of the storage, handling and transport network and do not take into account important system interactions.

In regard to other system-wide estimates of cost savings that may be achieved in a competitive environment, two studies are of particular interest. The first is the submission to the Commission by ACIL Australia Pty Ltd (ACIL). The second is the study prepared by Brindal and Dumas (1987) in a report to

the Western Australian Transport Strategy Committee.

ACIL submitted that overall cost savings of $15 per tonne can be achieved in the distribution system. These savings comprised $5 per tonne in bulk handling, $5 per tonne in land transport and $4 per tonne in ports and shipping and were

derived from a number of case studies conducted by ACIL.

In some respects it is not surprising that the savings estimated by ACIL exceed those estimated by the Commission. In particular, ACIL has estimated the savings that it believes could be achieved in a competitive environment by

considering alternative means of carrying out individual components of the storage, handling and transport task. The Commission, on the other hand, has approached the estimation

of resource cost savings from a system-wide perspective.

The main implication of adopting a system-wide perspective is that apparent savings in one area (say, storage and handling) may generate costs elsewhere (say, in the transport sector). For example, it may appear that in a particular area

transport of grain from farm to port is the least-cost solution, but unless allowance is made for the storage and receival requirements of many truckloads of grain at port and the queuing costs of this delivery choice then resource cost savings will be overestimated. Although the Commission finds estimates such as those submitted by ACIL useful, it believes that a system-wide approach to storage, handling and transport is the most appropriate means of considering alternative approaches to the distribution task.

In regard to the report to the Western Australian Grain Transport Strategy Committee (Brindal and Dumas 1987), a number of regulatory and deregulatory transport options were

examined with a view to finding the least-cost distribution path for grain in Western Australia. To this end the authors undertook budgeting exercises which examine the alternatives for clearing grain from selected branch lines in Western Australia. In addition, use was made of a computer

programming model developed by the Western Australian Department of Transport. This model is also concerned with

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determining least-cost paths for grain and has been applied to a region in the north-east of the Western Australian wheat belt.

In their budgeting analysis the authors focus on the

clearance of grain from the York-Bruce Rock,

Tambellup-Gnowangerup and Corrigin branch lines. However, only for the York-Bruce Rock and Tambellup-Gnowangerup lines is a full range of storage, handling and land transport

alternatives considered. Port service and sea transport costs are common to all options, in the case of each branch line evaluation, and do not therefore need to be considered in the analysis.

For the York-Bruce Rock line, Brindal and Dumas note that ' ... some savings appear to be possible from closing the line and operating road feeder services from existing receival bins to the standard gauge line' (p. 26). These savings are estimated to be $1.30 per tonne. Significantly greater savings are identified for the Tambellup-Gnowangerup branch line, where the least-cost option appears to be the closure of the rail line and the local silo and replacement with haulage from paddock direct to port. The estimated saving is $4.80 per tonne.

Concerning the application of the computer programming model, the study addressed options for distributing grain from a north-east grain belt region producing nearly 1 million tonnes of grain. Port service and sea transport costs were excluded as all grain is assumed to go to Kwinana and these costs are common to each option.

The options examined with the model included the current regulatory structure whereby grain transport beyond the initial receival point must be by rail (where rail links exist) and options that allow competition between road and rail transport. In addition, the authors used the model to estimate a 'minimum resource cost'.

The results of the analysis indicate that the current regulated environment is closer to the minimum resource cost than the alternative institutional settings where competition between road and rail is allowed, although the difference in resource costs between the current regulations and competition between road and rail (with road rates adjusted to reflect road damage costs) is only slightly greater than

1 per cent. Unfortunately, it is not possible to conclude from the analysis whether or not system-wide costs for the options that permit competition between road and rail are less than or greater than the system-wide costs of current regulations as storage and handling costs are pooled for both the 'regulated' and 'competitive' options.

One final issue concerning the Commission's estimated resource cost savings is the view put by some inquiry participants, in comments on Discussion Paper No. 5 - Preliminary Findings and Options - that savings reflect the results of modelling the distribution system in previous

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years and that these savings have since been realised. The Commission can make two points on its estimated resource cost savings in this regard.

First, any gains in efficiency in the distribution system in recent times have generally been confined to individual components of the storage, handling and transport system. That is, unit cost reductions may have been achieved in particular activities. Such gains represent a small percentage of the Commission's estimated resource cost

savings, which are dominated by system-wide efficiency gains. In effect, the Commission's modelling has estimated essentially short term efficiency gains resulting from a greater choice of grain paths and, to a lesser extent, some productivity gains through increased competition.

Second, to the extent that efficiency gains have been achieved in individual storage, handling and transport activities, it is not clear that such gains are necessarily

permanent in the current institutional environment. In the longer term, in a more competitive environment, there will be further efficiency gains through capital stock and

infrastructure adjustment and improved disinvestment decisions, and continual pressure for greater operating efficiency. This issue is addressed further in Chapter 9, in the Commission's discussion of administrative versus

competitive means of achieving potential resource cost savings.

6.5 Distributional impact of a competitive environment

The distributional impact of a competitive storage, handling and transport system is an issue that has been raised during the inquiry. In the event that a competitive environment for storage, handling and transport emerges, it could be expected that some growers would gain financially while others may

lose. There are two principal reasons for this.

First, the resource costs of storage, handling and transport differ depending on the choice of distribution path. As noted in Section 6.4, the various storage, handling, transport and port options have a range of cost

characteristics.

Second, the change in financial costs borne by growers will reflect the difference between the current price of storage, handling and transport services and the price paid for these

services under System D. This is in contrast to the change in costs that will result from a move to System D, which will reflect the difference between the resource costs of the current and alternative institutional arrangements.

While the Commission is of the view that a resource cost reduction of $9 per tonne is the primary factor that must be considered when contemplating administrative or regulatory changes to the distribution system, it is also interested in the distributional consequences of change. In particular,

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the implications for growers' financial returns of moving to a competitive environment, such as that outlined in System D, are of interest.

In its submission to the Commission, ACIL argued that it is possible for every grower to be better off under a

deregulated system. In adopting this position, ACIL appeared to have a longer term perspective: it referred to '... the dynamic gains which flow from a competitive market'. (ACIL submission, May 1987, p. 133)

The Commission's view is that the longer-term distributional consequences of a competitive environment may differ somewhat from those that occur in the short term. In particular, the Commission has noted in Supporting Paper 6 the pervasive cost pooling that occurs under current institutional

arrangements. It believes that such pooling is likely to result in some growers, at least in the short term, being worse off in a competitive environment. Nevertheless, it

should be noted that current pricing arrangements for storage, handling and transport have had their own

redistributive effects and that growers have usually been unaware of the relationship between the price and cost of services they use.

In order to examine the distributional consequences for growers of a move from current institutional arrangements to a competitive institutional setting based on System D, the Commission made use of the eastern Australia model developed by Blyth et al. (1987). The model includes grain supply regions in New South Wales, Victoria, Queensland and eastern South Australia, so it is particularly suitable for distributional analysis. The model does not include grain supply regions in Western Australia, but the Commission is of the view that the results obtained for eastern Australia would provide a useful guide to the Western Australian

situation. Full details of the analysis and its results are contained in Supporting Paper 8.

With the assistance of ABARE, the Commission disaggregated the estimated resource costs under System D for each of the eastern States. The form of the model used was that reported in Section 6.4.2, with Fisherman Islands and Port Kembla included as port terminals and storage, handling and transport cost assumptions similar to those adopted elsewhere in the Commission's modelling work. It was then assumed that prices for distribution services under System D would equal resource costs and these prices were deducted from the prices paid for storage, handling and transport under current institutional arrangements after deducting capital costs.

The distribution of savings for the 199 supply regions included in the model is illustrated in Figure 6.3.

Growers in two-thirds of the supply regions are estimated to obtain savings in the range $0 per tonne to $15 per tonne. Growers in 24 per cent of the supply regions are estimated to achieve savings in excess of $15 per tonne, while growers in

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9 per cent of supply regions experience losses of up to $6.85 per tonne. The majority of growers experiencing losses, however, are in the -$5 per tonne to $0 per tonne category

and most of these record losses of less than $1 per tonne.

In the case of the distribution of savings and losses at the State level, Table 6.4 indicates that all the supply regions experiencing financial losses are in Queensland and South Australia. The supply regions recording the largest gains, on the other hand, are located mainly in New South Wales and Victoria.

The pattern of savings at the State level arises, to a

significant extent, as a result of the differences between pooled and actual transport costs to domestic and overseas markets faced by growers under the current and alternative systems. Under current institutional arrangements, all port

service and sea transport costs, except for wharfage, are pooled nationally and growers in all States face a similar charge. In the competitive environment based on System D, on the other hand, growers face the cost of grain shipments made

from the port to which their grain is delivered and face no port service or sea transport cost if their grain is

delivered to the domestic market. Some growers in Queensland and in South Australia lose as a result of a move to a

competitive environment as their shipping costs are higher than is the case under current pricing arrangements. Some New South Wales and Victorian growers, on the other hand, face lower port service and sea transport costs in a

competitive environment compared to those paid under current institutional arrangements. Among other factors contributing to the distribution of savings described in Table 6.4 and Figure 6.3 are the following:

. higher prices paid for rail services in central

Queensland following the removal of subsidisation reflected in current pricing practices and the

introduction of a pricing regime which reflects efficient costs;

. gains accruing to southern Queensland growers using Fisherman Islands terminal rather than Pinkenba;

. gains accruing to growers in New South Wales and

Victoria who deliver to the domestic market and who are able therefore to avoid port service and sea transport costs altogether;

. losses in South Australia to growers who bear higher shipping costs, particularly those growers close to port who are unable to offset higher shipping costs with lower costs of inland storage, handling and transport.

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1 4 -

< - 5 5 to Ο 0 to 5 10 to 15 5 to 10

Savings ($)

FIGURE 6 .3 FREQUENCY DISTR IB U TIO N OF SAVINGS TO GROW ERS

Source: Royal Commission into Grain Storage, Handling and Transport.

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TABLE 6.4 FREQUENCY DISTRIBUTION OF SAVINGS IN EASTERN AUSTRALIAN STATE PRODUCTION REGIONS (Number of regions)

$10 to $15 $15 to $20 $0 to $5 $5 to $10 > $20 TOTAL

TOTAL

Source: Royal Commission into Grain Storage, Handling and Transport, using eastern Australia model.

Overall, as the eastern Australia model is concerned with grain distribution patterns in the short term, it could be expected that about 9 per cent of growers could be

financially worse off directly after the introduction of a competitive environment for storage, handling and transport. This percentage is likely to decline in the longer term, however, as investment and disinvestment in infrastructure occurs and further efficiency gains are achieved in the provision of services.

The results reported in this chapter and in Supporting Paper 8 are based on prices, in the alternative system, reflecting marginal resource costs. To the extent that a perfectly competitive environment does not emerge in an institutional environment based on System D, it can be expected that prices will diverge from costs and the

distribution of savings will change accordingly. In this case, the relationship between prices and costs will depend upon the underlying market structure that emerges in a distributional system based on System D, an issue that is examined in the following chapter.

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7. COMPETITION AND CONTESTABILITY

7.1 Introduction

The results presented in Chapter 6 suggest that it may be possible to achieve significant resource cost savings in the storage, handling and transport of grain. It is argued that these resource cost savings arise substantially from the

interaction of more flexible and efficient storage, handling and transport sectors.

Greater flexibility and efficiency can be pursued by administrative means or by introducing competition, or by a combination of these. The question of whether the resource cost savings identified in Chapter 6 are best pursued through a competitive approach or by administrative means is discussed in detail in Chapter 9. For the competitive route, the extent to which competition would exist in a less

regulated market is crucially important.

In this chapter the market structure for storage, handling and transport that might emerge in a more deregulated environment is examined. Of particular interest is the question of whether the market environment will exhibit

storage, handling and transport prices and a pattern of grain distribution such that service users can realise the available cost savings.

The remainder of this chapter is presented in four sections. In Section 7.2 particular attention is given to the concepts of economies of scale and scope, and natural monopoly and contestability. This is followed by an examination of competition and contestability in storage and handling

(Section 7.3) and transport markets (Section 7.4). In Section 7.5 the impact of grain marketing reform, including any changes that may emerge from the current Industries Assistance Commission inquiry into wheat industry assistance, on competition and contestability in the storage, handling

and transport sectors is considered. In Section 7.6 a brief overview of the chapter's findings is presented. Further discussion of the matters covered in this chapter is

contained in Supporting Paper 7.

7.2 Factors affecting competitive behaviour in grain storage, handling and transport

The Commission's quantitative estimates of potential resource cost savings discussed in Chapter 6 are based on the removal of existing storage, handling and transport regulations that restrict entry into these activities together with the disaggregation of port service and sea transport costs

(System D ). The estimated average (Australia-wide) resource cost saving of $9 per tonne is based on the assumption of a competitive environment. The nature of the market structure that emerges is therefore of central importance. One possibility is that there would be vigorous competition

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between storage and handling operators and between providers of transport services. If this were so, growers and other participants would face competitive prices for distribution services and the potential resource cost savings identified in Chapter 6 would be realised.

On the other hand, the absence of competitive behaviour in storage, handling and transport of grain would mean that a few operators would dominate and exert significant monopoly power. Under these circumstances it is unlikely that the potential resource cost savings would be realised.

Whether the outcome is one of these or some intermediate position is an issue that was canvassed in submissions and during the Commission's discussions with inquiry

participants. Overall, a wide range of views was put

forward, although few were based on comprehensive analysis. To a significant extent, such analysis has not been possible prior to the establishment of the Commission because of the unavailability of the relevant data.

The extent of competition likely to emerge will be determined by several factors. First, it is necessary to establish the extent to which conditions of natural monopoly apply in the

storage, handling or transport sectors. With a natural monopoly, the lowest average cost of providing a service can be achieved by a single supplier. The extent of natural monopoly will depend upon whether economies of scale or

economies of scope are present. Economies of scale occur when the average cost of a service declines as the level of output is increased; economies of scope occur when it is possible to provide a service in combination with other goods or services at a lower cost than by providing it alone. Should economies of scale or scope not be present, a natural monopoly is unlikely to emerge and, assuming that there are no other significant barriers to entry, conditions will be conducive to competition with pricing behaviour reflecting the identified resource cost savings in storage, handling and transport.

Second, the presence of economies of scale or scope, or both, and therefore the possibility of a natural monopoly, does not necessarily imply that, without regulation, excessive profits will be made. A natural monopoly need not be subject to actual competition in order to behave efficiently. The threat of competition may be sufficient to guarantee pricing behaviour that enables the majority of the resource cost savings of alternative systems for storage, handling and transport of grain to be realised. This would be the case if the markets for particular storage, handling and transport activities were contestable or, alternatively, if substitute services using different technology could be provided.

The degree of contestability of grain distribution markets will depend upon the extent to which certain conditions are met. These are discussed in Supporting Paper 7. In summary, they involve the following basic requirements:

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. that for a potential entrant into the storage, handling or transport activity, no restrictive legislation or other barrier to entry exists that is not already imposed on an incumbent operator;

. that any entrant into the storage, handling or transport activity be able to leave the market without incurring costs;

. that new entrants not be at any disadvantage compared to incumbent operators so far as all aspects of service provision and customer loyalty are concerned;

. that new entrants have the prospect of making a profit and will not be obliged to compete with the incumbent operators' prices that are below the marginal cost of providing the service and designed explicitly to force the new entrant from the market.

It follows that any assessment of the extent to which

potential resource cost savings from alternative systems will be realised must first establish whether a natural monopoly is likely to be present and then evaluate the extent to which the natural monopoly is contestable. As there is frequently more than one possible means for providing storage, handling

and transport services (for example, rail and road for transport of grain), consideration must also be given to the alternatives for undertaking distribution tasks.

7.3 Competition and contestability in grain storage and handling

7.3.1 Country storage and handling

Economies of scale and scope The results of the Commission's research into cost structures in storage and handling (see Supporting Paper 3) suggest that there are economies of scale in country storage and

handling. The nature of these economies is illustrated in Figure 7.1, which shows operating, construction and total costs for country storage and handling sites.

The economies of scale illustrated in Figure 7.1 arise from two sources: first, larger facilities have significantly lower construction costs per tonne; second, unit operating costs tend to decline as grain throughput increases.

Given the presence of economies of scale, it is clear that country storage and handling facilities display some features of a natural monopoly, as discussed in Section 7.2. A

moderating influence on the extent of monopoly power that can be exerted will be the cost of transporting grain from the point of harvest to the facility and alternative facilities. Transport costs increase directly with an increase in the size of the area being served.

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■ Η

Ο

Throughput (100 0001)

FIGURE 7.1 AVERAGE C O STS FOR C O U N TR Y STO RAG E AND HANDLING FACILITIES

Source: Royal Commission into Grain Storage, Handling and Transport

As growers take total storage, handling and transport costs into account when deciding upon the destination of grain deliveries, the volume of grain that can be captured by any individual operator of storage and handling facilities is

limited. Should an operator of a country facility attempt to price storage and handling services significantly above its costs, the total cost of storage, handling and transport to an alternative facility (either in the country or on the

seaboard) will become more attractive.

Economies of scope may arise in country storage and handling from operating a number of facilities or activities as part of a single concern. These benefits may arise as a result of the sharing of resources or from improved co-ordination and

information sharing. The use of a central workshop for repairs and maintenance, or the co-ordination between receival sites by an owner of country and port storage engaged in the assembly of homogeneous grain cargoes are some examples. However, beyond some point it is likely that diseconomies may occur due to, for example, the cost of co-ordinating large quantities of grain from a variety of dispersed storage and handling points.

Vertical integration of storage, handling, transport and marketing activities could also lead to economies of scope. To a significant extent, the current institutional environment excludes or discourages bulk handling agencies

from exploiting possible efficiencies through the vertical integration of country storage and handling with other services. It is likely, however, that such integration would occur in an environment where storage and handling agencies were able to offer services on the basis of commercial criteria. Some evidence for such an outcome has been obtained from the Commission's survey 1 of private grain handlers. In particular, it was found that storage and handling agents in New South Wales, Victoria and Queensland are frequently involved in a range of grain distribution and marketing services. The results of the survey are discussed in Supporting Paper 3.

Contestability Overall, there is evidence to suggest that country storage and handling services contain some elements of natural monopoly. In order to establish the extent of contestability

it is necessary to consider the four types of storage that could be used by a potential entrant into storage and handling. These are vertical, horizontal, and bunker storage in the case of bulk handling of grain, and on-farm storage.

Vertical silo storage of grain is a technology that tends not to comply with the conditions required for a contestable market. In particular, there are few, if any, alternative uses of vertical storage. Any entrant into the storage and handling sector may find it difficult, upon exit from the

industry, to obtain for the asset a salvage value equal to or even significantly less than its construction cost. In

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addition, vertical silos require the owner to incur

considerable capital costs.

In contrast to vertical storage, bunker storage has

characteristics that are more compatible with the

requirements of a contestable market. The construction cost of the bunker itself is comparatively small and a significant portion of the associated equipment (such as mobile receival grids, conveyor loading systems, augers for out-loading, and

the materials used in the bunker itself) could be relocated elsewhere. Of course, such mobility is not achieved without cost, although there does appear to be significant

opportunity for entrants to invest in and use bunker

technology without incurring major sunk costs.

The storage of grain in horizontal sheds can be regarded as lying between vertical and bunker storage so far as

contestability is concerned. As with vertical storage, any entrant using horizontal storage may have to incur sunk costs, although it may be less difficult to find alternative uses for horizontal than vertical storage. Horizontal sheds

located in country areas could be used to store a range of commodities or alternatively may be employed as machinery workshops or for other commercial purposes. The scope for diverting handling equipment used in association with horizontal sheds to other storage and handling sites or other uses is likely to vary with local circumstances, but it could be expected that some equipment such as front-end loaders could be employed elsewhere.

Aside from the potential entry of firms into the country storage and handling sector there is, as noted in Supporting Paper 3, a significant capacity of existing storage owned by the private sector. This storage would provide a basis for some competition with the bulk handling agencies and could be expanded in the event that monopoly profits appeared.

In addition to competition by potential entrants using horizontal or bunker storage and handling technologies, there are various types of sealed and unsealed storages that can be used on farm as a substitute for bulk storage and handling. Of course, there are considerable quantities of on-farm storage currently in existence. Providing growers have access to either sub-terminals or central receival points in the country and to port terminals, at prices reflecting the cost of service provision, there would be potential for expansion. Such expansion is unlikely to occur under current pricing practices, whereby growers generally pay a pooled charge for storage and handling regardless of the point of delivery into the bulk handling system.

In summary, it would appear that country storage and handling cannot be regarded as perfectly contestable. However, the use of alternative existing sites or horizontal, bunker and on-farm storage by potential entrants would limit the appropriation of excess profits by a storage and handling operator endeavouring to exploit a natural monopoly position. Given access on a commercial basis to

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sub-terminals, central receival points and port terminals, it appears that the country storage and handling market structure likely to arise in an environment where sole

receival rights are removed will exhibit sufficient contestability to ensure that a significant proportion of the benefits from alternative systems for grain distribution identified in Chapter 6 could be realised.

7.3.2 Port terminal and ship-loading facilities

Economies of scale The Commission has also analysed cost information provided by the bulk handling agencies concerning port terminal and ship-loading facilities. As with country storage and handling facilities, port terminal construction and operating costs, in the long run, decline with increasing capacity and

throughput, in the manner depicted in Figure 7.2. Once again, the prime reasons for declining costs are that larger facilities have significantly lower construction costs per

tonne of capacity and unit operating costs tend to decline as grain throughput increases.

Given the economies of scale identified in the Commission's research, it follows that for any particular region the provision of port terminal services constitutes a natural

monopoly. Again, the question arises of the extent to which this natural monopoly is contestable.

Contestability In order to provide port terminal and ship-loading services for bulk grains, major investments in receival, storage,

out-turn and wharf facilities are necessary. This is the case regardless of whether the operator chooses to invest in a throughput terminal with minimal storage capacity (for example, Fisherman Islands) or a site with more extensive storage capacity (such as Kwinana).

Should an incumbent port terminal operator charge prices that are significantly higher than costs, any potential entrant could well be faced with a significant proportion of its investment as irrecoverable upon exit. Given the existing grain marketing structure, with the majority of grain production under statutory arrangements, there is little

incentive for investment by private enterprise in new port terminals for grain.

Despite the difficulties in satisfying the contestability conditions, some interest has been shown -in recent times in investment in storage, handling and ship-loading operations designed to deal with a range of commodities. For example, there have been proposals to develop facilities to handle bulk ore, woodchips and grain in New South Wales.

Furthermore, it is of interest to note that the ship loaders owned and operated by the Department of Marine and Harbors in

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I I | I | | |

Tonnes

FIGURE 7.2 ILLUSTRATIVE LONG-RUN C O S T CURVE FOR PORT TER M IN AL C O N S TR U C TIO N AND OPERATING C O STS

Source: Royal Commission into Grain Storage, Handling and Transport.

South Australia are able to handle a number of bulk

commodities. Provided a suitable site is available, any entrant into a deregulated storage and handling sector in South Australia would be able to avoid some capital

expenditure by using a conveyor from storage to the

Department's ship loader, although considerable investment in storage and receival facilities may still be necessary. At other ports (for example Pinkenba in Brisbane), coal has been loaded at Maynegrain's port terminal and BGQ has considered the loading of woodchips and mineral sands at the same site.

In regard to other means of containing the monopoly power an incumbent port terminal operator may possess, competition between grain ports is of interest. Such competition would

arise particularly in overlapping grain catchment areas and would depend on the costs encountered over the entire range of grain paths from farm to port. Should a port terminal operator significantly raise prices above the costs of

service provision, growers and others may turn to another port. However, this opportunity may be limited for growers and country storage and handling agents located relatively

close to any particular port, or if alternative port terminal destinations are owned by the same operator. To some extent, competition between interstate ports occurs under existing institutional arrangements, although the extent of such

competition is limited by pooling of costs incurred at both country and seaboard facilities.

Although it appears likely that some competitive influences will bear on port terminal operators in a deregulated storage, handling and transport environment, it is evident that the market structure could not be regarded as

contestable. The possession of monopoly power by a port terminal operator is of significance for two reasons. First, any such monopoly power could be used to raise prices to levels not justified by the underlying cost structure.

Second, and perhaps more important, monopoly power held by a port terminal operator in conjunction with ownership of country storage and handling facilities could create problems

in relation to access to the terminal.

If a port terminal operator were to discriminate against particular sources of grain or modes of delivery, the potential resource cost savings from alternative grain paths for grain distribution identified in Chapter 6 would be jeopardised. This is not to suggest that some price

differentiation between types of grain and modes of grain delivery is not justified at the seaboard. Indeed, it is likely that the various grains will impose different costs on the storage and handling operation due to their respective characteristics (for example, volumetric properties) and varying quantities. Moreover, it is likely that the cost of

receiving grain by road will differ from the cost of

receiving grain by rail. In such circumstances it would be appropriate, from the standpoint of economic efficiency, to charge storage and handling prices that reflect any

differences in the costs of receival, storage and out-turn of the various grains. However, price discrimination involving

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different charges for similar services, grains and quantities will not generally be in the community's interest.

To overcome anti-competitive behaviour that may emerge in a deregulated storage, handling and transport environment, the port terminal operators could be made subject to the scrutiny of the Trade Practices Commission. A more detailed

discussion of options to deal with anti-competitive behaviour in storage and handling is contained in Chapter 9 and

Supporting Paper 3.

7.4 Competition and contestability in land transport

7.4.1 Background

The primary focus of this section is the transport of grain destined for export markets. However, the analysis has general relevance and is also applicable to the transport of grain to domestic markets.

There are two important phases of land transport of relevance to the Commission's inquiry: transport from farm to receival point in the bulk handling system, and transport from receival point to port. The first phase is undertaken either by growers using their own trucks or by road transport contractors; the second phase is carried out either by rail authorities or by operators using articulated road vehicles. This second phase may involve more than one journey by either road or rail because grain may be moved directly from

receival point to port or it may be moved from the initial receival point (for example, a silo) to a second receival point (for example, a sub-terminal) en route to port.

As with storage and handling, the central issue for rail and road transport, so far as realisation of the potential resource cost savings is concerned, is whether withdrawal of sole receival rights, removal of road transport restrictions and disaggregation of the costs of port services and sea transport will result in a competitive outcome. Once again, it is necessary, in the first instance, to establish whether natural monopoly conditions prevail in either or both of the two transport phases. Should natural monopoly conditions be present, the contestability of the market structure likely to emerge following removal of storage, handling and transport restrictions needs to be considered.

7.4.2 Transport from farm to receival point

Transport from farm to receival point generally occurs directly after harvest, although the increase in on-farm storage in recent years has seen some grain remain on the farm prior to delivery to the bulk handling system. The research results reported in Supporting Paper 4 suggest that the market for contract road transport is competitive and is undertaken by many operators. The Bureau of Transport

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Economics (1987, p. 11) has pointed out that the initial fixed investment in a prime mover and trailer is small relative to variable operating costs and capacity is quickly reached. Both these factors imply that economies of scale are of little importance for road transport and that the industry is contestable.

There are two further features of road transport indicating that the industry is competitive. First, any sunk costs of road construction are currently incurred by governments rather than by transport operators. Consequently, road transport operators are able to enter and leave the industry at relatively low cost. Should road transport operators be required to contribute to the costs of road construction in a deregulated transport environment, such contributions would presumably be related to annual use of roads and therefore would not change the competitive nature of road transport.

Second, the fact that many farmers undertake or could undertake their own transport of grain from the farm to receival point suggests that road transport contractors would be unable to appropriate excess profits.

One final feature of road transport is that it has

historically exhibited a high turnover rate. This has occurred in Australia and overseas and is sometimes cited as a cause for concern. Whilst individual haulage firms may display instability, experience shows that the industry is

itself stable, in that a service is continuously available, and is efficient in technical operation.

7.4.3 Transport from receival point to port

Under current institutional arrangements, the transport of grain from bulk handling receival point to port is dominated by rail. This frequently involves movement of grain along a branch line and subsequent transport (often using the same

train) along a main line.

A central feature of the Commission's research results reported in Chapter 6 is that, while rail is the least-cost transport mode for volumes of grain carried on main lines, there is significant scope to achieve resource cost savings through the use of road transport in some branch line

situations, particularly where transport of relatively small volumes of grain is involved. An issue of fundamental importance, therefore, is whether or not the market behaviour of rail and road transport agencies will generate this outcome in a deregulated storage, handling and transport environment.

As pointed out by the Bureau of Transport Economics (1987, p . 11), economies of scale have traditionally been considered to be present in rail operations. These economies stem not from the size of the rail network, but rather from economies of traffic density over a given network. As with storage and handling facilities (see Figures 7.1 and 7.2), increased use

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of a rail network will result in average costs falling until capacity is reached.

The economies evident in rail operations reflect the

advantages of intensive use of indivisible plant; that is, the permanent way. Moreover, it is often possible to achieve major increases in total carrying capacity through relatively minor additional investments in technology, such as passing

loops and rudimentary signalling.

Overall, it is clear that rail transport exhibits features of a natural monopoly. Should rail authorities charge prices in excess of the efficient cost of providing the service it is

unlikely that new rail services could be provided: State and federal agencies control entry under current industry arrangements. Even if the industry were open to new

entrants, the prospect of large capital investments becoming sunk costs would most probably inhibit effective competition.

Even though rail transport can be considered a

non-contestable natural monopoly, competition from a substitute transport mode, namely road, arises for two reasons. First, road transport can compete effectively for the lower volume freight tasks at present undertaken by rail, especially low volume branch line traffic. Second, the competition rail faces for the journey from receival point to

port includes road transport from farm to a receival point other than a country silo (that is, sub-terminal or port) or direct delivery from paddock to port by road. Both these factors enable road transport to be a potential substitute

for rail transport, even though rail transport, when

considered by itself, can be regarded as a non-contestable natural monopoly.

While road and rail transport could provide competition for one another in many areas, and thereby assist in the

realisation of the potential resource cost savings discussed in Chapter 6, the rail authorities have expressed concern that road competition for a grain transport task that

fluctuates according to variations in production could lead to substantial market instability. In particular, they suggested that road transport operators will enter the market and capture any excess profits when demand is relatively high, thereby hindering a rail system's capacity to adjust prices in response to variations in the size of the total transport task.

Under these circumstances it has been claimed that rail authorities may find it difficult to make a profit on

investment in the long run, and may be forced to disinvest and leave the total transport task to road, at a higher

overall cost to the community. The research results reported in Chapter 6 and in Supporting Paper 8 lend little support to this concern. Rail transport was shown to retain much of its existing traffic, particularly its main line movements, and to haul grain frequently over longer distances in unit

trains. These outcomes could be expected even after

allowance is made for fluctuations in grain production.

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Furthermore, the Commission's research suggests that in general the most significant grain losses by rail to road transport would occur in low volume branch line situations that are currently the high cost component of rail

operations. However, much of this grain would not be lost to rail as it was shown to frequently go to sub-terminals located on main rail lines. Withdrawal of rail services in relatively high cost areas may enable rail authorities to focus on those high volume branch line and main line

activities where services can be provided at low cost.

Overall, the Commission believes that in many areas

competition between road and rail will enable the potential resource cost savings to be substantially realised. There will, however, be areas where one of the two modes is

decisively inferior in terms of the price at which it could offer an economical service. Where rail is inferior, competitive pressures within the road haulage industry and

ease of entry will ensure that competitive behaviour prevails.

Where road is inferior, on the other hand, some users have expressed the fear that in certain situations rail may price above stand-alone costs. The Commission regards this fear as largely unfounded. It is not unreasonable for a competitive rail authority to price some of its services above avoidable costs so that fixed and joint costs can be recouped. In any case, rail is likely to be subject to competition from road transport in most, if not all, areas.

One final point concerning behaviour in the transport market concerns predatory pricing where advantage is taken of market power in one segment of the transport market to limit

competition elsewhere. The Commission notes that this issue was not a major point of concern during the inquiry and is of the view that such behaviour could be dealt with, as

discussed in Chapter 9 and Supporting Paper 4, through the provisions of the Trade Practices Act.

7.5 Marketing reform and its impact on competition and contestability in the storage, handling and transport sector

In this section the impact of changes to domestic and export grain marketing arrangements is considered. The principal issues of interest are, first, the responsibility given to statutory marketing boards in an environment where storage, handling and transport services are deregulated, and second, whether or not domestic and/or export marketing of grain

(wheat, in particular) is a necessary condition in order to obtain sufficient competition and contestability in the distribution system.

Previously it has been argued that the grain storage, handling and transport task is likely to be undertaken in a relatively efficient manner providing that certain obstacles (such as natural monopoly conditions at the seaboard) can be

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overcome. While it has not been necessary to discuss the competitiveness of sea transport (these prices are determined on world markets), it has been argued elsewhere (see

Chapter 6) that significant savings can also be made in this area through the disaggregation of port service and sea transport costs.

Given that competitive influences will or can enable relatively efficient storage, handling and transport of grain, it appears that, under current marketing arrangements, the responsibility for capturing available cost savings clearly rests with the statutory and non-statutory marketing agencies.

In general, marketing agencies will be able to pursue two alternative courses of action in regard to the storage, handling and transport sector. First, at one extreme it would be possible, in an environment where sole receival

rights are withdrawn and transport restrictions removed, for the marketing agencies to forgo any potential resource cost savings by choosing not to use the services of any agents other than those that they currently employ. Second, at the other extreme, marketers may be prepared to authorise, under commercial contract, any suitable provider of grain storage, handling and transport services. If this were the case, it is likely that there would be sufficient competitive pressure to realise potential resource cost savings under the current marketing arrangements.

While the Commission is of the view that potential resource cost savings can largely be realised under current marketing arrangements, it also recognises that marketing reform, such as that being considered in the current Industries Assistance

Commission inquiry into wheat industry assistance, may inject additional competitive pressure into the market environment for storage, handling and transport. The Commission has not considered the overall desirability or otherwise of changes to export or domestic marketing arrangements: it regards this subject as being beyond the scope of its inquiry. However, it is concerned with the impact of marketing reform on the efficiency of storage, handling and transport of grain. In this regard, the central point of interest is that the incremental competition obtained by marketing reform may not be significant providing that marketers choose the second course of action, as outlined. Nevertheless, it is worth noting the major sources of competitive pressure that reform of domestic and export marketing arrangements could bring to grain distribution. The discussion focusses primarily on wheat.

In its draft report the Industries Assistance Commission (1987) has proposed that the permit system for feed wheat be extended to cover wheat for any domestic use. If

implemented, this proposal would allow any grower or firm to trade wheat domestically providing that a permit is purchased from the AWB. Apart from the need to purchase a permit, the Commission understands that the Industries Assistance

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Commission regards this proposal as equivalent to

deregulation of the domestic market.

In an environment where the domestic market is deregulated, the BAE (1987, p . 40) has pointed out that growers would be provided with a range of marketing options. In particular, it would be possible for growers to sell directly to end users such as flour millers and stockfeed manufacturers as well as trade through a merchant or sell to the AWB. Similar options would be available to end users. Overall,

deregulation of the domestic market may see the emergence of a range of new storage, handling and transport options including the following:

. an increase in sales direct from grower to end user, particularly between those buyers and sellers who are either currently or will be in the future in close proximity to one another - this development is likely to result in new handling, storage and transport options outside the central bulk handling system;

. an increase in the use of on-farm storage as growers develop their own marketing strategies;

. expansion in the activities of those private storage and handling agents currently engaged in the distribution of non-statutory grains, including vertical integration of storage, handling, transport and marketing of grain;

. extension of the services provided by existing bulk handling agencies, whereby additional warehousing is undertaken for private traders on the domestic market as well as for millers and growers.

In relation to the export market the Industries Assistance Commission has proposed that the AWB sell wheat to private traders for export to any market, other than a small number of specified markets reserved for the AWB. Furthermore, it

(IAC, 1987, p. 107) raised the possibility of allowing traders to accumulate wheat for export direct from growers and/or local merchants, in which case there could be direct interaction between the private trade and operators in the storage, handling and transport sector.

In the event that private traders of wheat have flexibility to negotiate with storage, handling and transport operators of their own choice, it could be expected that additional competitive pressure would be brought to bear on the grain distribution system. The significance of such pressure would depend upon the quantity of wheat that private traders are permitted to export.

One further option put forward by ACIL was that the

compulsory acquisition powers of statutory marketing boards (for domestic and export grain) should be removed. Implications of such changes to the domestic market for storage, handling and transport have already been

considered. The major points of interest, so far as export

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market deregulation is concerned, relate to the likely expansion in the activities of international grain traders, the possibility of vertical integration of marketing with storage, handling and transport of grain, and the possible emergence of a futures market that would allow all traders

(including those engaged in grain distribution) to

accommodate any price risk confronted on the world and Australian wheat markets.

In regard to entry of international grain traders into export marketing, it is of interest to note that vertical

integration of marketing and storage, handling and transport of grain is an integral feature of other grain distribution systems such as those in North America. Such integration is

likely to occur primarily because the marketer needs to be assured of access to grain.

Given a greater number of grain traders with export market deregulation and vertical integration of marketing with storage, handling and transport services, it is likely that additional competitive pressure (over and above that offered by regulatory control of wheat exports and domestic market

deregulation) would be brought to bear. Each of the grain traders and their ancillary storage, handling and transport operations would put continuous effort into reducing margins to improve their competitive positions. However, the magnitude of this effect is difficult to ascertain. In any event, the Commission is of the view, as noted, that

significant competitive pressures can be brought to bear on the storage, handling and transport sector under the existing marketing arrangements.

In regard to the possible emergence of a futures market in an environment where export marketing is deregulated, it is of interest to note that firms involved in storage, handling and transport may be able to spread the risks of their operations across speculators elsewhere in the market. In particular, firms would be able to acquire grain and hedge against subsequent price movements. This opportunity may also reduce the need for firms entering the markets for distribution services to be vertically integrated.

7.6 Overview

The various components of the grain storage, handling and transport network differ significantly in their competitive characteristics. At one extreme is the road transport

industry, which can be regarded as highly competitive; at the other, port terminals exhibit many of the characteristics of a natural monopoly and may not be contestable.

The lack of contestability exhibited by port terminals is a potential problem and could lead to monopoly pricing of services and discrimination against users. This is likely to be of greatest significance if country and port storage and handling facilities are owned by the same operator, enabling the monopoly power at port terminals to be exerted elsewhere

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in the distribution system. There are several options that could be used to deal with such situations and these are considered in Chapter 9.

For country storage and handling there is likely to be sufficient potential competition to limit the extent of monopoly power. In particular, there is scope for

competition between different grain paths, as well as potential for entry by new operators and growers should charges by incumbent operators rise excessively above the efficient costs of service provision. In some circumstances where monopoly power could be exercised, anti-competitive

intervention by government may be appropriate. Such intervention is unlikely to be necessary in the grain transport sector, where competition between road operators

and/or rail authorities is likely to be strong, although, once again, the emergence of any problems in this regard could be handled by appropriate anti-competitive

intervention.

Providing that adequate safeguards against anti-competitive behaviour are included in the distribution system, and that marketers of grain actively pursue all commercial

opportunities to minimise storage, handling and transport costs, the Commission is of the view that withdrawal of sole receival rights, the removal of transport restrictions and the disaggregation of port service and sea transport costs will result in a sufficient degree of competitive pressure to

ensure the realisation of most of the potential resource cost savings. Of course, a market solution is not the only means available to pursue such benefits: the other principal approach would be to use an administered efficiency solution. These alternatives are examined in Chapter 9.

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8. INDUSTRIAL RELATIONS

8.1 Introduction

In this chapter a number of industrial relations issues and their impact on the efficiency of the grain distribution system are examined. In the view of many inquiry

participants, the industrial relations area is of

considerable importance; a number of participants suggested that improved industrial relations would have a major impact on overcoming existing deficiencies in the distribution system.

The area of industrial relations encompasses a range of interrelated issues that shape relations between workers and management at the workplace and between unions and employers more generally. The issues range from such basic matters as pay and employment conditions to complex and increasingly important issues concerning work organisation, skill enhancement and technological change. The Commission did not see its role as inquiring into industrial relations generally in the grain distribution system but, rather, to focus on those aspects that may have a major influence on the

operating efficiency of the system.

Information provided to the inquiry and consultation with the Australian Council of Trade Unions, individual unions, service providers and others make it clear that the key areas that warrant detailed examination are restrictive work and management practices and, to a lesser extent, industrial

disputes. Hence, these two areas form the focus of the Commission's attention in assessing the impact of industrial relations on the efficiency of the grain distribution system.

The current industrial relations environment is examined in Section 8.2 and is followed in Section 8.3 by an assessment of the impact of restrictive practices and disputes. Factors influencing the industrial relations environment are considered in Section 8.4 and, finally, a number of

approaches for improving the current environment are discussed in Section 8.5. Further information about industrial relations, particularly restrictive practices, is contained in Supporting Paper 10.

8.2 The industrial relations environment

It is often difficult to assess both objectively and simply the state of industrial relations in an industry. This is particularly so when, as is the case of the grain

distribution system, the industry encompasses a large number of disparate organisations. For instance, it involves a range of Commonwealth and State organisatons, road transport operators, stevedoring companies and other private sector organisations each of which has some role in grain storage, handling, transport and marketing. The workforce is highly diverse and is represented by a large number of unions whose

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coverage varies from State to State. Industrial relations jurisdiction is shared between Commonwealth and State industrial commissions.

As might be expected, perceptions about the state of

industrial relations vary considerably. For example, the Grains Council of Australia submitted that ' the Sydney Terminal [of the GHA] is an industrial failure of massive proportions' (GCA submission, 13 May 1987, p. 138). On the other hand, the Australian Workers' Union which, with the

Public Service Association of New South Wales, represents employees at the Sydney terminal, expressed the view that '... in general, industrial relations in the industry have been maintained at a reasonable and constructive level' (AWU Federal Office submission, April 1987, p. 1).

It is useful to begin with a summary of inquiry participants' perceptions about the industrial relations environment.

8.2.1 Participants' views

In Chapter 3 reference is made in general terms to

participants' views about the industrial relations environment; the following paragraphs provide a more detailed review. Opinions were expressed about all parts of the grain

distribution system.

In the case of storage and handling in the country, and road and rail transport, the view of both service providers and users was that in general industrial relations are good. For

example, the Rock-Urana Combined Silo Committees said that in regard to the GHA's country operations '... organisation, productivity and industrial relations ... is pleasing, making it hard to identify areas where significant gains could be made.' (Rock-Urana Combined Silo Committees submission,

February 1987, p. 1). Nevertheless, it was recognised that in some areas efficiency could be improved, particularly with regard to hours of operation at country receival facilities, and the number of hours able to be worked per shift under existing rail industry awards. In addition, the AWB noted

'... the existence of some disruptive work practices and over manning levels in rail transport.' (AWB submission, April .1987, p. 36).

With the principal exception of New South Wales, perceptions of industrial relations at port terminals were also generally favourable. Again, however, scope for efficiency

improvements was recognised, mainly in relation to the loading rate of vessels.

The industrial situation at New South Wales port terminals was strongly criticised by grower organisations, which cited restrictive practices, frequent stoppages and high levels of absenteeism as the main contributors to inefficiency. The

GHA acknowledged the scope for improvement at a Commission public hearing:

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The great difficulty historically . . . has been at the two seaboard terminals of Sydney and Newcastle. It is not inaccurate to say that the two terminals are

inefficient. There is overmanning and there is a measure of feather-bedding in both facilities. (GHA, Transcript, p. 51)

Problems at terminals, however, are not limited to New South Wales; the WACBH submitted that in recent years it ' . . . has had some industrial stoppages at most of its port terminals but the main area of concern ... from an industrial relations viewpoint has been the Kwinana Grain Terminal.' (WACBH

submission, April 1987, p. 177).

Stevedoring and port services received particular attention in a number of submissions. The main issues raised were manning levels and labour-ordering procedures relating to stevedoring and a number of inappropriate practices in relation to port services such as towage, mooring and watchmen. In commenting on this, the Queensland Government noted that the '... problem of inappropriate work practices

at the waterfront has long been a concern of the grain

industry. Whilst the problem has not been as serious in Queensland as in some other States, there is considerable scope for increased efficiency in grain handling and exporting through the adoption of more appropriate work practices.' (Queensland Government submission, February 1987, p. 103).

8.2.2 Restrictive practices

A key area of industrial relations is restrictive practices. These can be defined as arrangements, traditions and ways of doing things for reasons other than the safe and efficient performance of the tasks of an organisation. Restrictive practices limit productivity and efficiency and inhibit growth in output and real income. The definition extends significantly beyond active disagreement between management and the workforce over work organisation or workplace

industrial relations issues.

The Commission is not particularly concerned about whether a practice is labelled a work practice or a management

practice. In any event, the distinction may not always be clear in that operational practices attributed to labour are quite often within the prerogative of management - what is important is that significant impediments to operational efficiency be identified.

A large number of restrictive practices were brought to the Commission's notice both in submissions and during

discussions with inquiry participants. The Commission circulated to major service providers and unions a summary of the practices mentioned in order to test whether the perceptions could be taken as a valid and reliable guide to

the actual situation.

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The Commission received comments on the summary and discussed it with various organisations. It became apparent that it would be necessary to examine the impact of restrictive practices in an overall system context rather than on a piecemeal basis. Practices in one activity of the

distribution system, apart from affecting the efficiency of that activity, also affect other parts of the system.

Having identified the principal issues, the Commission engaged the Centre for Transport Policy Analysis at the University of Wollongong to undertake a detailed analysis. The Centre's task was, among other things, to identify the most significant restrictive practices in five case study

areas. The areas were based around a port terminal in each State - Brisbane in Queensland, Newcastle in New South Wales, Geelong in Victoria, Port Lincoln in South Australia and Albany in Western Australia - and reached inland to country receival facilities and land transport, and seawards to ship loading, port services and ships' times in port. Details of the analysis and the reasons for selection of the case study areas are provided in Supporting Paper 10. A draft of the Centre's report was circulated for comment to interested participants.

The analysis identifies restrictive practices in each case study area. The most common practices relate to the

employment of more labour than judged necessary (waterfront labour in all ports, at port terminals in Albany and Port Lincoln, and in the railways in Victoria) and interruptions to ship loading operations (Brisbane and Geelong). At the Newcastle terminal industrial disputes and absenteeism are

significant. A variety of less significant practices are also identified in individual case study areas, including arrangements for train crew accommodation, export inspection practices and the inspection of phosphine-treated grain.

An interesting finding of the analysis is the substantially lower incidence of restrictive practices at country receival facilities and in road transport as compared with rail transport, port terminals and on the waterfront. Another is the confirmation that practices in one part of the

distribution system can have a significant impact on the efficiency of other parts and therefore on the system as a whole. This matter is addressed in Section 8.3.

It is important not to interpret too literally the results of the analysis. For example, it should not be assumed that if all restrictive practices identified by the Commission were successfully eliminated there would be no scope for further efficiency improvements. It is likely that other practices exist that were not identified and in any event, in a dynamic environment, different and better ways of doing things will probably present themselves continually. Further, the fact that a practice has not been identified in a particular case study area does not necessarily mean that the practice does not exist; it means only that attention was focussed on more

significant practices.

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8.2.3 Industrial disputes

The second key area of industrial relations identified was industrial disputes. Although official statistics on disputes are kept, they are not normally disaggregated on a commodity basis. The AWB, however, maintains national statistics that measure the loss of opportunity to load wheat

vessels because of unauthorised stoppages and strikes.

Although subject to a number of qualifications (see

Supporting Paper 10), the statistics show a substantial recent reduction in the loss of opportunity to load wheat vessels. In 1986-87 the loss of opportunity was 4.7 per cent

of all wheat exported; this compares with an average of 11.4 per cent for the preceding four years. All States recorded a decrease, with New South Wales continuing to have the highest figures.

The statistics distinguish between loss of opportunity because of stoppages by waterfront labour and because of stoppages by bulk handling agency employees. Waterfront labour is not differentiated into stevedoring, tugs or other port service activities. The statistics for Australia, which

are strongly influenced by stoppages in New South Wales, show that the majority of the losses in 1982-83 and 1986-87 were attributable to bulk handling agency employees while in the intervening years waterfront labour was identified as the major cause.

The AWB statistics do not capture 'up country' disputes that may occur at country silos, on the railways or in industries associated with grain distribution. Information submitted

during the Commission's inquiry suggests that such disputes are both infrequent and of minor impact.

Demarcation issues do not appear to be a major cause of disputes in the grain distribution system^ but when they do arise they are often protracted and difficult to resolve. This was the case in 1979 with the Waterside Workers

Federation achieving coverage of WACBH employees at the Kwinana grain terminal, in 1985 with the Australian Workers Union and Builders Labourers Federation disagreement about which union should build additional wheat silos at Newcastle,

and in 1984-85 with rail interruptions during the SKA program to reduce train crews from three to two.

8.3 The costs of restrictive practices and industrial disputes

The costs of adverse industrial relations in the grain distribution system are manifested in a number of ways: they can increase the cost of providing services; they can harm Australia's international reputation as a reliable supplier;

and they can lead to inappropriate investment decisions.

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Restrictive practices increase the cost of providing grain distribution services because operating procedures that are less than efficient are employed and costs are imposed on other parts of the system. Industrial disputes also add to the costs of the grain distribution system, both directly

from costs associated with unproductive time and indirectly through, for example, ship owners adding a premium to their freight rates to allow for the possibility of their ships being delayed by industrial action, including strikes.

The Centre for Transport Policy Analysis estimates that, for the five case study areas, restrictive practices and industrial disputes add, on average, $1.50 per tonne to the cost of export grain. This does not include any premium included in shipping freight rates as a result of Australia's industrial environment. In discussions with members of the Baltic Exchange in London, the Commission was told that a

freight rate premium could amount to about $2 per tonne.

Of the $1.50 per tonne, about half is attributable to direct effects; that is, the additional costs to the organisation in which the practices or disputes occur. The balance of the costs arise as a result of indirect effects; that is, where restrictive practices in one area impose additional costs elsewhere in the grain distribution system.

The main practice that results in indirect costs involves interruptions to vessel loading, which slows down vessel turnaround and increases shipping costs. Interruptions arise through stoppages for lunch and rest breaks which are often amplified through the mismatch of working hours between labour at the terminal and on board vessels. In the case of the Geelong analysis, continuous shiploading throughout the two shift span normally worked at the terminal has the potential to raise the gross loading rate by 30 per cent.

Additional costs are also identified for rail and road transport in several States as a result of practices in other parts of the system. For example, in the Albany analysis the cost to WACBH of altering its grain receival hours at the port terminal was estimated to be substantially outweighed by savings from more efficient vehicle utilisation by the road haulier.

The estimated costs should be regarded as indicative only of the Australian position for a number of reasons. Among these are the fact that the case study areas are not necessarily representative of the Australian grain distribution system, the list of restrictive practices identified is not exhaustive, and a considerable element of judgment is involved in assessing what savings should be possible in moving from a 'restrictive' to an 'efficient' practice. Nevertheless, it seems clear that scope exists for

significant cost savings in an improved industrial relations environment.

The potential saving of $1.50 per tonne is to some extent additional to the potential resource cost savings identified

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in Chapter 6 under a deregulated grain distribution system. It is not fully additional because the productivity

improvements assumed for the storage and handling system would, at least in part, result from better industrial relations, while for rail transport the modelling used 'efficient' costs (that is, with restrictive practices removed). However, it appears realistic to assume that most, if not all, of the indirect effects of about 75 cents per tonne would be additional to the savings identified in Chapter 6. In addition, the overseas freight cost could be reduced if existing shipping rate premiums were lowered or eliminated as a result of a reduction in industrial disputes, and a consequent improvement in the overall reputation of Australia's ports.

Impacts which are less easily quantified are the potential harm to Australia's marketing effort and the possibility of inappropriate investment decisions. Actions that prevent or disrupt the loading of grain ships can damage the nation's reputation as a reliable supplier and contracts for grain sales can be jeopardised. Investment decisions can be influenced if management is reluctant or unwilling to invest in plant or equipment if industrial disputes are likely to prevent it operating to its full potential. On the other hand, management decisions to introduce new technology and automate work processes may be, at least in part, an attempt to become less dependent on an industrially active workforce.

8.4 Factors influencing the industrial relations environment

Before considering possible means of improving the current situation, it is useful to examine the reasons that have caused an undesirable situation. Restrictive practices in grain distribution appear to have developed over a long period. No doubt many have their origins in better economic times, when deals were struck and concessions granted with little thought for the future. Other practices, although they may have been introduced for valid reasons, have become outmoded and are no longer appropriate. Such sentiments in relation to the New South Wales grain terminals were

expressed at a Commission public hearing:

[Restrictive practices] have been put in place over the last probably two decades; they have been put in place with the knowledge and the agreement of management and at times the endorsement of the Industrial Commission in this State. They do reflect the climate in which the industry was operating at those times. In other words, production was paramount and exporting grain was the number one priority of the industry in this State. For that objective ... practices ... were allowed to develop that in the current financial climate cannot be afforded by the industry. (GHA, Transcript, p.-51)

Another contributing factor is the complex industrial structure of the system as outlined in Section 8.2. Although demarcation disputes have not been a frequent problem in the

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past, the potential for this remains. For example,

negotiations are currently in progress to establish union coverage of employees at the new Port Kembla terminal. At present, New South Wales terminals share representation

between the Australian Workers Union and the Public Service Association of New South Wales. These two unions, as well as the Waterside Workers Federation (which undertakes vessel loading) and the Federated Engine Drivers and Firemen's

Association (which represents workers at the Port Kembla coal loader), are vying for coverage at Port Kembla.

The reasons cited may provide an initial explanation for the current unsatisfactory industrial relations environment but they also raise the question of why such a situation arose in the first place. The Grains Council of Australia put forward an explanation:

... a series of monopoly authorities , . . have

consistently chosen the path of least resistance in their dealings with unions and have decided time and time again that it is easier, simpler and even better to concede the claim and increase the costs to users rather

than face further industrial unrest and disruption. The monopoly-cost plus approach to the industry by both unions and management has adversely affected efficiency in the grain service sector. (GCA submission, May 1987,

p. 135)

In the Commission's view, the fundamental reason which has allowed the development of the present industrial climate in the grain distribution system is the institutional

environment, which has directed the structure of the industry towards a number of monopolies in which both management and unions have little continuing incentive to maximise efficiency.

8.5 Strategies for improvement

There is considerable scope for improvement in industrial relations in the grain distribution system. This is borne out not only by the views expressed during the inquiry by representatives of management, unions and users, but also by the Commission's research.

Restrictive practices and industrial disputes have a significant influence on the industrial relations

environment. Restrictive practices occur in all parts of the distribution system but particularly in rail transport, at port terminals and on the waterfront. On the other hand, industrial disputes are a less serious problem with the

specific exception of the New South Wales terminals where industrial disruptions have been a major cause for concern for a prolonged period. Although dispute statistics provide a useful guide to the state of industrial relations, they do not represent the complete situation. For example, it may be

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possible to maintain industrial harmony by means of

'sweetheart' agreements that incur costs through inefficient work practices and other concessions to the workforce.

It is also necessary to place the potential gains from improvements in industrial relations in the context of gains likely to be made as a result of other improvements in

efficiency. In relation to the potential resource cost savings identified under the deregulated grain distribution system (System D) described in Chapter 6, the combined direct and indirect savings of $1.50 per tonne estimated to derive from a better industrial climate would account for between 15 and 20 per cent of the potential savings resulting from other reasons.

The key question is how best to ensure that the potential benefits identified as being available from improved industrial relations can be achieved and sustained. In the Commission's view, there are essentially two choices; to pursue efficiencies through administrative means or through competition.

Periodic attempts (such as the review of the New South Wales grain handling system in the early 1980s) have been made to improve efficiency by administrative methods. Approaches of this kind generally produce some worthwhile results but productivity gains are unlikely to be enduring in the absence of sustained pressure for change. Without such pressure, efforts to improve efficiency invariably lapse and

organisations either return to familiar operating methods or work routines or once again fall behind in maximising efficiency as changes occur in their operating environment.

The present unsatisfactory state of industrial relations in many parts of the grain distribution system highlights to a large extent the result of organisations not operating within

a competitive environment.

It is, of course, possible for satisfactory industrial relations to exist in a non-competitive environment. It is equally clear, however, that providers of services that are not performed in a competitive environment will have less incentive to improve their productivity than those who are exposed to the rigours of market competition.

ACIL summed up the situation:

From the point of view of establishing policy, the key to eliminating the numerous sources of inefficiency which are generally grouped as "industrial practices" is not to outlaw them via a court action or to seek to

dispense them one-by-one. Rather it is to remove the underlying cause (non-contestability) of the practices and allow new entrants to offer competitive services based on more efficient practices. Individual firms - including the existing authorities - would then respond as they saw fit in order to become more competitive.

(ACIL submission, November 1987, p. 5)

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The Commission's view is that the underlying condition for improved industrial relations is the institutional environment. An environment that allows extensive

competition and thereby provides service providers with an incentive structure to pursue productivity improvements is an essential element to ensure continuing gains in efficiency.

Although the removal of barriers to competition should provide the incentive for service organisations to pursue efficiency improvements, the question arises of the extent to which this may be hampered in industries which have a highly organised workforce. In such situations, labour and unions

are generally able to exert considerable pressure on managements in regard to work organisation and employment conditions.

Where workforce pressures are largely limited to particular worksites, such as an individual port terminal, the

Commission's view is that under a competitive environment such influences would be minimised. This is because the use of alternative facilities, for example in a neighbouring State, would be available albeit at an additional, short-term cost.

The provision of rail and port services, however, are two parts of the grain distribution system which have

particularly well organised workforces at a national level. Hence, the potential for efficiency improvements in these two areas may well be less in a deregulated environment than might be expected.

In respect of rail, excessive influence by labour or unions is likely to be offset by the removal of regulations which prevent the use of road transport. Increased competition between road and rail should provide the necessary incentives for efficiency improvements both by management and labour in the railway system; failure to do so would be likely to result in an increasing volume of grain being transported by road to the detriment of the railways in general and railway employment in particular.

The position at ports is less straightforward. The

availability of a greater number of grain paths to port and the disaggregation of port services and sea transport costs should result in some competition between ports as port operators seek to optimise the volume of grain through their respective ports.

In respect of port services, however, this incentive for efficiency improvements may not generally exist. For example, in the case of stevedoring services, a small number of companies and unions control this activity at virtually

all Australian ports and could be expected to be largely indifferent as to the port from which grain is shipped. One limiting constraint in this regard is that the survival of the domestic industry using the port services often depends on it remaining internationally competitive. Where such an industry represents only a small part of the port's total

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throughput, however, this is unlikely to be a major

constraint.

The Commission notes that the Waterside Workers Federation currently has a policy of excluding grain vessels from industrial disputes and that it is involved in a joint venture to provide lower cost stevedoring services at the port of Mackay. While these are worthwhile initiatives, they do not derive from an enduring incentive structure and thus their future continuation is uncertain.

The Commission is aware that substantial improvements on the waterfront, particularly in regard to manning levels, have occurred over the last decade or so. In addition, more recently negotiations under the second-tier wage increases have led to further improvements in manning levels and restrictive practices. Such improvements, however, need to be kept in perspective. For example, the second-tier wage negotiations revolved around pay increases of up to four per cent in exchange for productivity improvements of a similar order. Quite clearly, scope exists for productivity improvements many times the four per cent figure.

A continuation of the current approach to efficiency improvements at ports will be a drawn out process. In

addition, the present climate for improvement, largely brought about through general community recognition of the need for Australian industry generally to become more efficient, may well diminish or evaporate once Australia's balance of payments position improves.

In the Commission's view, there is an urgent need to change the operating environment on the waterfront such that competition is encouraged between organisations whose respective workforces are dependent on the economic well-being of their employers. Only in such an environment

are real gains in efficiency improvements likely to be achieved on a continuing basis.

It would be unrealistic to expect that significant

improvements in the industrial environment at ports could be achieved for the grain industry in advance of port

improvements generally. In the Commission's view, the question of productivity improvements at port needs to be considered in a context broader than this inquiry. In this regard, the Inter-State Commission is currently conducting an inquiry on the Government's Waterfront Strategy and it would be appropriate for that inquiry to have regard to the Royal Commission's views on both the need for, and approach to,

achieving efficiency improvements on the waterfront.

One further activity where the removal of barriers to competition in the grain distribution system may not, of itself, result in a more competitive environment is in the export inspection of grain. The extent of the inspection task is a technical matter determined by, amongst others, the Commonwealth Government and marketers, while its cost, which is influenced by factors such as manning levels and

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practices, is largely determined by government. Given that many overseas purchasers require government certification of Australia's grain exports, the task is not one that easily lends itself to competition. However, continuing budgetary

constraints provide some internal incentives for efficiency from within government while the 50 per cent cost recovery from industry provides a measure of external control.

Overall, the Commission considers that the introduction of a competitive environment for the grain distribution system would provide appropriate incentives for both management and labour to pursue efficiency improvements. The main exception

relates to the provision of certain port services, an area which is being addressed by a current inquiry by the

Commonwealth Government.

The Commission has not given consideration to the precise arrangements that would be necessary to give effect to improvements in industrial relations at the organisational and workplace level within the grain distribution system. Rather, as noted, it believes that a revised institutional environment will inevitably lead to the adoption of more efficient practices and ultimately reduce the level of disputes.

Although many of the inefficient work and management practices are common to various parts of the grain

distribution system, they have grown out of the workplace and must primarily be dealt with at that level by the parties directly concerned. In dealing with such matters at the workplace level, some key principles must be followed and it will be necessary to handle the many complex issues in a

sensible and sensitive way. These and a number of related matters are discussed in Supporting Paper 10.

Quite clearly, the settling of industrial relations matters should be through the fostering of an attitude and a willingness on the part of all those involved - management, unions and the workforce - to strive for efficiency

improvements within an environment that provides appropriate incentives. Nevertheless, the Commission believes that, just as firms which engage in anti-competitive practices can be subject to legal sanctions, equally, avenues of redress against disruptive or inefficient practices by labour and unions ought to apply. At present, such avenues are the

industrial commissions or the Trade Practices Commission.

One specific matter which in the Commission's view ought to be settled as quickly as possible is the question of union representation at the new Port Kembla grain terminal. The uncertainty associated with prolonging a decision on this matter may well have a debilitating effect on the operation of the current New South Wales terminals and will most

certainly hinder progress in planning for the efficient operation of the Port Kembla terminal.

In the present climate of international economic pressure on the grain industry there is an increasing awareness of the

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implications of unsatisfactory industrial relations for the grain distribution system, and particularly for employment. This, together with broad community awareness of the need for

efficiency improvements in industry generally, has contributed to the current recognition among the

organisations and unions whose members are involved in grain handling of the need to improve industrial relations.

The current awareness of the need to improve efficiency and the generally co-operative climate that exists is fortunate in that it should enable improvements to be achieved more quickly than would otherwise be the case. It is important to recognise, however, that the impetus for these improvements has arisen from pressures external to the grain distribution system. Such pressures are often transient and, as history has shown, the momentum can easily falter if there is no continuing incentive to use resources efficiently. In the Commission's view, exposing the grain distribution system to increased competition would provide an appropriate institutional environment for improved industrial relations.

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9. POLICY OPTIONS FOR AN EFFICIENT AND COST-EFFECTIVE INTEGRATED DISTRIBUTION SYSTEM

9.1 Background

From the Commission's analyses it is clear that significant resource cost savings can potentially be achieved by moving from the current institutional arrangements for grain distribution to arrangements which allow greater choice and

flexibility.

The principal sources of the potential savings are indicated in the Commission's guantitative analyses described in Chapters 6 and 8. The analysis of alternative systems in

Chapter 6 reveals an average potential saving of around $9 per tonne, the majority of which would derive from new, lower-cost pathways for grain distribution and the remainder from operating efficiency improvements. The findings in Chapter 8 indicate a saving of around $1.50 per tonne from a reduction in certain restrictive practices and industrial disputes. As some of the savings from a better industrial environment are already captured in the $9 per tonne estimate, the combined outcome from an overall national

perspective is a potential saving in resource costs of around $10 per tonne. At a State level the potential savings vary and are $6 per tonne for South Australia, $7 per tonne for Western Australia, $10 per tonne for Victoria, $11 per tonne

for New South Wales and $13 per tonne for Queensland.

The savings are based largely on the existing physical network for grain distribution and no allowance has been made for dynamic structural efficiency improvements that may occur in future years. In particular, additional efficiency gains will be possible in the longer term as the capital stock and

infrastructure for storage, handling and transport further adjusts to more closely reflect the requirements of a competitive market environment.

The key question that arises following identification of potential savings is simply ' what is the best way to ensure that those savings are realised?'. For effective realisation of these savings the Commission has identified three policy

options:

. Option 1 - an administered efficiency approach to

provision of storage, handling, transport and port services;

. Option 2 - a deregulatory approach to provision of

storage, handling, transport and port,services;

. Option 3 - a mixed deregulatory/regulatory approach to provision of storage, handling, transport and port services.

All three options are considered in terms of their capacity to realise the resource cost savings described for a

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distribution system based on System D, as outlined in Chapter 6. It will be recalled that this system is based on the freedom to choose distribution paths as well as market participants facing prices that reflect the real costs of

storage, handling, transport and port services.

Many aspects of Options 1 and 2 were discussed in some detail in Chapters 5 and 7 respectively; in this chapter the key points of interest are summarised and additional relevant issues raised. This task is undertaken in Section 9.2. Option 3, which is a policy approach designed to accommodate the strengths and minimise the weaknesses of Options 1 and 2, is outlined initially in Section 9.3 and considered in

further detail in Sections 9.4 to 9.6. To this end, specific policy options for the storage and handling sector are presented in Section 9.4, for the transport sector in Section 9.5, and for port services and sea transport in

Section 9.6.

9.2 Administered efficiency and deregulatory approaches to provision of grain distribution services

9.2.1 Administered efficiency

With an administered efficiency approach to realising potential resource cost savings in the storage, handling and transport system, the existing or similar institutional arrangements would remain in operation. That is, legislation

and agreements between key participants would continue to be used as the principal policy instruments to achieve

efficiency, cost effectiveness and integration of the storage, handling and transport task.

An administered efficiency approach to achieving potential resource cost savings would, however, require one basic change to the distribution system. It would be necessary for

decision-making to become more centralised so that the storage, handling and transport arrangements could be evaluated from an overall perspective with a view to

identifying least-cost paths for grain flows.

Such a task could not be performed by existing storage, handling and transport agencies since they are concerned with individual components of the distribution system and would not be in an appropriate position to take decisions with regard to system-wide efficiency, cost effectiveness and integration. Furthermore, there is at present no single authority in Australia charged with the overall

responsibility for storage, handling and transport of grain. It follows that the current system for grain distribution in Australia is ill-equipped to ensure that efficient, cost-effective and integrated grain paths from an overall

viewpoint are selected.

One possible approach to centralised decision-making in an administered efficiency framework would be to give the

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overriding responsibility for grain storage, handling and transport to a single organisation. Some inquiry

participants suggested that this responsibility should lie with the statutory marketing boards, in particular the AWB. While recognising the importance of marketing boards'

requirements in grain storage, handling and transport and the role they could play in minimising distribution costs, the Commission has difficulty with the concept of marketing boards assuming responsibility for day-to-day operational decision-making. In particular, an administered efficiency system whereby marketers are given the power to direct the operations of all agencies in the distribution system would place bulk handling agencies and others in an untenable position with regard to decisions concerning the storage, handling and transport of the various statutory and

non-statutory grains. That is, there would be no effective mechanism for allocating scarce storage, handling and transport resources to competing demands.

An alternative administered approach would be to expand an existing agency or to create a new authority charged with the responsibility for storage, handling and transport of all grains. This concept had little support from inquiry participants and is not favoured by the Commission because even a specialised administrative body could not overcome the two fundamental weaknesses in the administered efficiency approach. First, for such an organisation to select

least-cost grain paths it would need to accumulate

substantial quantities of data and devise detailed strategies for various aspects of grain distribution in accordance with day-to-day changes in domestic and international market circumstances. Such a process would, in the Commission's view, prove a very expensive and probably nonfeasible option.

Second, given that the existing institutional arrangements would remain, and that these effectively restrict the choice of storage, handling and transport options available, the major source of savings cannot be realised by the

administered efficiency approach. An exception could be interstate movements that are substantially free of regulatory restrictions. Thus the scope for improved efficiency in the grain distribution system would be limited to administrative pressure on each of the providers of services to reduce costs, and possibly more effective co-ordination at service interfaces.

In summary, the Commission does not support an administered efficiency approach to grain distribution because it is unlikely to be able to realise potential resource cost savings and would prove a costly option to implement. Although there is merit in statutory marketing agencies having a charter to minimise the distribution costs of grain they acquire on behalf of growers, the Commission considers

it would not be efficient to require marketers to meet such a commitment through an administered efficiency approach to storage, handling and transport of grain.

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9.2.2 A deregulatory approach

At the opposite end of the regulatory spectrum, it would be possible to pursue potential resource cost savings by allowing the distribution of grain from farm to port to be determined in a deregulated environment. This would involve the withdrawal of sole receival rights currently held by bulk handling agencies and the removal of all restrictions and/or disincentives currently in operation for road transport of grain.

In such an environment there would be no requirement for bulk handling agencies or rail authorities to meet non-commercial objectives and there would be no regulations of any kind concerning the market behaviour of participants in the storage, handling and transport system. Marketing

arrangements would, however, remain as they currently are, except that statutory marketing boards would be required to alter their revenue pooling practices such that the costs of port services and sea transport associated with the various grain paths were reflected back to growers and other

participants in the distribution system.

The major benefit of the deregulatory approach is that the revised incentive structure would be expected to facilitate the integration of storage, handling and transport and thereby enhance the realisation of the potential resource cost savings identified. A deregulatory approach would also achieve efficiency gains in storage and handling and transport, to the extent that competition within these activities emerged. Nevertheless, it is important to note that even under this policy option there would continue to be a significant degree of administered efficiency in the grain distribution system because the AWB an'd other marketing boards would continue to be involved in the formulation of shipping programs and scheduling of cargo assembly.

With a deregulatory approach to grain distribution there would, however, be a number of areas of concern. Some stem from the relationship between a deregulated grain

distribution system and statutory marketing arrangements for grain; others stem from the likely market structures and failures that may emerge in a deregulated environment.

First, a deregulated storage, handling and transport system free of intervention in any form may lead to natural monopoly power in parts of the storage and handling system, as

discussed in Chapter 7. If such monopoly power were

exercised, it is probable that the opportunity for achieving potential resource cost savings would be reduced.

Second, there is the question of whether grain hygiene standards will be compromised if any individual or agency is free to store and handle grain. The Commission has not addressed the desirability or otherwise from a marketing perspective of maintaining particular grain hygiene requirements: that is beyond the scope of its inquiry.

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Rather, it has assumed that such standards will be set in accordance with the best judgment of grain marketers.

It follows that a key issue to be resolved in a deregulated storage, handling and transport environment is the ability of the system to maintain grain hygiene standards designated by marketing boards. In particular, bulk handling agencies, and

to a lesser extent marketers, have expressed concern that if grain can be stored, handled and transported by any

individual or firm, it will be difficult to maintain the reputation that Australia currently enjoys on world markets as being a supplier of clean grain.

Third, in a deregulated setting for grain distribution it is possible that in some areas rail authorities and road operators may engage in predatory pricing whereby advantage is taken of market power in one area to reduce or eliminate

competition elsewhere.

Fourth, a deregulated storage, handling and transport environment is unlikely to ensure that all costs and benefits arising from grain transport are internalised to the

individuals or agencies responsible for their generation, although the Commission is also of the view that such

problems are not handled adequately under existing

institutional arrangements. The main problem areas identified in this regard are road damage caused by road transport, road accidents, pollution and congestion. The most significant of these is road damage, which would occur on all roads used by the various classes of heavy vehicles.

Finally, the Commission considers that the mechanisms currently employed for funding roads would not be

satisfactory in a deregulated storage, handling and transport environment, although, again, the Commission has serious reservations about existing road funding arrangements within

the current environment for grain distribution.

9.3 A combined regulatory/deregulatory approach

It is apparent that neither the administered efficiency nor the deregulatory approach to achieving the benefits of alternative systems of grain distribution will provide for an

efficient and cost-effective integrated system. The Commission believes, however, that there is scope to combine these two approaches such that the desired outcome is

achieved. This combination is based on the deregulatory approach with elements of administered efficiency in the interaction between the marketing and storage, handling and transport systems. In addition, the combined approach includes a number of initiatives that governments can take or

hold in abeyance in the event that further measures are required in order to improve the competitive outcome.

The key aspects of the Commission's preferred policy approach are outlined below. In addition, particular areas of concern that could arise following implementation of the preferred

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approach are identified. These are addressed in the

following sections in conjunction with a more detailed discussion of the various policies.

The key aspects are:

. withdrawal of the sole receival rights that bulk

handling agencies currently hold for any grains;

. removal of any transport restrictions that prevent or restrict the movement of grain by road transport;

. the requirement that marketing boards minimise the costs of storage, handling, land transport, port services and sea transport and reflect in returns to each grower the actual charges incurred by that grower for these services.

9.3.1 Storage and handling

With sole receival rights for storage and handling of grain withdrawn and with a charter to minimise costs of storage, handling and transport, the marketing authorities would have

the flexibility and responsibility to employ those agencies able to provide the required services at least cost. For statutory grains, it would be necessary for marketing boards

to interact with a competitive storage and handling sector. There are several options available (such as licensing, competitive tendering, or combined licensing and tendering) that could be used to facilitate such interaction. The Commission suggests that marketers issue licences to storage and handling operators in the country and at the seaboard. Competitive tendering could be used in conjunction with a

licensing system, although this need not be an essential element. For their part, marketing boards would need to reflect in returns to each grower the actual charge incurred by that grower for storage and handling services.

Licensed receivers could include any operator with suitable facilities to undertake the storage and handling task in any State. Such operators would enter into commercial contracts with marketers and provide storage and handling on a 'fee for

service' basis. Of course, storage and handling agents licensed by marketing boards would also be free to engage in any other activities.

The Commission envisages that the commercial contract between marketers (and any other end user) and storage and handling agents would be freely negotiated and flexible, as in other spheres of commercial activity. For example, storage could be for a period that is mutually agreed between the parties; service payments to the storage and handling operator could be either on a progressive basis or at the end of the storage period. Also, the free negotiation of contracts should effectively eliminate the current practice whereby growers who use the 'grower-to-buyer' or 'permit' wheat marketing provisions are still charged a storage and handling 'fee'.

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Generally, the Commission foresees no significant problems in establishing suitable commercial relationships between marketing boards and storage and handling agents. In regard to the detailed arrangements required, a central issue is the restructuring of the bulk handling agencies such that they

are prepared for a commercial environment. Furthermore, consideration needs to be given to the control of any

anti-competitive behaviour in which storage and handling agents may engage as a result of market power conferred by a natural monopoly position. Attention also needs to be given to the procedures necessary to ensure satisfactory grain hygiene practices. These issues are addressed in

Section 9.4.

9.3.2 Land transport

The removal of all restrictions on the road transport of grain would require a range of responses by the States. For Victoria and Queensland it would be necessary to remove all regulations concerning who can transport grain and over what

distance; for Western Australia it would be necessary to relax government policy such that road transport of grain is permitted in areas currently reserved for rail; for South Australia it would be necessary to remove the $2.50 per tonne surcharge currently imposed by AN for the road transport of grain from rail-served silos. Only in New South Wales are there no restrictions on road transport of grain.

Rail authorities would need to be provided with a commercial charter following the removal of road transport

restrictions. Both road and rail would be able to take whatever initiatives are seen as appropriate by management and the market behaviour of both modes would be determined strictly by commercial criteria.

In a competitive land transport environment, growers, storage and handling agents, and any end users organising their own land transport would have freedom of choice between road and rail. In situations where grain is received by a licensed

country storage and handling agent on behalf of a marketing authority, it may be necessary for that agent to arrange transport to designated domestic outlets and port terminals. Once again, the responsibilities of the storage and handling agent could be stipulated in the commercial contract with the marketing authorities.

Under this approach growers would be fully aware of land transport costs from any particular country location to a domestic outlet or the seaboard because freight rates from these locations would be published in conjunction with

storage and handling charges. Country storage and handling agents could pay the road transport operator or rail authority for the movement of grain and be reimbursed at the published rate by the marketer upon receival of grain at the nominated destination. Growers would be aware that the

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deduction from their grain payment for land transport would be the published transport rate.

The detailed arrangements for land transport involve a range of issues and these are discussed in Section 9.5. The issues relate mainly to the nature of the 'level playing field' upon which road and rail would compete for the transport of

grain. In particular, the recovery of road damage and other costs imposed on the community by road transport is

considered, as are road funding and cost recovery issues and the commercial operations of rail transport.

9.3.3 Port services and sea transport

The disaggregation of port services and sea transport costs would require marketers of grain to pass back to growers and other market participants the actual costs incurred at Australian ports and in sea transport. For c.i.f. sales of grain, these costs are readily identified; for f.o.b. sales

it would be necessary for marketers to determine such costs via the differentials between ports in prices received for grain. These differentials are likely to change with developments in port-loading facilities, changes in the size of vessels that ports can receive, and changes in the

geographical location of Australia's export markets. Nevertheless, it should be possible for marketers to advise country storage and handling agents, and in turn growers, of

the deduction for port services and sea transport costs that will be made for grain destined for alternative seaboard locations from country receival points.

As with storage and handling, and land transport, there are some detailed arrangements to be put into operation for port services; these are discussed in Section 9.6 and are concerned primarily with corporate structure, market behaviour and decisions concerning investments by port authorities.

9.3.4 Scheduling and co-ordinating grain flows

With the institutional arrangements for storage, handling, transport and port services reformed to reflect the Commission's preferred distribution system, it is likely that the task of moving grain from the farm to the domestic market or international customer would be undertaken by more organisations than are currently involved. In this environment, the question arises of how grain flows will be scheduled and co-ordinated to meet market requirements.

The Commission believes that various distribution paths would be used to move grain from the farm to the domestic user or seaboard and that, in most instances, end users and marketers

are likely to be concerned with the timing and location of specified grain deliveries rather than the means by which the grain is stored, handled and transported en route to its

final destination. That is, the principal concern of grain

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marketers and end users would be the outputs of the

distribution system, which they can negotiate with storage, handling and transport agents.

Although the Commission would not wish to preclude export marketers of grain or domestic users from becoming involved in the scheduling and co-ordination of grain flows, it considers that it would often be more efficient for this task

to be undertaken by market participants that either

specialise or have comparative advantage in this task. For example, the despatch of grain from country receival points to the seaboard prior to shipping could be arranged by port terminal operators on behalf of the marketing authority. Alternatively, the organisation of grain transport from the

country to the seaboard could be undertaken by freight forwarding agents, on behalf of the country storage and handling agents, who would in turn be providing a service to a marketing authority. The Commission is confident that the

state of data processing and communications technology is such as to provide agencies responsible for co-ordination of grain flows with a fast, reliable and efficient source of information on the whereabouts and availability of required grains as well as the transport options that can be used at

any time.

The Commission does not see it as appropriate to specify how such scheduling and co-ordination will occur; the efficient solution will vary with market circumstances. Rather the Commission's preferred policy approach provides for a market environment that would leave contract parties in a position

to negotiate the most efficient and cost-effective solutions for the storage, handling and transport task.

9.3.5 Price signals

It is clear that the Commission's preferred system for storage, handling and transport would put storage and handling agents in a central position so far as the

transmission of price signals to growers is concerned. The Commission is of the view that the supply of information about storage and handling, land transport, port services and sea transport costs by the country storage and handling agent is central to a properly functioning distribution system. That is, efficiency, cost effectiveness and integration in the distribution system will be achieved only if growers and other market participants are aware of the system-wide costs of alternative paths for storage, handling and transport.

Thus the Commission expects that grain would flow from the farm to the domestic user or seaboard in response to the price signals provided via storage and handling agents. It is appropriate that the price signals and the least-cost pathways would change from season to season and even within a season in response to changes in storage, handling and transport markets as well as developments in grain production and export and domestic grain markets. This may occur, for example, when a marketer requires a specific variety of grain

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at a seaboard position commitment. in order to meet a shipping

Another point concerning the nature of the Commission's preferred distribution system is that longer term on-farm storage of grain may, on occasions, be an integral component of the grain distribution path chosen by some growers. The economic feasibility of this option will be influenced by a number of factors, including the payment arrangements for the various grains. For some grains, growers would not choose

longer term on-farm storage because payment is not received until grain is delivered to a licensed agent of the marketing authority. It follows that growers storing grain on farm would forgo interest on the value of their crop until

delivery to the marketing authority is completed.

The Commission considers that the payment system for grains should be neutral in terms of growers' choice of storage. Such neutrality would require that growers are not penalised as a result of their storage choice. The principle of

payment neutrality is reflected, to some extent, in the deferred delivery payment systems for wheat in New South Wales and Victoria. With deferred delivery, growers can get a rebate in recognition of the savings in interest costs on borrowings incurred by the AWB. However, the rebate is determined on the basis of the Australian Savings Bond rate,

which may not reflect the true cost of AWB borrowing.

A central argument for neutrality in the grain payment system is that storage and handling expenses are a cost incurred by the economy regardless of whether grain is stored on or off

the farm. The Commission does not see it as appropriate to suggest a specific deferred payment mechanism for grain; such a mechanism should not be developed in isolation from overall marketing arrangements. The Commission notes, however, that there may be an opportunity to consider such mechanisms in conjunction with the Industries Assistance Commission's report on wheat industry assistance.

9.3.6 Debt restructuring

The debt structure of some bulk handling authorities and rail authorities would need to be addressed in relation to the new competitive environment. Their initial competitive position would be affected by their existing debt situation and some debt restructuring may be necessary; this could be the case,

for example, for BGQ and the GHA. This problem should be addressed in the context of the corporate restructuring undertaken in the new environment. Any necessary debt restructuring or new borrowing should take into account the emergence of new financial instruments for funding long-term commercial projects.

The Commission considers this issue to be a State matter, as are other decisions allocating State expenditure between competing ends. The Commission therefore cannot support the requests by the Queensland Government, the only State

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government to do so, for financial assistance from the Commonwealth Government to cover the re-financing of BGQ loans and the upgrading of QR facilities.

9.4 Proposed changes in storage and handling

One implication of the Commission's preferred system is that the bulk handling agencies will be able (and required) to compete commercially on equal terms with private storage and

handling companies. The 'commercialisation' of the bulk handling agencies and the establishment of a ' level playing field1 for the grain storage and handling market involve two requirements: first, the existing bulk handling agencies must be restructured in such a way as to allow them the commercial

freedom and incentive to compete effectively; second, the advantages and disadvantages conferred on the bulk handling agencies by current regulations should be removed.

In this section the Commission describes its preferred model for the commercialisation of the bulk handling agencies, first considering the government-owned statutory authorities and then the co-operatives. The section concludes with a consideration of the contingency policies that may be necessary in the event of a restructured bulk handling agency

exploiting possible market power.

9.4.1 Government-owned statutory authorities

The Commission believes that the desired ' commercialisation' of the New South Wales, Victorian and Queensland bulk handling agencies can be achieved through any one of a number of alternative corporate structures, including private companies, grower co-operatives, or statutory corporations wholly or partially owned by the State governments. What is

important is not primarily ownership but the ability of the restructured corporations to compete on equal terms with private storage and handling companies. To achieve such a 'level playing field', the restructuring process must ensure

that the new corporate structure provides no inherent advantages or disadvantages to the bulk handling agencies relative to their private sector competitors.

The governments of New South Wales, Victoria and Queensland should, at the outset, consider whether they wish to retain ownership of their grain handling authorities. There is no legal doubt that the statutory authorities are owned by the

State governments and could be sold off if desired, but a case may be made on equity grounds that growers should share in the ownership of such corporations. This case is based partly on the fact that the capital invested in the grain

handling and storage system was paid for by growers through storage and handling charges. While this would not normally constitute a case for ownership (users of'privately provided goods and services also contribute to the supplying company's capital investment), in this case growers have had no choice about using the service and paying the additional cost to

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finance the bulk handling agencies. Moreover, unlike most other publicly provided utilities, the service is provided on a fee-for-service basis to a clearly defined sub-sector of the economy. It could be argued that governments have contributed through guaranteeing storage and handling authority loans but the risk actually borne by the government has been minimal because of the monopoly position of the bulk handling agencies.

If, in considering these issues, a government concluded that it was prepared to divest itself of all or part of the

ownership of the new bulk handling corporation to growers, this could be done by allocating all or part of the shares in the corporation to growers on the basis of their grain deliveries into the system over a specified period. If ownership was fully divested to the grain growers of a State, collectively they could consider the ultimate form of corporate structure they would prefer. If a public company structure was preferred, allocated shares would become tradeable on the open market; if a co-operative structure was favoured then some further restructuring of the corporation

to meet the legislative requirements for -a co-operative may be necessary. Both companies and co-operatives are

legitimate corporate structures with different advantages and disadvantages and owners should be free to pursue whichever form they believe will give them the best return in a

competitive market.

If retaining the grain handling authorities in government ownership is the chosen option then the requirements for a 'level playing field' need special consideration. As discussed in Chapter 5, government ownership, unless carefully structured, tends to involve the imposition of constraints and non-commercial objectives that limit the capacity of a government-owned agency to compete effectively with private competitors. On the other hand, government ownership may also involve some advantages, such as the absence of a requirement to pay dividends or company income tax, that other companies may not have. In both cases the requirements for a 'level playing field' are violated. Issues related to the commercialisation of bulk handling agencies that remain under State ownership are considered in the next section.

Restructuring the statutory authorities under State ownership If the statutory authorities are to be retained in government ownership, the Commission believes that commercialisation can best be achieved through a process of 'corporatisation', which involves restructuring to provide a commercial charter

and incentive system without the need for a change of

ownership. Potentially, a corporatised State-owned enterprise can embrace the full range of commercial and management strategies in the interests of efficiency and cost effectiveness.

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The corporatisation model described here, while only one of several possible alternatives, is considered by the Commission to include the minimum provisions necessary to ensure the effective commercialisation of a State-owned enterprise. It addresses the problems that can arise in a government enterprise which limit its capacity to compete

effectively. These are discussed in Chapter 5 and elsewhere (Spriggs et al. 1987) and can be summarised as follows:

. multiple and conflicting objectives, including

commercial and non-commercial objectives;

. bureaucratic controls on managers, with a heavy focus on inputs rather than output;

. lack of managerial autonomy;

. legislative protection of the activity from competition and unnecessary constraints on the activity's behaviour;

. lack of managerial accountability.

To deal with these fundamental problems and constraints it is necessary to ensure that responsibility for non-commercial functions is separated from commercial service and trading activities. Managers would be required to run the

organisation as a successful business enterprise, with freedom to make decisions about operational, investment, pricing and marketing aspects of services within agreed performance objectives. The advantages and disadvantages that State enterprises have, including unnecessary barriers

to competition, would be removed so that competition would be on equal terms. Under these circumstances, commercial criteria can provide a fair assessment of managerial performance.

The implementation of this approach would require the establishment of a suitable legal form encompassing a corporate structure and accountability procedures that would ensure that the boards of the newly structured 'corporations' have the freedom and incentive to manage their operations

commercially, without political control. As a general principle, the relationship between government and the restructured 'corporation' should be similar to that which

exists between a large private company and its owners. In both cases the owners are primarily interested in the financial success of the company and thus require sufficient information to monitor performance. The owners would appoint

directors and, given satisfactory company performance, would generally not interfere in the commercial management of the company.

The nature of the restructuring necessary to achieve this objective is outlined in the following paragraphs. In this discussion the term ' grains corporation' is used to distinguish the restructured corporate entity from the

existing statutory authorities. (More detail on the corporatisation process is provided in Supporting Paper 3.)

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To ensure that the grains corporations are neither advantaged nor disadvantaged relative to private competitors it would be necessary to establish an appropriate ownership structure and

dividend policies. One possible approach would be for the new grains corporations to be set up with nominated

government ministers holding the shares in the grains corporations on behalf of the various State governments. Their primary interest as shareholders would be to ensure that the financial performance of the corporations afforded the taxpayer an appropriate return on investment.

Each grains corporation would be managed by a board of directors appointed by the shareholders. The board would report to the relevant share-holding ministers in accordance with certain accountability provisions. Shareholders would have the power to appoint and dismiss directors and to determine the broad guidelines within which the corporation operates. Directors would be responsible for key decisions on the operations of the grains corporations, including, for example, strategic planning and the appointment and dismissal of the chief executive.

The main vehicles for monitoring and accountability would be the 'statement of corporate intent' and the annual report issued by the grains corporation each financial year. The statement of corporate intent would contain the key operating parameters for the enterprise in the period ahead and would represent a broad statement of the corporation's objectives, directions, targets, and performance measures. In

conjunction with the grains corporation's annual report, which would provide information on actual business

activities, it should permit assessment of the corporation's performance against comparable private sector norms.

The legal structure of the grains corporations should ensure that they are not required to provide non-commercial services. If a government sees a social need to provide services that would not normally be provided in the

competitive market, it should define the required service in a contract and call for tenders from all participants in the storage and handling market.

Dividend policy should also be an integral component of the overall financial objectives and monitoring system for the grains corporations. The shareholders and the directors of each corporation should work together to agree on a dividend policy that adequately reflects views about returns on new investments, profit forecasts, borrowing capacity, and private sector dividend policies.

In the event that the financial performance of a grains corporation failed to be satisfactory, a number of options would be available to the government as owner of the company:

in accordance with private sector practice, consultants could be called in to assess the need for changes in

management practices; directors could be dismissed and a new board appointed; ultimately, the company could be closed

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down, sold off or restructured further. Major restructuring could entail a contraction of activities to a commercially viable core or the separating of different parts of the company into management and profit centres.

9.4.2 The co-operative companies

The corporatisation guidelines, as described, relate primarily to the government-owned statutory authorities that operate in New South Wales, Victoria and Queensland; however, the Commission believes that the principle of

commercialisation is equally relevant in South Australia and Western Australia, where co-operative bulk handling agencies operate. In the Commission's view, if the co-operatives cannot provide an efficient and cost-effective service on

terms at least as favourable as those of their private competitors, they cannot claim to be acting in the economic interest of their members.

The co-operative companies in both South Australia and Western Australia are established as companies under their own legislation, but with a co-operative structure. The specific legislation in each case establishes the sole

receival rights of the company and incorporates some provisions related to rights and obligations, corporate structure and powers of the minister. A move to

commercialise the co-operative bulk handlers would render these provisions redundant and effectively remove the rationale for the legislation. Accordingly, the Commission is of the view that the repeal of the specific Acts and the reconstitution of the co-operative bulk handlers under general legislation as either true co-operatives or public

companies should be considered.

In this respect the Commission believes that the historical structure and operation of these co-operatives presents a strong case for formal grower ownership of any restructured organisation. Growers should have the right to set up the corporate structure that provides the best return in a competitive market. They may choose to have the

reconstituted co-operative bulk handler registered under the standard provisions of the co-operatives legislation in each State; any reorganisation that may be necessary in the light

of a more competitive market environment would be possible within the co-operative structure.

Although operating as a co-operative would allow the restructured companies to maintain some tax advantages, there are also some disadvantages from a commercial point of view. The increased commercial flexibility that a company structure would afford in terms of capital raising and business operations, for example, may be more attractive to growers.

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9.4.3 Policies to limit market power

The removal of sole receival rights and the commercial restructuring of the grain handling agencies is designed to establish a competitive market for storage and handling services. As discussed in Chapter 7, potential monopoly power would be limited by the prospect of potential entrants into storage and handling, particularly in the country system. Furthermore, monopoly power in the country would be constrained by transport costs incurred as individual operators attempted to capture more grain. At the seaboard, port terminals could possess significant monopoly power,

although, again, there are likely to be some influences that will diminish the extent of such power, as discussed in Chapters 7.

The Commission proposes various policies for limiting monopoly power if it arises in the storage and handling system. The need to introduce such policies and the choice of option should be assessed on a case-by-case basis. As a general principle, the Commission believes that such policies

should be kept in reserve and applied only if necessary in the light of the observed behaviour of the restructured market. Considerable time and expense could be wasted by

trying to anticipate market behaviour and implement policies to address some possibly adverse market outcomes when such outcomes may not eventuate. On the other hand, governments should act promptly to limit anti-competitive behaviour if it appears.

Before considering the available policy options, the point should be made that the attitude of governments will be important in fostering effective competition. Governments

should refrain from ad hoc funding of State-owned authorities and corporations as this will give them an unfair advantage and undermine their commercial incentive structure. The need for even-handedness also extends to other aspects of government involvement; for example, bias should not be shown in considering approval for private companies to set up operations, such as an alternative export loader, that may represent additional competition for government owned facilities.

The policy options available to limit market power can be separated into two categories, regulatory policies and market-based policies to improve competition.

Regulatory policies It is a fundamental principle of the commercialisation approach, as outlined, that the resulting corporations should neither enjoy advantages nor suffer disadvantages in relation to private sector commercial organisations. In accordance with this principle, the Commission is of the view that the grains corporations should be subject to the provisions of the same trade practices legislation as apply to private and public companies. This would ensure that the grains

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corporations encounter the same disciplines as private organisations in respect of monopoly or anti-competitive behaviour.

Bulk handling corporations, whether owned privately or by government, which seek to exploit dominant positions by using anti-competitive behaviour to suppress competition, would be liable to private actions by affected organisations or

enforcement action by the Trade Practices Commission. Growers, marketers and other grain storage and handling companies would all have an incentive to monitor the

commercial behaviour of other agencies and register any alleged anti-competitive behaviour with the Trade Practices Commission. Similarly, grains corporations, like private sector organisations, should be prohibited from engaging in certain classes of restrictive trade practices, whether as individuals or in collusion with other traders. Merger and takeover notification requirements should also apply.

Market-based policies As an adjunct to the regulatory safeguards described above, particularly if monopoly pricing appears to be a problem, the possibility of improving the competitive environment through government actions should be considered. Actions that would

introduce further elements of competition into the storage and handling market include the following:

. limiting the number of port terminals that can be owned or operated by any single operator;

. establishing statutory 'common user' facilities at port;

. leasing or contracting out the operation of country and port storage and handling facilities;

. separating the ownership of port and country storage and handling such that the incentive for discriminatory behaviour on the part of the port terminal operator is reduced.

A variation on this last policy which could well be

appropriate for the grains corporations is the concept of separate cost and profit centres within a single corporate structure. The centres would be largely independent and would each be required to act commercially. Such an approach was put forward by the GHA: it suggested that such a

structure could 'allow the introduction of competitive yardsticks and would separate terminal operations and management from country storage operations and management' (GHA submission, October 1987, p. 3). If terminal operations were separated from country storage and handling, any

anti-competitive behaviour by a grain corporation in the provision of access to the terminal for competing storage and handling companies would be more readily identifiable and it would be possible for affected parties to take action to prevent such behaviour.

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9.4.4 Grain hygiene

Throughout the inquiry concern was expressed about

maintaining grain hygiene standards if the sole receival rights currently held by bulk handling agencies are

withdrawn. In particular, it was suggested (by the bulk handling agencies, most notably) that private storage and handling agents and growers might use inadequate practices for control of insects and may have insufficient regard for pesticide residues. It was also argued that widespread use

of chemicals for control of insects may lead to an increase in pesticide and fumigant resistance levels.

In many respects this concern is not surprising given the hygiene standards that currently apply. For example, Australia has a 'nil tolerance' requirement for insects in exported grain, which is set under the Export Control Act

1982 (Cwlth). Similarly, there is concern in Australia and elsewhere about chemical residues in grain, which has resulted in the setting of maximum residue limits by the joint Food and Agriculture Organisation/World Health Organisation Codex Alimentarius Commission. In Australia, maximum residue limits have been set by the National Health

and Medical Research Council.

There are several observations that the Commission has made with respect to grain hygiene, both in a deregulated and in the current environment for storage, handling and transport.

First, the Commission conducted a survey of private storage and handling companies in New South Wales, Victoria and Queensland; the results of the survey pertaining to grain hygiene are discussed in Supporting Paper 9. Although private storage and handling is generally limited by institutional constraints to certain types of grain, and the grain handled is often under the direct control of marketers, the Commission observed that private handlers had a

responsible attitude towards grain hygiene. In particular, application rates of pesticides were understood and fumigation was generally carried out by registered

contractors.

Second, a number of inquiry participants suggested that the introduction of a decentralised system in Australia for storage, handling and transport would result in grain hygiene standards being lowered to levels such as those found in the United States. The Commission notes that, in comparison with Australia, insect densities are considerably higher on

average in grain exported from the United States. Even so, it would be incorrect to conclude that, of the 100 million tonnes of grain exported annually by the United States, none displays a high standard of grain hygiene. Rather, during its visit to the United States, the Commission obtained the impression that United States' marketers are making continual trade-offs between quality and price for domestic and export

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grain and are able to provide grain of high quality to

interested markets.

Furthermore, in the Commission's view it would be incorrect to conclude that any grain hygiene problems evident in the United States can be attributed directly to a decentralised grain distribution and marketing system. As the New South Wales Department of Agriculture pointed out in its

submission, the major cause of grain hygiene problems in the United States system may well be the regulations inherent in that system. In particular, the United States price support program for grain has resulted in considerable quantities of grain being stored on farm for lengthy periods and there is

little distinction in the price support system between grains of varying quality and hygiene characteristics. In addition, the maintenance of high standards of grain hygiene is

inhibited to some extent in the United States by legislation that restricts the use of chemicals.

Third, a regulated system for storage, handling and

transport, such as that currently in operation, has not always provided for a high standard of grain hygiene in Australia. Although the central system has been relatively successful in maintaining high standards of grain hygiene in recent years, some 80 per cent of wheat shipments from Australia to the United Kingdom were found to have insect

infestations prior to the introduction of Malathion in the early 1960s. Moreover, problems with pesticide resistance in insects during the mid-1970s resulted in increased levels of insect detection before alternative chemical protectants were introduced.

Fourth, the most serious concerns about grain hygiene in a competitive storage, handling and transport environment were expressed in relation to the use of longer-term on-farm storage of grain. The Commission recognises that some growers will find such an option economic in a competitive environment, although it is important to note that this

storage strategy was not a feature of the results reported in the Commission's analysis of alternative distribution systems in Chapter 6. In any event, it should be recognised that the technology and appropriate practices for control of insects on farms is becoming well known by growers and could become more widespread with increased extension efforts. The BAE has estimated that there is, under current institutional

arrangements, some 9.5 million tonnes of on-farm storage capacity which means that there is already considerable use by growers of chemical protectants and fumigants. The Commission does not regard the control of insects or the

administering of chemicals and fumigants as any more complex than many other farm production tasks and growers will, like other participants in the storage, handling and transport

system, respond to penalties and incentives put in place for grain hygiene.

The debate about the emergence of grain hygiene problems in a deregulated environment for storage, handling and transport has, in the Commission's view, overstated the likely

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problems. The Commission considers that any potential problems can be dealt with in the environment that would emerge from its preferred approach to the grain distribution system. One element of this is that marketers appoint

licensed receivers for storage and handling of grain. Under this arrangement, marketers would consider, among other things, the capacity of a prospective storage and handling agent to maintain satisfactory grain hygiene and would include in commercial contracts appropriate clauses providing for financial penalties in the event that grain did not meet designated hygiene standards. The Australian Barley Board has indicated that such an approach is satisfactory from its viewpoint. Furthermore, the AWB has supported this

approach. Further details on their views are in Supporting Paper 9 together with a detailed discussion of grain hygiene issues.

The Commission has also given consideration to other initiatives that could, if necessary, be adopted in its preferred approach for the storage, handling and transport of grain. These include increased research into and development of alternative grain insect control strategies and a number of other measures such as extension of information concerning grain hygiene methods to growers and others. Further initiatives include a national co-ordination body whose role would be to monitor grain hygiene practices and developments, on-farm monitoring of grain insects and pesticide residues such as that conducted in Western Australia, random

inspection for insects and chemical residues for grain received in the country or at the seaboard from longer term on-farm storage, and grain hygiene certification for grain delivered from farms. The establishment of a national co-ordination body warrants particular consideration and is relevant to both the Commission's preferred approach and the current system for grain distribution.

These initiatives are discussed in detail in Supporting Paper 9, as are the estimated costs of their implementation. The Commission emphasises, however, that the mandatory introduction of any of these initiatives is not part of its preferred approach. Rather, the Commission's strategy would be to handle any potential problems concerning grain hygiene through the licensing system for appointing storage and handling agents. This approach provides for flexibility and the modification of grain hygiene strategies in response to prevailing circumstances, demonstrated performance and expected market developments.

In the Commission's view, the introduction of measures other than licensing rests with grain marketers, although

individual participants in the storage, handling and

transport system may, of their own accord, find it economic to adopt particular initiatives.

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9.5 Proposed changes in land transport

9.5.1 Introduction

With the removal of grain transport restrictions, many of the policy issues that arise are associated with the whole transport system. As such, they are issues that should be addressed through reform of general rail and road transport policies rather than those specifically related to grain.

The Commission has taken the view that, to the extent that general transport policies affect the efficiency of the grain transport system, it is appropriate for the Commission to

comment and make recommendations on these policies.

The main elements of the Commission's preferred transport approach can be summarised as follows:

(a) no discriminatory restrictions on road's capacity to service freight requirements in certain industries (Section 9.5.2);

(b ) rail free to compete with road on a commercial basis either without non-commercial requirements imposed on it or with explicit government contracts and subsidies to cover non-commercial activities (Section 9.5.3);

(c) both modes covering avoidable costs on each traffic, recovering joint and common costs on business where demand conditions allow, and covering any other social costs (Sections 9.5.4, 9.5.5);

(d) the incidence of taxes and charges to be related to road usage and associated road damage (Sections 9.5.4, 9.5.5);

(e ) arrangements in existence to ensure that road funding matches incidence of costs (Section 9.5.6);

(f ) effective prevention of restrictive trade practices and exploitative pricing practices (Section 9.5.7).

Under such conditions not only would the ' playing field' be level but economic efficiency criteria would be satisfied: the most efficient level and combination of resources would be invested in transport and the optimal balance of road and rail modes for grain transport would ensue. Policy

implications related to each element of the Commission's preferred option are discussed below in the following sections.

9.5.2 Deregulation of grain transport

The Commission considers that the most significant proposed change, and the one that most directly affects the grain transport system, is the removal of restrictions on road's capacity to service freight requirements in certain

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industries. All States have some form of protection of rail transport of grain. For Victoria and Queensland the removal of rail protection would involve the removal of the distance limits to which road transport of grain is restricted. For Western Australia, the objective would be achieved through

allowing road competition in the areas currently designated as rail only. In New South Wales, the protection afforded by the lack of road receival facilities at port will inevitably be reduced through the provision of such facilities at both Port Kembla and Newcastle.

The removal of the impediment to road competition in South Australia is something of a special case. Although road is free to compete with rail for grain transport, this

competition is inhibited by the surcharge imposed by AN on the road transport of grain between rail-served silos. AN argues that the ' . . . aim of the . . . surcharges has been to provide an incentive to growers to use the large investment made in the rail system, and thus help to reduce the

uncertainty which would otherwise exist concerning the size of rail's long-term traffic task' (AN submission, March 1987, p. 13). AN claims that the surcharge protects the long term commitment that rail has to the grain industry in South Australia.

The Commission believes, however, that if this commitment is of value to the grain industry then it can and should be reflected in the terms of the rail freight charges negotiated between the parties involved. To impose an additional cost on road transport in order to protect rail business appears to represent anti-competitive behaviour. In this regard the practice could well contravene the provisions of the Trade Practices Act 1974. In advice sought by the Commission, the Trade Practices Commission drew the conclusion that there are

. . positive indications that evidence may exist which discloses a contravention of section 46 by the ANRC in respect to the imposition of surcharge by using the market power it has in the supply of grain storage

facilities to deter other persons from competitive conduct in the market for transporting grain from the facilities to the port terminals and domestic outlets. Likewise, so far as section 47 is concerned . . . there are positive indications that evidence may exist in relation to the imposition of the surcharge which discloses a contravention of paragraph 47(2)(d) of the Act by the ANRC. (Trade Practices Commission

submission, January 1988, p. 46)

Another impediment to free competition between rail and road would appear to be the restrictions imposed by governments on the use of more efficient types of road vehicle such as

B-doubles and road trains. These restrictions are usually rationalised as being necessary for safety reasons or to limit congestion and/or road damage problems; however, such

external costs could be addressed through the registration and user charging system. In many cases the restrictions may, in fact, be a form of protection for the railways. The

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Commission is of the view that, unless clearly justifiable, restrictions on the physical characteristics of road vehicles should be lifted.

9.5.3 Railways as commercial operations

The Commission advocates that the railways should be able to act commercially in their pricing and investment decisions and modify their services without being constrained by non-commercial objectives. The principles involved are

similar to those described above for the storage and handling sector. Although all railways are making progress toward achieving these objectives the Commission sees particular merit in the corporate structure used for AN.

The Australian National Railways Commission Act requires AN to act as a commercial business enterprise and gives it

significant freedom to pursue commercial objectives without government intervention. In these respects, A N 's legislative and policy environment is unique among Australian government railways. Key features of its commercial charter are as

follows:

. a requirement to conduct its business in accordance with sound commercial practice;

. freedom from ministerial intervention, except in limited ways largely aimed at increasing the level of financial accountability;

. provision for financial separation of non-commercial activities, by establishing criteria for AN to receive financial compensation for actions taken in response to government direction;

. freedom to set charges, so long as they conform

principles established by the Australian National Railways Commission and approved by the relevant

minister;

. a requirement to prepare strategic plans, budgets and profit targets annually;

. a requirement to pay dividends from profits;

. the ability to acquire shares and enter into joint

ventures for purposes allied to railway business.

A key feature of AN's accountability provisions is the

preparation each year of a corporate plan to be submitted to the relevant minister. As part of the corporate planning process AN is required to establish annual financial targets before the commencement of each financial year. In practice, successive rounds of corporate planning involve reviewing and revising objectives for productivity improvement, business growth and financial performance.

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Of particular importance is the separation of commercial and non-commercial activities. This provides a clear focus of appropriate business strategies and staff motivation in a competitive environment, ensures accountability, and helps avoid possible cross-subsidisation. Explicit revenue supplements are received from the Commonwealth Government to cover losses incurred by AN' s non-commercial activities, in particular, operations in Tasmania and all passenger services.

Commercialisation of rail would also require that a

satisfactory overall cost recovery rate on commercial (non subsidised) activities is achieved. If a commercial incentive structure is to be effective in stimulating cost-efficient performance, then the automatic funding of operating deficits in these areas should not continue. In some cases, outstanding debt should be restructured to establish a debt structure more in line with commercial practice. Any further borrowing or debt restructuring should take into account the emergence of new financial instruments for funding long-term projects.

The Commission believes that an approach such as that outlined above is a suitable means of putting rail on an equal footing with road. Under these arrangements the railways would have more freedom and incentive to compete effectively for grain transport. They would not be

encumbered by non-commercial objectives and would be better able to concentrate on those areas of business where they have a comparative advantage. This would lead to a better modal balance, exploiting the relative strengths of each mode.

9.5.4 Transport cost recovery

Deregulation of grain transport and the commercialisation of the railways' grain business would increase the flexibility and responsiveness of the grain transport system. The benefits of these reforms would be maximised if the financial costs faced by the alternative modes accurately reflect the resource and social costs of providing the services.

In establishing the Commission's position on issues related to transport financing and cost recovery, it was necessary to recognise current transport policy developments in Australia and their implications for economic efficiency. These developments and implications are discussed in Supporting Paper 4 but of particular importance are the

findings of the National Road Freight Industry Inquiry in 1984 concerning the need to redress inefficiencies related to road cost recovery. A number of changes were proposed in the area of cost recovery and road funding, and in 1985 the Commonwealth Govermment announced its decision to implement, in co-operation with State and Territory governments, an initial 'fast track' package of the Inquiry's

recommendations.

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Specific recommendations made by the Inquiry, which pertain directly to the Commission's concerns about financing practices and cost recovery, are discussed in the following paragraphs.

Financing practices and proposed reforms Definition of charges and hypothecation The Commission's preferred transport approach requires that both road and rail recover avoidable costs on each traffic. Determining the extent to which this occurs currently and under any alternative road user charging method depends critically on a comparison of user charges with avoidable costs. The National Road Freight Industry Inquiry noted major difficulties associated with defining and attributing

different road-related taxes and charges as 'road user charges' which can legitimately be matched against road costs to establish the level of cost recovery. The Inquiry

recommended that governments 'classify as road user charges appropriate portions of the yields from the prevailing fuel taxes, vehicle registration fees and driver licence fees'. (NRFII, 1984, p. 251)

The Commission also found this issue to be of major concern. At present the principal revenue sources related to road transport cannot be readily classified as road user charges or general taxes. The following are the main road taxes and

charges:

. taxes on the sale of motor fuels - these comprise

Commonwealth excise on motor spirit and diesel fuel (part of which is hypothecated to road funding through the Australian Land Transport Program, the Australian Bicentennial Road Development levy (fully hypothecated),

and the petroleum franchise licence fees (collected by all States except Queensland and hypothecated to varying degrees);

. taxes on the ownership and operation of motor vehicles (States) - these include vehicle registration fees and taxes (generally fully hypothecated to road funding), driver licence fees, and (some small) road transport taxes;

. sales taxes and customs duties (Commonwealth) - these comprise sales taxes on motor vehicles, tyres (new and recapped) and parts, and customs duties on motor vehicles and parts (no hypothecation involved);

. stamp duties on the transfer of vehicle ownership (States) (no hypothecation involved).

The Commission found that the diversity of views about which of these taxes and charges should be offset against road costs was one of the most important factors inhibiting a more

rational and constructive approach to cost recovery policy. Attitudes vary widely and would appear to reflect the particular interests of the organisations involved. For

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example, railway authorities and railway unions argue that only hypothecated charges should be considered in determining the rates of road cost recovery. Other parties suggested that all taxes and charges should be offset against road expenditure. Such groups include representatives of the road freight industry and some grower representatives.

The issue of road user charges and taxation has also been considered by the Industries Assistance Commission (1986). In its report it concluded that the current system of road user charges and taxes has deficiences whether viewed as a cost recovery process or a general tax-raising process. As a mechanism for recovering costs, the current procedures do not provide a good matching of charges and costs. As taxation devices, they are inconsistent and almost certainly distorting. In considering petroleum excises (which apply to both road and rail) as taxes the Industries Assistance Commission concluded, 'They are generally too high, particularly given the widespread use of petroleum as an input to other activities. The rates also vary too much - both between products and over time' (IAC, 1986, p. 129).

These deficiencies and the lack of a clear definition of imposts as either road charges or general taxes also makes it impossible to undertake unequivocal cost recovery analyses. The Commission agrees with the National Road Freight Industry Inquiry when it stated that ' . . . the confusion brings the governments into disrepute, breeds resentment at apparent unfairness, and invites attempts to avoid payment of the levies' (NRFII, 1984, p. 221). Clearly, it exacerbates the already difficult problem of getting widespread support for policy intitiatives.

The Royal Commission supports the Industries Assistance Commission recommendation that direct charging for road infrastructure use should be pursued as soon as is considered practicable and that rates of petroleum excise should be reduced to levels more in line with taxes on other goods

(IAC, 1986, p. xxvi). On the question of exemptions from the diesel excise, an issue raised with the Royal Commission in relation to railway usage, the Industries Assistance Commission concluded that, pending such changes to the taxing and charging structure, there are not sufficient grounds to alter the existing rate structure. However, once reliance on petroleum excises for revenue raising is reduced,

restructuring of the rates and the introduction of

intermediate exemptions might be practicable. The Royal Commission endorses this position.

Given that a more appropriate structure of taxes and charges is implemented, then further policy reform can proceed. In this regard the Commission agrees with the National Road Freight Industry Inquiry that steps should be taken to declare formally which levies are to be regarded as general taxes and which are to be raised in order to finance roads. The latter group of charging instruments should then have its yields formally hypothecated to road expenditure.

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With regard to the actual levels of taxes as opposed to hypothecated charges, the Commission takes the view, in accord with its Letters Patent, that economic efficiency should prevail as the overriding criterion for attributing

imposts rather than arbitrary, bureaucratic or expedient classifications. There is no doubt that all imposts on road users, regardless of their nominal purpose, have an impact on the use of the road transport mode. From an economic

efficiency point of view, the levies can be viewed as

increasing the price of road use to a level that better reflects the true resource cost of the service, thereby encouraging a more efficient level of usage. Thus, to the extent that taxes and charges can be offset against the

avoidable cost of road transport, this can be regarded as appropriate in terms of economic efficiency: both the usage of the mode and its cost are brought into line with

economically efficient levels. To the extent that all taxes and charges paid by road users exceed or fall short of road costs, distortions will occur.

In considering cost recovery under the current system the Commission therefore believes that it is appropriate to regard all taxes and charges as an offset against road costs. This is not to imply that there are satisfactory mechanisms for the flow of funds from road users to road

expenditure: on the contrary, the Commission sees considerable room for improvement in the procedures involved, as discussed in Section 9.5.6. However, from an economic efficiency point of view this is a separate issue.

Uniform distance and weight-based user charges The recommendations of the National Road Freight Industry Inquiry (1984) and the Industries Assistance Commission (1986) mentioned above are aimed at a more systematic and efficient system of road user charging. Such a system should

have as its basic objective the recovery of avoidable costs (including any attributable social costs) from each class of vehicle according to its contribution to road damage and other costs. The recovery of joint and common costs should

also be pursued where demand conditions allow.

The major reform leading to this objective, and advocated by the National Road Freight Industry Inquiry, is the levying of road user charges on the basis of distance travelled and vehicle characteristics. Specifically, the inquiry recommended that the Commonwealth and State governments ' . . . establish a revised method for the recovery of road costs, designed to make the charge for an individual truck match more closely the road costs incurred as a result of the actual distance travelled by that particular truck'. (NRFII, 1984, p. 252)

Clearly, the current system of road user charges and taxes is, at best, only weakly linked to avoidable cost. For example, the amount paid in fuel taxes increases less than proportionately with vehicle mass and hence cannot reflect those pavement costs that increase with the fourth power of

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axle loads. Similarly, vehicle registration fees and other fixed annual charges do not reflect distance travelled.

In practice, the introduction of a charge based on

vehicle-kilometres calls for resolution of some practical issues. These issues are outlined in Supporting Paper 4 and discussed in some detail in the National Road Freight Industry Inquiry report where a step-by-step agenda for implementing the reforms is provided.

Progress on policy reform As noted, in 1985 the Commonwealth Govermment announced its decision to implement, in co-operation with State and Territory governments, an initial 'fast track' package of the recommendations of the National Road Freight Industry

Inquiry. As part of its responsibilities in the package, the Commonwealth Government also established the Australian Road Freight Transport Advisory Council to provide to the Minister for Transport 'first hand' advice on matters affecting the industry.

To date limited progress has been made. A move toward a more uniform registration system linked to road usage and impact has been partially achieved through the Federal Interstate Registration Scheme. Apart from this all States and Territories have endorsed the principles enunciated in the National Road Freight Industry Inquiry report and some progress is being made toward wider implementation of the recommended reforms. The Australian Transport Advisory Council, which comprises Commonwealth, State and Territory ministers of transport, is currently considering an agenda

for reform. A working party of officials is considering the issues of cost recovery and funding and has concluded that the current system lacks consistency, equity, sensitivity to user preferences, simplicity, and general acceptance. The working party recommended a more rational system based on the following principles:

. full road cost recovery from all users in an equitable and efficient manner, and earmarking of revenue to roads;

. clear definition of road user charges, as distinct from general taxation;

. consistent and cost-related registration fee levels and structures for the federal and State systems;

. road user consultation in determination of road user charges and road programs.

Implications of current policy for the Commission's recommendations The question that arises is whether implementation of the Commission's preferred approach for transport deregulation should be contingent upon further reform to the current road

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cost recovery arrangements. A number of submissions argued that deregulation under the current road user charging arrangements would seriously disadvantage rail because road transport significantly under-recovers road damage and other costs, whereas rail grain freight largely (or completely) covers its costs. Similar arguments for opposing or delaying transport deregulation were raised in relation to the alleged inadequacies of the road funding distribution system.

In relation to cost recovery, the Commission has considered two key issues: the nature and rate of policy reform that is in progress, and the current relationship between grain cost recovery on road and cost recovery on rail operations.

In the case of the first issue, it is clear from the

preceding discussion of transport policy developments that the shortcomings of the current system of road user charging are well recognised and that a process of policy reform has

been initiated. The Commission would like to see more rapid progress in this regard and considers that this would be facilitated by more co-ordinated involvement of State and Commonwealth agencies such as the Inter-State Commission, the Bureau of Transport and Communication Economics, and State

and Commonwealth departments of transport.

A closer consideration of the second issue is presented in the following sections.

9.5.5 Cost recovery and efficiency

Notwithstanding the problems inherent in the current system of road user charges and taxes, some comparisons between road and rail cost recovery can be made. Using economic efficiency as the criterion, it is possible to establish some ground

rules for the comparison. As discussed in Section 9.5.4, the criterion of economic efficiency dictates that all taxes and charges should be regarded as an offset against road costs.

There is also debate about the appropriate basis for establishing the level of rail cost recovery. A number of submissions to the Commission, particularly from railways, emphasised the high level of cost recovery achieved by grain rail freight operations and contrasted this with the supposedly lower rate of recovery from road transport.

The Commission believes, however, that it is invalid to compare grain freight recovery on rail with road recovery rates because, for all rail systems other than the SRA, rail grain business is in some way protected from road

competition. (Even in New South Wales rail grain freight is substantially protected by lack of road receival facilities at ports.) This is in notable contrast to most other types of rail traffic where rail must compete with road. Under these conditions it is not surprising that rail can achieve relatively high cost recovery rates for grain. Accordingly, the grain recovery rates cannot be regarded as a measure of the cost-effectiveness of rail grain operations or as a

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reason for limiting road competition. Rather, they are an indication of the fact that grain transport has continued to be singled out for special protection by most railways.

In considering the elements of a 'level playing field' and trying to establish a legitimate basis for cost comparisons, the Commission regards the rate of cost recovery on

unprotected (competitive) rail operations (especially freight operations) as a more appropriate comparison. This rate is likely to be a better estimate of the rate of cost recovery that railways would accept for grain business in a

competitive environment; to claim that a greater rate of cost recovery would be necessary to maintain the grain freight service would be at odds with pricing policies applied to other freight business.

Given these principles pertaining to road and rail costs, some assessment can be made of the current situation. The Commission was primarily interested in the cost recovery rate for additional grain that may be transported on road compared with rail cost recovery rates. The approach to the analysis was consistent with the Commission's focus on economic efficiency. Calculations were done in resource cost terms to account for the true cost to the economy of alternative paths; changes were assessed on an incremental basis, that is, the costs and benefits of changes from the current system

were examined; and finally, emphasis was placed on the avoidable costs of changes because these were regarded as the most appropriate additional costs to be weighed against any additional benefits from policy changes. The cost recovery

assessment, together with other analyses related to the cost structures of road and rail transport, is presented in Supporting Paper 4 and summarised below.

Road cost recovery In summary, the Commission's estimation of avoidable costs for additional grain transport by road is based on a

life-cycle analysis that includes costs of periodic reconstruction of the road bed as well as costs of normal maintenance work and all other road authority tasks. These costs will vary depending on the class of road under

consideration.

Recovery of avoidable costs is of interest because it is a measure of the net cost/revenue effect of an incremental change in the use of road transport for the transportation of grain. From the Commission's analysis, described in detail in Appendix A of Supporting Paper 4, the avoidable costs were determined at around 1 to 1.5 cents per net tonne-kilometre for six-axle articulated trucks used primarily on arterial roads. Any increase in the use of road transport for farm to sub-terminal or farm-to-port deliveries is likely to involve such trucks mainly on rural arterial and better secondary roads. Hence, the Commission believes that 1 to 1.5 cents per net tonne-kilometre represents an appropriate value for incremental road costs. From other Commission calculations related to resource cost adjustments (see Supporting Paper 4)

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it was determined that, on average, truck operators

contribute the equivalent of about 1.7 cents per net

tonne-kilometre to government revenue from sales taxes, fuel taxes and franchise fees, stamp duty, registration and other fees.

On this basis, the Commission concludes that additional road traffic that may become involved in grain transportation, especially from farm to sub-terminal and port, is likely to incur sufficient taxes to offset additional avoidable road costs. Where trucks are used extensively on poorer quality roads the extent of avoidable cost recovery is likely to be

less.

Concerns about various forms of social costs that may arise as a result of deregulation of road transport were raised with the Commission, in particular a possible increase in road accidents with more trucks and increased congestion and pollution mainly in built-up areas. As little increase in

direct delivery to ports by road transport is likely the Commission does not see a significant increase in congestion and pollution costs. If localised problems do occur councils may need to exercise their right to redirect some traffic.

Apart from the very important human aspect of road accidents, which is impossible to evaluate in economic terms, the net economic cost to the community of road accidents is reflected in the excess of cost above health, workers' compensation or

accident, and vehicle insurances. The Commission believes that these insurances account for most of the economic cost of road accidents.

Rail cost recovery As argued in Section 9.5.5, the appropriate cost recovery rate for rail in comparison with road is the recovery rate for competitive rail operations, especially freight operations, and not the recovery rate for the protected grain

freight component. This presents a difficulty because of the dearth of information available to assess the recovery rates for particular components of rail business. However, some observations can be made based on studies undertaken by Holthuyzen (1987) and the Inter-State Commission (1985). A review of these studies is presented in Supporting Paper 4.

It is clear from this review that definitive figures are not available; nevertheless, there seems little doubt that where rail business is not protected from competition the rate of cost recovery is generally less than 100 per cent.

Timing of change Although fully aware of the imperfections of the current road user charging arrangements, the Commission considers that this ought not constitute a barrier to the immediate

implementation of its preferred approach. It is clear that transport policy is in the process of being reformed and, in any case, the cost recovery rates for additional grain

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transport by road are sufficient to allow deregulation to occur without unduly favouring either mode. Perhaps the overriding consideration, however, is that current policies

actively discriminate against grain. No valid justification for this to continue has been found by the Commission.

This is not to deny that some distributional and funding difficulties continue to exist. Effective policies are yet to be implemented that would ensure that both road and rail cover their avoidable costs and the problem remains as to the most appropriate method for covering the joint and common costs of each mode. The Commission's preferred transport

approach would have joint and common costs recovered on business where demand conditions allow. Although this approach has merit from an economic efficiency point of view, the Commission recognises the practical difficulties of implementing such a policy. Demand conditions vary from place to place, from time to time, and from one type of

freight to another. This means that, at best, the allocation of joint and common costs across vehicle classes on road and business types on rail can be linked only roughly to demand conditions. Nevertheless, for grain freight on rail, the Commission believes that the commercialisation of the railways will allow them to capitalise on the potential comparative advantage they have in many situations and thus allow this business to make a significant contribution to joint and common costs.

The Commission is also aware of difficulties with road funding policies. These difficulties have been strongly emphasised by shire councils concerned about the effect of increased road transport of grain in their district. The policy issues involved are addressed in the following

section.

9.5.6 Road funding issues

The Commission received a number of submissions from local governments and local government associations that expressed serious reservations about the effects of more grain trucks using roads under their jurisdiction. In essence, they claimed that current road funding arrangements provide no effective mechanism for compensating local councils for an increase in road damage that may result from transport deregulation. In this section this claim is considered in the light of current funding arrangements, and some policies designed to remedy the situation are examined.

First, it is appropriate to point out again that in many situations there is not likely to be a significant increase in the overall rate of deterioration of local roads as a result of deregulating grain transport. The amount of grain carried off the farm by road is not likely to change

significantly and the first part of the journey will continue to be mainly on local roads. However, the Commission's research indicates that instead of most grain being delivered to the local silo, more will be delivered (primarily using

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arterial roads) to a sub-terminal or port. Consequently, the incremental increase in road transport will often be on better rural arterial roads, which are generally funded by State and Commonwealth governments.

The other factor to consider is the configuration of the trucks involved in grain transport. An increase in road transport over longer distances is likely to mean an increase in the use of less damaging articulated vehicles and improve the potential for better policing of weight limits. A distinction should also be drawn between the damaging effects of the concentrated road movement of grain (sometimes in poor weather) that can occur currently under the direction of bulk handing agencies or marketing boards and the more diffuse pattern of movement that would result from the Commission's preferred option.

Although these factors will tend to minimise the extent of any additional local road damage caused by deregulation of grain transport, it is still relevant to consider some road funding issues.

Current funding arrangements A description of current road funding arrangments is provided in Supporting Paper 4. The focus of concern expressed to the

Commission was the limited funds available to local councils to maintain local roads. More than the other tiers of

government, the local councils are dependent on external sources of funds to cover their road expenditure; they have limited scope for local revenue-raising.

Local government revenues for roads comprise road grants from Commonwealth and State governments, general revenue grants from the Commonwealth Government, loan funds, parking charges and rates levied on land owners. While Commonwealth and

State road grants must be spent on roads, other local

government revenue sources generally are not dedicated to road expenditures. Local governments are now primarily concerned with local roads, and the criteria applied in deciding expenditure on such roads include many intangible

factors related to accessibility, environment, and the general level of community amenity.

Under the Commonwealth's Australian Bicentennial Road Development scheme and Australian Land Transport Program, the allocation of local road grants between State road authorities and local authorities, and among local

authorities, is in accordance with principles formulated by each State and approved by the Commonwealth. In practice, a formula is negotiated between the relevant State authority and a body representing local authorities in that State. The

formula varies from State to State but the main components are road length and population. The relative weighting of the two components varies between States and in some cases it differs between urban and rural authorities. (Cameron 1986, pp. 27-28)

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It is clear that the concerns of the local governments extend beyond grain transport to the whole question of adequate funding for local roads, an issue outside the Commission's terms of reference. Of more direct concern to the Commission is the fact that the main funding arrangements currently involve no direct mechanism that would ensure that additional road funds are made available to local authorities to offset additional road maintenance, construction or upgrading costs that may result from a change in traffic patterns. In part, the Commission sees this situation as a symptom of a

generally inefficient and ad hoc system of road funding, where local road funds tend to be allocated on the basis of road length and population without regard to the issue of efficiency. Little attempt appears to have been made to allocate road funds on a basis that would secure maximum social welfare or even provide a better link between the incidence of road costs and the provision of funds.

Alternative funding arrangements The Commission considered the scope for implementing more 'efficient' nationwide procedures that would link local road funding to road use and damage levels in accordance with the principle that expenditure should reflect demand patterns

(see Supporting Paper 4). Because of the problems of monitoring road usage and damage, and the lack of available information necessary to administer such a scheme, the Commission concludes that, at this time, there is little

scope for implementing an effective generalised allocative procedure that would automatically and efficiently compensate individual local councils for significant changes in traffic volumes and patterns. Nevertheless, the Commission supports policy moves in that direction and the development of systems to collect the necessary data to implement such a policy. In the interim, having examined several alternatives (see

Supporting Paper 4), the Commission supports the development of methods to target funds more effectively.

Targeted funding schemes With regard to the allocation of funds, the Commission supports the view of the Local Government Association and

Shires Association of New South Wales that any shift in the modal balance for grain transport from rail to local roads effectively represents a shifting of responsibilities from the State government to local government. As the

Associations point out, the Advisory Council for

Inter-government Relations, in its report Responsibilities and Resources of Australian Local Government (ACIR 1984), states that one of the principles linking responsibilities to revenue needs is 'if responsibilities already being performed by a sphere of government are transferred to local

government, then the funds necessary to provide them should also be transferred'.

A means of achieving this link between responsibilities and funding is the approach implemented in some States, where particular roads are designated for special funding. This

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approach is possible where it is clear that particular roads will be important in grain transport and where normal funding arrangements are not likely to provide sufficient funds to

cover the costs of maintenance and, if necessary, upgrading.

Designated roads could be selected through a process of consultation between grain industry representatives and the various tiers of government and would be eligible for special funding. Such an approach would be consistent with efficient

road user charging procedures because funds would be directed back to the roads where the costs were incurred.

In some cases this targeting strategy could be handled by extending existing schemes such as the Victorian Special Impact Works fund. In this case limited funds are made

available each year by the Victorian Road Construction Authority for roadworks throughout the State where it is demonstrated that the works are required to assist in the implementation, or as a result of the impact, of government

initiatives. Over the period 1984-85 to 1986-87, $1.85 million was allocated from the fund to partially compensate some councils for the damage caused by 'grain cartage to central receival points in lieu of local silos'.

A similar targeting approach is used on a small scale in South Australia, where two separate schemes operate. In the first case some of the Commonwealth Australian Land Transport Program funds for local roads are held back and allocated to special road development projects. The second involves a small amount of State funding allocated to some local roads designated for their importance to tourism, forestry or national parks.

In New Zealand the concept of targeting is taken to its ultimate extent, with all central government funding for local roads being allocated on the basis of applications to the National Roads Board from counties, municipalities, and district offices of the Ministry of Works and Development.

As an alternative to general purpose programs, a more specific scheme may be appropriate. Such is the approach adopted in New South Wales to handle the road funding implications of the SRA's 'Option 3' plan to withdraw services from a number of grain-only branch lines and replace the services with road transport. The New South Wales Government plans to establish a fund to compensate local governments for the additional damage caused.

The Commission considers that targeting schemes are the most effective approach currently available for linking road expenditure to demand patterns without restricting the freedom to choose the most effective mode and path of grain transport. Ultimately, funds for such schemes would be

derived from Commonwealth and State collections of charges levied on the road transport industry following the establishment of an efficient road user charging system and reform of the existing structured taxes and charges levied on road transport. In the meantime, the Commission considers

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that specific Commonwealth funding support, on a joint basis with the States, for targeting schemes is warranted.

Overloading Regardless of the road funding arrangements that may be implemented, the issue of overloading of grain trucks warrants attention. The Commission recognises that excessive road damage is caused by overloaded grain trucks and commends efforts by road transport authorities and others to reduce the incidence of overloading. The Commission acknowledges the difficulty that road transport authorities and police have in enforcing road vehicle load limits and consequently advocates a system of self-regulation on the part of the grain industry. Such a system currently operates in

Queensland and Victoria. BGQ submitted,

Following years of frustration by the Transport Department and Main Roads Department in trying to regulate grain vehicle load limits, the Queensland Grain Growers Association and BGQ in conjunction with these Departments, adopted an Industry Self Regulation

arrangement commencing in 1986. The basis of the arrangement was a maximum concession of 15% overload on legal weights with vehicles in excess of 20% overload being rejected at BGQ depots.

The programme was considered to be extremely successful in reducing gross overloading and some 132 loads were rejected under this arrangement during the 1986/87

winter crop intake. (BGQ submission, March 1987, p. 13)

In Victoria, as part of a self-regulation agreement between the Victorian Farmers Federation and the GEB, maximum gross weights for various truck axle configurations have been established. 'Any vehicle exceeding these limits will not be unloaded at GEB facilities. The maximum gross weights acceptable at GEB facilities are for two-axle trucks

15.9 tonnes, for three-axle trucks 24.4 tonnes, for four-axle trucks 30.9 tonnes, for five- and six-axle trucks

40.0 tonnes, and for six-axle trucks with permits

42.0 tonnes'. (GEB submission, September 1987, p. 2)

In a deregulated storage, handling and transport system, one way that self-regulation could be achieved would be by making the granting of a receival licence by marketing boards conditional upon the agent enforcing the vehicle mass limits.

9.5.7 Limiting restrictive trade practices

The final aspect of the Commission's preferred transport approach is effective prevention of restrictive trade practices and exploitative pricing practices. Monopoly pricing is not likely to be a problem where road transport can provide a service at competitive prices. However, there has been some concern that in a deregulated transport setting there may be situations where rail has a significant cost

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advantage over road transport and would therefore be able to charge a service price that generates returns in excess of costs incurred. In practice, the prices charged by rail

authorities in a deregulated transport environment will depend upon the road competition they face in various regional areas.

The Commission considers that, at any particular location, the margin between the cost of a rail service and the price that can be obtained by a rail authority will be effectively limited by the local road price for grain transport. In those situations where rail authorities are able to extract a margin, it will generally be warranted on the grounds that

joint and fixed costs of the overall rail network must be covered from traffic where rail has a comparative advantage. Only if a rail authority charged a service price exceeding stand-alone costs would a user be justified in complaining that an excessive price was being charged; however, it is most unlikely that rail's stand-alone cost would ever exceed

the price limit set by competitive road transport.

Of more concern to the Commission is the possibility of predatory pricing whereby advantage is taken (by road or rail) of a favourable operating position in one market segment to price in a predatory fashion elsewhere. The

Commission believes that it is appropriate for such situations to be handled by the Trade Practices Commission and notes that it will be necessary in this regard to ensure

that railway authorities are subject to the relevant legislation.

9.6 Proposed changes in port services and sea transport

As outlined in Section 9.3, one of the principal elements of the Commission's preferred approach is that port service and sea transport costs at individual Australian ports be transmitted to growers and other participants in the storage, handling and transport system: in effect, ports would be competing for business. Introduction of this policy would require marketers of grain to move away from current practices whereby buyers of f.o.b. grain quote on an 'east coast' or 'west coast' basis and are directed, once in the vicinity of Australia, to a specific port.

Rather, buyers of grain would be able to offer prices for grain f.o.b. at individual Australian ports; it is the differential between f.o.b. prices for the same grain that would form the basis of the disaggregated costs for port services and sea transport. The only seaboard cost not reflected in f.o.b. prices received by marketers is that incurred for wharfage which is currently paid by marketers and subsequently deducted from growers' payments, on a pooled basis, at the State level. Although under current marketing

arrangements there are differences concerning who initially bears port service and sea transport costs, these differences are immaterial so far as the transmission of accurate price

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signals to growers and other market participants is

concerned.

In the Commission's view, marketers should be able to devise a strategy for reflecting port service and sea transport costs to growers and other market participants, as discussed in Section 9.3. The AWB indicated in its November 1987 submission that this would require a re-examination of the AUSTWHEAT Charter Party and other marketers may find themselves in a similar position. The Commission proposes that such a re-examination be undertaken with a view to securing the resource cost savings identified in this report.

As noted, disaggregation of port service and sea transport costs should be accompanied by buyers of Australian grain quoting freight rates for specific ports under the charter arrangements. The Commission notes that until such a pricing regime is put into operation it would be difficult for the grains industry to realise the benefits of significant investments such as the Port Kembla terminal. Without such a pricing regime, ship owners would be unaware of the ports to

be visited to load Australian grain, and would have no incentive to use large vessels such as those that will be able to be accommodated at Port Kembla.

A further implication of the disaggregation of port service and sea transport costs is that the costs of investments in seaboard facilities (such as wharves and channels) would also

be transmitted to growers and other market participants. It follows, therefore, that port authorities are likely to evaluate such investments more carefully as the competitive position of the port will be affected by such costs.

Efficient investment behaviour and other benefits of port competition may be jeopardised in situations where a competitive environment does not emerge. The Commission's approach in this regard is that further initiatives would be introduced to achieve the desired outcome. These initiatives have been discussed earlier with respect to storage and handling and land transport of grain and include action by the Trade Practices Commission as well as competitive tendering, franchising and other measures. In Chapter 8 the Commission noted that in respect of certain port services, such as stevedoring, a competitive environment does not exist and is unlikely to emerge under a deregulated approach. It suggests that this be addressed within the current inquiry into the Government's Waterfront Strategy being conducted by the Inter-State Commission.

The Commission is aware that in recent times port authorities around Australia have been encouraged by State governments to provide services on a commercial basis. Without assessing the situation in each State, it is evident that port

authorities tend to be autonomous units from an operations viewpoint, although they continue to rely on State

governments to approve and arrange capital funding of port investments. The Commission is concerned that the commercial flexibility of port authorities will be influenced adversely

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by State government funding controls and it is of the view that in a competitive environment these controls would be of. lesser importance.

Overall, the Commission concludes that port authorities should be commercialised along lines similar to those outlined for storage and handling and transport authorities, so that the potential resource cost savings identified in this report can be realised. As port authorities typically have interests in a range of commodities, it would be

appropriate for governments to give consideration to the commercialisation of all activities of the port authorities rather than grain alone.

One final issue to be addressed is the 'fair share' principle for export of wheat that has been applied by the AWB to

shipping programs for the respective States. This principle aims to assign export shipping to States on the basis of the export availability of wheat from each State as a proportion of Australia's total export availability, and thereby to treat the States as equitably as possible.

The Commission was advised by the AWB that the ' fair share' rule has not resulted in additional net costs to the storage, handling and transport system. The Commission has not evaluated this claim but considers that any rules developed

to establish equity in the shipping programs of the

respective States may have the potential to interfere with the efficiency, cost-effectiveness and integration of the distribution system. The AWB asserted that the increased logistical complexity of the export task has necessitated a move away from the application of the ' fair share' principle

and that it, like the Commission, believes that the ' fair share' principle should be abandoned.

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1 0. R E C O M M E N D A T I O N S , E F F E C T S A N D I M P L E M E N T A T I O N

10.1 Introduction

The Commission's terms of reference, as specified in its Letters Patent, require it to report on the 'nature of the most efficient and cost-effective integrated system that might be instituted in Australia for storing, handling and

transporting grain' to final markets, both domestic and export. The Commission has interpreted the 'nature of the most efficient and cost-effective integrated system' as primarily applying to the institutional environment within which the relevant services are provided.

In Section 10.2 the various elements of the Commission's report are brought together in a list of recommendations, the implementation of which the Commission believes will bring about the changes necessary to achieve an efficient, and cost-effective integrated grain distribution system in Australia. In view of important system interactions, the

Commission believes it essential that the main components of its recommendations be implemented as a total package. Not to do so would lead to lower overall resource cost savings and, under some circumstances, would increase resource costs. The likely effects of implementing these changes are discussed in Section 10.3 and an approach to facilitate implementation is put forward in Section 10.4.

10.2 Recommendations

The Commission has inquired into a range of alternative systems for grain storage, handling and transport. The following recommendations give effect to the policy conclusions presented in Chapter 9; they are directed at

providing a more competitive environment for the provision of storage, handling, transport and port services, and removing impediments to the commercial operation of the bulk handling agencies and rail authorities.

The recommendations are grouped according to their relevance to marketing boards, storage and handling, land transport and ports and shipping.

Marketing boards R.l The Commission recommends that Commonwealth and State marketing boards be required (under their enabling legislation) to undertake the following tasks:

. minimise storage, handling and transport costs and reflect in returns to each grower the actual charges incurred by that grower for storage, handling and transport services;

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. provide for competition in storage and handling

services by not being restricted to only one licensed receiver in each State;

. disaggregate port services and sea transport charges and reflect these in returns to individual growers.

Storage and handling R.2 The Commission recommends that greater competition be encouraged in the provision of grain storage and handling services by the removal of sole receival rights

for all grains and by the ' commercialisation' of the bulk handling agencies.

To implement these changes the Commission recommends as follows:

R.2.1 modify legislation to remove sole receival rights (Commonwealth and all States);

R.2.2 remove port handling monopoly for export grains (Victoria and Queensland);

R.2.3 remove legislative and other impediments to the commercial operation of the bulk handling agencies (all States);

R.2.4 consider the appropriateness for continuing ownership of bulk handling agencies by State governments (New South Wales, Victoria,

Queensland);

R.2.5 undertake corporate restructuring to establish commercial operating structures for the bulk handling agencies (all States);

R.2.6 make bulk handling agencies subject to the provisions of the Trade Practices Act (all States);

R.2.7 discontinue the current storage and handling charges imposed on 'grower-to-buyer' and 'permit' wheat transactions (all States);

R.2.8 the grain industry consider the establishment of a grain hygiene co-ordinating body (Commonwealth and all States).

Land transport R . 3 The Commission recommends that greater competition be encouraged in the provision of land transport for grain by the removal of restrictions precluding the use of

road transport for grains and by the 'commercialisation' of rail freight services.

To implement these changes the Commission recommends the following:

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R.3.1 remove legislative and administrative

arrangements requiring use of rail for grain transport (Victoria, Queensland, Western Australia);

R.3.2 remove the Australian National surcharge on road movements of grain between rail-served silos in South Australia (South Australia);

R.3.3 remove restrictions on the use of alternative types of road vehicle if the restrictions cannot be justified on social cost grounds (Commonwealth and all States);

R.3.4 remove impediments to the railways' commercial operation (Commonwealth and all States);

R.3.5 undertake corporate restructuring of railways to facilitate their commercial operation

(Commonwealth and all States);

R.3.6 ensure that rail authorities are subject to the Trade Practices Act (Commonwealth and all States);

R.3.7 schemes be developed in each State to target specific local roads for additional funding (all States);

R.3.8 as an interim measure the Commonwealth Government contribute specific funds jointly with State governments to road targeting schemes to cover additional road damage arising from

implementation of the Commission's

recommendations (Commonwealth and all States);

R.3.9 the grain industry implement a system in all States of self-regulation of vehicle mass limits;

R.3.10 current transport policy reforms aimed at establishing a more efficient system of road user charges be expedited (Commonwealth and all States);

R.3.11 transport research and policy development aimed at establishing a more effective and efficient system for allocating road funds be strongly supported by Commonwealth and State governments.

Ports and shipping R. 4 The Commission recommends that State governments continue the process of 'commercialising' port authorities with the aim of permitting greater

competition in the provision of port services (all States).

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The Commission also recommends that:

R.4.1 its views on the unsatisfactory nature of the institutional environment on the waterfront be brought to the attention of the Inter-State Commission for consideration by that body in its

inquiry on the Government's Waterfront Strategy;

R.4.2 the question of union coverage at the new Port Kembla grain terminal be settled as a matter of urgency.

10.3 Effects

The Commission's recommendations are aimed at establishing a competitive environment for grain distribution leading to a more efficient and cost-effective, cost-effective integrated system for grain storage, handling, land transport and port

services. It has estimated that on a national basis savings of some $10 per tonne are achievable in the short term and should be pursued immediately.

In the longer term, the changed institutional environment will ensure continuing pressure for productivity gains and cost containment through competition between the service providers and progressive restructuring of the grain

distribution system.

A range of effects would emerge in this competitive

environment, an important one being the distribution of potential savings amongst growers which is considered in detail in Chapter 6 and Supporting Paper 8. The Commission

concludes that the vast majority of growers would benefit, and there is a clear net benefit for the industry and the community.

A competitive environment for the bulk handling agencies and rail authorities would in most cases require significant changes in corporate and management structure and practice.

Under competition, the restructured bulk handling agencies would have the commercial independence and freedom to make adjustments to operating practices, including pricing structures and service provision, in order to retain market

share. Over the longer term, the bulk handling agencies would adjust their capital stock and infrastructure to reflect their most competitive sites, thus further reducing unit costs. Similarly, rail authorities would make adjustments to operating practices and pricing structures, and parts of the rail networks that are uneconomic would be abandoned.

Decisions made in this more competitive environment would influence the mix of technology and operating practices used and would have an effect on staffing levels and the training and types of expertise required. The various unions would be affected to some extent, but the Commission anticipates that a constructive approach between management and unions would facilitate development of a satisfactory strategy.

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The Commission makes no specific recommendations concerning port authorities, other than that the current intention on the part of most State governments that such authorities operate more commercially be proceeded with. Implementation of the Commission's recommendations would, however, increase competition for export grain between ports. There would therefore be considerable pressure on port authorities and on those bodies providing port services to minimise costs and, in particular, to carefully assess any capital expenditure proposals for port improvements.

10.4 Implementation

10.4.1 Legislative and administrative changes

The Commission's Letters Patent require it to address 'the legislative or administrative changes, if any, that are necessary or desirable'. The recommendations, as expressed in Section 10.2, call for considerable legislative and

administrative change, details of which are provided in Appendix H.

Many other changes could reasonably be expected to flow from the Commission's recommendations; for instance, the Commission has not anticipated the form of corporate restructuring which State governments may pursue with respect to bulk handling agencies and rail authorities. In some cases, where major changes to legislation are proposed (for example, the removal of Co-operative Bulk Handling sole

receival rights in South Australia), it may be necessary to review such legislation in its entirety.

10.4.2 Timing of changes

The potential resource cost savings identified by the Commission are significant and capable of_ being achieved in the immediate future. A more competitive environment will result in further long-term efficiency gains. On this basis, the Commission proposes that its recommendations should be implemented as quickly as is practicable.

In the case of storage and handling, legislative or

administrative changes to the responsibilities of marketing boards with respect to minimising storage, handling and transport costs, making provision for appointing more than one licensed receiver, and disaggregating the costs of port services and sea transport should be proceeded with

immediately.

The Commonwealth Government could lead the way with the Australian Wheat Board acting as a catalyst for subsequent change. Since the bulk handling agencies have a substantial competitive advantage in that their infrastructure already exists, sole receival rights should be immediately removed.

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This competitive advantage will provide the bulk handling agencies with some short-term relief from the rigours of a competitive market while the issue of the appropriate corporate structure is addressed.

The removal of regulations requiring the use of rail for grain directly affects the transport system. All States (with the exception of New South Wales) have some form of legislative or administrative protection of rail transport of grain. The Commission proposes that these restrictions be

removed immediately.

Although supporting deregulation in principle, some participants argued that removing restrictions on road transport should be delayed in order to allow the railways time to become more efficient and so better able to cope with the increased competition. It was claimed that potentially

profitable grain freight business could be permanently lost from rail if deregulation occurs too quickly. The Commission sees no justification for delay on these grounds, and it is concerned that open-ended and conditional plans for deregulation will jeopardise the potential gains for the reasons discussed in Section 9.5.5.

Embarking immediately on a program of deregulation may require some aspects of the railways' restructuring plans to be implemented more rapidly than intended, but it would not in the short term require a completely revised corporate strategy. Longer-term efficiency gains and corporate restructuring would be stimulated by the increasing competition.

The Commission believes that railways can improve

productivity and cost effectiveness more rapidly than is generally recognised provided the incentive structures are appropriate and the railways are free to act. On this basis they should be able to withdraw from operations that are unprofitable and concentrate on freight business that is commercially attractive.

The Commission has proposed that any non-commercial services provided by rail authorities as a social obligation by agreement with government should be explicitly funded. Current railway funding arrangements should not need modification to handle any short-term support that may be necessary during the period of structural adjustment. Such

funding has not been required to any significant extent for grain freight because grain has been protected on rail. Grain growers and other users (coal producers, for example)

as well as taxpayers have paid the cost of supporting high cost grain freight services. The funding of rail operating deficits for commercial (unsubsidised) services could be terminated in parallel with the introduction of an efficient road user charging and road funding mechanism.

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10.4.3 Facilitating implementation

Given that the implementation of the recommendations of the report involves five State governments and the Commonwealth Government, and the issues are both complex and cross portfolios, the Commission suggests that some special approach to implementation is required.

As the primary responsibility for implementing change in the grain storage, handling and transport areas rests with State governments, it is most important in the first instance to establish effective machinery in each State.

The Commission suggests that, as the range of interests involved in the implementation do not fall neatly within one Ministerial portfolio, a Cabinet sub-committee oversight a small task force consisting of relevant officials and industry representatives. The task force should be supported by a secretariat established in the departments of Premier and Cabinet by each State government.

With regard to the Commonwealth Government, the existing Cabinet sub-committee on Structural Adjustment could be used, with a similar task force and secretariat established in the Department of Primary Industries and Energy.

The Commission recognises that there is some institutional machinery in place; for example, the Australian Agricultural Council, and the Australian Transport Advisory Council with

supporting standing committees of officials and numerous other committees and working parties of diverse complexion. However, the Commission has noted that not all the relevant interests involved in implementation are represented on these two councils. In addition, in the Commission's view this institutional machinery is too cumbersome.

The Commission considers there is need for some co-ordination at the regional and national levels. This co-ordination should be in the form of information exchange, facilitation of progress, and to provide a forum for an overall review of

progress from a national viewpoint.

The Commission suggests that the Commonwealth task force be given the responsibility for undertaking the co-ordination activities as described with State government task forces, both on a regional and national level and on a regular basis,

to facilitate reports to individual governments on progress with implementation.

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A P P E N D I X A L E T T E R S P A T E N T F O R T H E I N Q U I R Y

The Royal Commission was established by Letters Patent (in effect, the terms of reference for the inquiry) issued by the Governor-General and the Governor of each of the

participating States: New South Wales, Victoria, Queensland, Western Australia and South Australia. The full terms of reference are set out below.

The initial Letters Patent for the Commonwealth, New South Wales, Victoria and South Australia were subsequently revoked in order to waive the requirement for the Royal Commission to provide a first report by 31 July 1987. The revised Letters

Patent differ from the originals only in respect of the reporting requirement and the amended sections are also set out below.

The Letters Patent for Western Australia did not include reporting dates and therefore were not required to be replaced. The Queensland Government did not agree to a change in the reporting requirements.

In December 1987 the Royal Commission sought an extension of time to 26 February 1988. The request was granted by all participating governments.

T H E C O M M O N W E A L T H

C O M M O N W E A L T H O F A U S T R A L I A

ELIZABETH THE SECOND, by the Grace of God, Queen of Australia and Her other Realms and Territories, Head of the

Commonwealth:

To:

JAMES CARVEL McCOLL

GREETING:

WE DO, by these Our Letters Patent issued in Our name by Our Governor-General of the Commonwealth of Australia on the Advice of the Federal Executive Council and pursuant to the Royal Commissions Act 1902 and every other enabling power,

appoint you to be a Commissioner to inquire into the nature of the most efficient and cost-effective integrated system that might be instituted in Australia for the purpose of providing storage, handling and transport services and port terminal services to Australian grain marketing authorities

and organisations and Australian grain growers for the storage, handling and transporting of wheat and other grains -

177

(a) in the course of, or for the purposes of, overseas or interstate trade or trade with a Territory; or

(b ) in a Territory or for the purposes of marketing or use in a Territory:

AND we direct you to make such recommendations arising out of your inquiry as you think appropriate, including

recommendations regarding the legislative or administrative changes, if any, that are necessary or desirable:

AND, without restricting the scope of your inquiry or in any way limiting the generality of the foregoing, We direct you, for the purposes of your inquiry and recommendations, to give particular attention to the following matters, namely -

(c) the standard of the grain storage, handling and transport services and port terminal services sought by Australian grain marketing authorities and organisations and Australian grain growers and the appropriateness of those standards;

(d ) the institutional arrangements to which the

organisations providing grain storage, handling and transport services and port terminal services are at present subject and any alternative arrangements that might be made;

(e) whether any of the institutional arrangements at present in operation have the effect of limiting the kinds of bodies that provide grain storage, handling and transport services and port terminal services;

(f) the capital and cost structures (including

personnel levels and operating procedures) at present used by the organisations referred to in paragraph (d ) and -(i) the effect of technological developments on

those structures; and

(ii) the ability of those structures to adapt to technological developments;

(g) the present accounting practices of the

organisations referred to in paragraph (d ) and the present contractual arrangements, or other

arrangements, between those organisations or between any of those organisations and Australian grain marketing authorities and organisations or Australian grain growers and the kinds of practices

and arrangements that might be adopted or made in order to promote the most cost-effective provision of such services;

178

(h) the effect on Australian grain marketing

authorities and organisations and Australian grain growers of the present pricing and charging practices for grain storage, handling and transport

services;

(i) the costing and pricing methods that might be used to enable Australian grain marketing authorities and organisations and Australian grain growers to select the most cost-effective combination of services;

(j ) the use of on-farm storage and the location and operating practices of receival points,

sub-terminals, export ports and terminals for grain; .

(k) the present facilities for, and practices relating to, the transport of grain and any alternative facilities and practices that might be provided or adopted;

(l) the benefits to Australian grain marketing authorities and organisations and Australian grain growers likely to result from an efficient, cost-effective integrated system of services and the private and public costs involved; and

(m) the need to ensure that any system for providing grain storage, handling and transport services and port terminal services is sufficiently flexible to enable it to adapt easily and quickly to the

requirements of technological development and to meet changing service needs of Australian grain marketing authorities and organisations and Australian grain growers:

AND We declare that you are authorised to conduct your inquiry into any matter under these Our Letters Patent in combination with any inquiry into the same or related matters that you are directed or authorised to make by any Commission issued, or pursuant to any order or appointment made, by any

of Our Governors of the States:

AND We require you as expeditiously and on as informal a basis as possible to make your inquiry and to furnish to Our Governor-General of the Commonwealth of Australia -(n) not later than 31 July 1987, or such later date as

We may be pleased to fix, a report of the results of your inquiry; and

(o ) not later than 31 January 1988, or such later date as We may be pleased to fix, your recommendations.

179

WITNESS His Excellency the Right

Honourable Sir Ninian Martin Stephen, a member of Her Majesty's Most Honourable Privy Council, Knight of the Order of Australia, Knight Grand Cross of The Most

Distinguished Order of Saint Michael and Saint George, Knight Grand Cross of The Royal Victorian Order, Knight Commander

of The Most Excellent Order of the

British Empire and Governor-General of the Commonwealth of Australia.

Dated this 13 day of October 1986

N.M. Stephen

Governor-General

By His Excellency's Command,

Bob Hawke

Prime Minister

In the new Letters Patent issued on 29 May 1987, the

paragraph dealing with the changed reporting requirement reads as follows:

NOW THEREFORE We do, by these Our Letters Patent issued in Our name by Our Governor-General of the Commonwealth of Australia on the advice of the Federal Executive Council and pursuant to the Royal Commissions Act 1902 and every other enabling power, vary the Letters Patent issued on 13 October 1986 so as to require you to furnish to Our Governor-General of the Commonwealth of Australia, not later than 31 January 1988, or such later date as We may be pleased to fix, a

report on the results of your inquiry into, and your

recommendations concerning, all matters specified in the Letters Patent issued on 13 October 1986.

NEW SOUTH WALES

ELIZABETH THE SECOND, BY THE GRACE OF GOD QUEEN OF AUSTRALIA AND HER OTHER REALMS AND TERRITORIES, HEAD OF THE

COMMONWEALTH.

To James Carvel McColl

GREETING:

WHEREAS by Letters Patent issued in Our name by Our

Governor-General of the Commonwealth of Australia on the

180

advice of the Federal Executive Council and pursuant to the Royal Commissions Act 1902 of the Commonwealth and every other enabling power, you have been appointed to be a

Commissioner to inquire into the nature of the most efficient and cost-effective integrated system that might be instituted in Australia for the purpose of providing storage, handling and transport services and port terminal services to Australian grain marketing authorities and organisations and Australian grain growers for the storage, handling and transporting of wheat and other grains (a) in the course of, or for the purposes of, overseas or interstate trade or trade with a Territory, or (b ) in a Territory or for the purposes of marketing or use in a Territory:

AND WHEREAS it is desired by the Government of the State of New South Wales that you should conduct on its behalf an inquiry, complementary to the inquiry instituted by the Government of the Commonwealth of Australia, into the storage, handling and transporting of wheat and other grains in the course of, or for the purposes of, intrastate trade

within New South Wales:

Now by these Our Letters Patent We, with the advice of the Executive Council of the State of New South Wales, hereby authorise and require you to inquire into and report to Our

Governor of the said State on the following matter:-The nature of the most efficient and cost-effective system that might be instituted in the State for the storage, handling and transporting of wheat and other grains in the course of intrastate trade within New South Wales.

AND We direct you to make such recommendations arising out of your inquiry as you think appropriate, including

recommendations regarding the legislative or administrative changes, if any, that are necessary or desirable.

AND We direct you, in making your recommendations to Our Governor, to have regard to the object of the inquiry

instituted by the Government of the Commonwealth, of achieving the most efficient and cost-effective integrated system that might be instituted in Australia for the purposes expressed in the Letters Patent referred to in the first of the recitals in these Our Letters Patent.

AND We authorise you, in connection with the inquiry

instituted by the Government of the Commonwealth and in connection with the inquiry instituted by these Our Letters Patent, to inquire into any practice, arrangement or other matter of or relating to an authority or organisation which

is an instrumentality of the State.

AND without restricting the scope of your inquiry or in any way limiting the generality of the foregoing, We direct, for the purposes of your inquiry and recommendations, to give particular attention to any matters relating to the storage, handling and transporting of wheat and other grains in the

181

course of intrastate trade within New South Wales that, in relation to that trade, are of a similar kind to the matters referred to in paragraphs (c) to (m) in the Letters Patent issued to you by Our Governor General of the Commonwealth.

AND We declare that you are authorised to conduct your inquiry into any matter under these Our Letters Patent in combination with the inquiry instituted by the Government of the Commonwealth and with any other inquiry into the same or related matters that you are directed or authorised to make by any Commission issued, or pursuant to any order or

appointment made, by any of Our Governors of the other States of the Commonwealth.

AND We require you as expeditiously and on as informal a basis as possible to make your inquiry and to furnish to Our Governor of the State -(1) not later than 31 July 1987, or such later date as

We may be pleased to fix, a report of the results of your inquiry;

(2) not later than 31 January 1988, or such later date as We may be pleased to fix, your recommendations.

In Testimony Whereof, We have caused these Our Letters to be made Patent, and the Public Seal of Our State to be hereunto affixed.

Witness Our Trusty and Well-beloved Sir JAMES ANTHONY ROWLAND, Knight Commander of Our Most Excellent Order of the British Empire, upon whom have been conferred the Decorations of the Distinguished Flying Cross and the Air Force Cross, Our Governor of Our State of New South Wales and its Dependencies, in the Commonwealth of Australia, at Sydney, in Our said State, on Twenty-Second, October, 1986, in the 35th year of Our Reign.

J.A. Rowland Governor

Barrie Unsworth

By His Excellency's Command

182

In the new Letters Patent issued on 6 May 1987, the paragraph dealing with the changed reporting requirement reads as follows:

NOW THEREFORE We do, by these Our Letters Patent issued in Our name under the Great Seal of Our said State and the hand of Sir JAMES ANTHONY ROWLAND, Our Governor of Our said State, require you, not later than the 31st day of January, 1988 or

such later date as We may be pleased to fix, to furnish to our Governor of Our said State a report of the results of your inquiry.

VICTORIA

ELIZABETH THE SECOND BY THE GRACE OF GOD QUEEN OF AUSTRALIA AND HER OTHER REALMS AND TERRITORIES, QUEEN, HEAD OF THE COMMONWEALTH.

To Our trusty and well-beloved

JAMES C. McCOLL

GREETING:

Know Ye that We, reposing great trust and confidence in your knowledge and ability, have constituted and appointed and by these presents do constitute and appoint you JAMES C. McCOLL, to be our Commissioner to inquire into the following matters:

The nature of the most efficient and cost-effective integrated system that might be instituted in Australia for the purpose of providing storage, handling and transport services and port terminal services to Australian grain

marketing authorities and organisations and Victorian grain growers for the storage, handling and transporting of wheat and other grains -(a) in the course of, or for the purposes of, overseas

or interstate trade or trade with Victoria; or

(b ) in Victoria or for the purposes of marketing or use in Victoria.

AND direct you to make such recommendations arising out of your inquiry as you think appropriate, including

recommendations regarding the legislative or administrative changes, if any, that are necessary or desirable.

AND, without restricting the scope of your inquiry or in any way limiting the generality of the foregoing, direct you, for the purposes of your inquiry and recommendations, to give particular attention to the following matters:

183

(c) the standard of the grain storage, handling and transport services and port terminal services sought by Australian grain marketing authorities and organisations and Victorian grain growers and the appropriateness of those standards;

(d) the institutional arrangements to which the organisations providing grain storage, handling and transport services and port terminal services are at present subject and any alternative arrangements that might be made;

(e) whether any of the institutional arrangements at present in operation have the effect of limiting the kinds of bodies that provide grain storage, handling and transport services and port terminal services;

(f ) the capital and cost structures (including personnel levels and operating procedures) at present used by the organisations referred to in paragraph (d) and -

(i) the effect of technological developments on those structures; and

(ii) the ability of those structures to adapt to technological developments;

(g) the present accounting practices of the

organisations referred to in paragraph (d) and the present contractual arrangements, or other arrangements, between those organisations or between any of those organisations and Australian grain marketing authorities and organisations or Victorian grain growers and the kinds of practices

and arrangements that might be adopted or made in order to promote the most cost-effective provision of such services;

(h) the effect on Australian grain marketing

authorities and organisations and Victorian grain growers of the present pricing and charging practices for grain storage, handling and transport services;

(i ) the costing and pricing methods that might be used to enable Australian grain marketing authorities and organisations and Victorian grain growers to select the most cost-effective combination of services;

(j ) the use of on-farm storage and the location and operating practices of receival points,

sub-terminals, export ports and terminals for grain;

184

(k ) the present facilities for, and practices relating to, the transport of grain and any alternative facilities and practices that might be provided or adopted;

(l) the benefits to Australian grain marketing

authorities and organisations and Victorian grain growers likely to result from an efficient, cost-effective integrated system of services and the private and public costs involved; and

(m) the need to ensure that any system for providing grain storage, handling and transport services and port terminal services is sufficiently flexible to enable it to adapt easily and quickly to the

requirements of technological development and to meet changing service needs of Australian grain marketing authorities and organisations and

Victorian grain growers.

AND declare that you are authorised to conduct your inquiry into any matter under this Commission in combination with any inquiry into the same or related matters that you are directed or authorised to make by any Commission issued, or pursuant to any order or appointment made by the

Governor-General of the Commonwealth of Australia or the Governors of any of the other States of the Commonwealth of Australia.

AND require you as expeditiously and on as informal a basis as possible to make your inquiry and to furnish to the Governor of the State of Victoria -(1) not later than 31 July 1987, or such later date as may

be fixed, a report of the results of your inquiry; and

(2) not later than 31 January 1988, or such later date as may be fixed, your recommendations.

IN TESTIMONY WHEREOF We have caused these Our Letters Patent and the Seal of our said State to be hereunto affixed.

WITNESS, His Excellency the Honourable Sir John McIntosh Young, Knight Commander of Our Most Distinguished Order of Saint Michael and Saint George, Administrator of the State of

Victoria, at Melbourne this twenty eighth day of October one thousand nine hundred and eighty six and in the thirty fifth year of our Reign.

J M Young

By His Excellency's Command,

John Cain

PREMIER

185

In the new Letters Patent issued on 16 June 1987, the

paragraphs dealing with the changed reporting requirement read as follows:

KNOW YE THAT we do vary the Letters Patent issued on

28 October, 1986 by deleting therefrom clauses (1) and (2) (which require you to report the results of your inquiry not later than 31 July 1987 and furnish a report not later than 31 January 1988, or such later dates as may be fixed) and substituting therefor the following clause:

"not later than 31 January 1988, or such later date as We may be pleased to fix, a report on the results of your inquiry into, and your recommendations concerning, all matters specified in the Letters Patent issued on

28 October, 1986."

QUEENSLAND

Elizabeth the Second, by the Grace of God, Queen of Australia and Her other Realms and Territories, Head of the Commonwealth.

To: JAMES CARVEL McCOLL, Esquire.

Greeting:

WE DO, by these Our Letters Patent issued in Our name by Our Governor of Our State of Queensland in the Commonwealth of Australia on the advice of Our Executive Council and pursuant to the Commissions of Inquiry Acts 1950-1954 and every other

enabling power, appoint you to be a Commissioner to inquire into the nature of the most efficient and cost-effective integrated system of providing storage, handling and transport services and port services to grain marketing authorities and organisations and grain growers for the storage, handling and transporting of wheat and other grains in the course of trade within Our State of Queensland.

AND WE DIRECT YOU to make such recommendations arising out of your inquiry as you think appropriate, including recommendations regarding the legislative or administrative changes, if any, that are necessary or desirable.

AND WE DIRECT YOU, for the purposes of your inquiry and recommendations, to give particular attention to the following matters, namely:

(a) the standard of the grain storage, handling and transport services and port services sought by grain marketing authorities and organisations and grain growers;

186

(b ) the appropriateness of these standards and the manner and extent to which such standards constrain the efficiency of, or increase costs to, the organisations providing grain storage, handling and

transport services and port services;

(c) the institutional arrangements to which the organisations providing grain storage, handling and transport services and port services are at present subject and the manner and extent of the cost to these organisations and to the public of any

alternative arrangements that might be made;

(d) the appropriateness of the September 1981 Report of the Queensland Planning Committee on Future Grain and Oilseed Handling, Storage and Transport, and subsequent reviews of that Report, and the impact the implementation of the Report's recommendations has had, and can be expected to have, on the

efficient and cost-effective provision of storage, handling and transport services and port services in Our State of Queensland;

(e) the capital structures at present used by the organisations referred to in paragraph (c) and the constraints that these capital structures place on the efficient and cost-effective storage, handling and transport of grain, particularly of grain grown outside of Our State of Queensland;

(f) the appropriateness of modifications or expansions to these capital structures, the funding

requirements of any such modifications or

expansions having regard to the current financial indebtedness of the organisations referred to in paragraph (c), alternative arrangements for the ownership or operation of existing, modified or expanded capital structures, and the

appropriateness of contractual or other

arrangements to ensure the long-term viability of such modified or expanded capital structures;

(g) the cost structures of the organisations referred to in paragraph (c) and in particular, the

personnel levels and the work practices of

personnel engaged in the provision of port

services, including industrial disputations at ports, and the manner and extent to which such cost structures constrain the efficiency of, or increase costs, including ocean freight costs, to these organisations or to grain growers;

(h) the present contractual arrangements, or other arrangements, between the organisations referred to in paragraph (c) or between any of those

organisations and grain marketing authorities and organisations or grain growers and the kinds of arrangements that might be adopted or made in order

187

to promote the most cost-effective provision of appropriate services and in particular to ensure that organisations providing storage, handling and transport services to grain marketing authorities and grain growers receive the appropriate

incentives or disincentives for services rendered to such authorities;

(i) the use of on-farm storage and the location of receival points, sub-terminals, export ports and terminals for grain and in particular the impact on grain hygiene, grain quality, grain handling efficiency and grain marketing of any increased use of on-farm storage;

(j ) the present facilities for, and practices relating to, the transport of grain and the implications of any alternative facilities and practices that might be provided or adopted;

(k) the benefits to grain marketing authorities and organisations, grain growers and the organisations referred to in paragraph (c) likely to result from an efficient, cost-effective integrated system of services having regard in particular to the benefits to be derived from the storage, handling

and transport of grain grown outside of Our State of Queensland, and of commodities other than grain;

(l) the need to ensure that any system for providing grain storage, handling and transport services and port services is sufficiently flexible to enable it to adapt easily and quickly to the requirements of technological development and to meet changing service needs of grain marketing authorities and organisations and grain growers;

Provided that the terms of any contractual arrangements between the Crown in right of Our State of Queensland and instrumentality or body corporate representing the Crown in right of Our State of Queensland or any statutory body established by or under any Act of Our State of Queensland, and any other person, and any information or data in any way related to such contractual arrangement, shall not be made available to you under your Commission unless the approval of the relevant Minister of the Crown is first obtained.

AND WE DECLARE that you are authorised to conduct your inquiry into any matter under these Our Letters Patent in combination with any inquiry into the same or related matters that you are directed or authorised to make by any Commission issued, or pursuant to any order or appointment made, by any of Our Governors of Our States or of Our Governor-General of the Commonwealth of Australia.

188

P

AND WE REQUIRE YOU as expeditiously and on as informal basis as possible to make your inquiry and to furnish to Our Governor of Our State of Queensland in the Commonwealth Australia-

(1) not later than 31st July, 1987, or such later date as We may be pleased to fix, a report of the

results of your inquiry; and

(2) not later than 31st January, 1988, or such later date as We may be pleased to fix, your

recommendations.

IN TESTIMONY WHEREOF, We have caused the Public Seal of Our said State to be hereunto affixed.

WITNESS Our Trusty and Well-beloved His Excellency the Honourable Sir WALTER BENJAMIN

CAMPBELL, one of Our Counsel learned in the law, Governor in and over the State of Queensland and its Dependencies in the Commonwealth of Australia, at Government House, Brisbane, this twentieth day of November, in the year of our Lord, one thousand nine hundred and eighty-six, and

in the thirty-fifth year of Our Reign.

W.B. Campbell Joh Bjelke-Peterson

By Command

WESTERN AUSTRALIA

ROYAL COMMISSION

By His Excellency Professor Gordon Reid, Governor in and over the State of Western Australia and its Dependencies in the Commonwealth of Australia.

TO JAMES CARVEL McCOLL:

I, the Governor, do by this commission issued with the advice and consent of the Executive Council -

Western Australia

Gordon Reid

Governor.

189

(1) appoint you to be a Royal Commission to inquire into the nature of the most efficient and cost-effective integrated system that might be instituted in Australia for the purpose of providing storage, handling and transport services and port terminal services to Australian grain marketing authorities and organizations

and Australian grain growers for the storage, handling and transporting of wheat and other grains; and

(2) direct you to make such recommendations arising out of your inquiry as you think appropriate, including recommendations regarding the legislative or

administrative changes, if any, that are necessary or desirable; and

(3) without restricting the scope of your inquiry or in any way limiting the generality of the foregoing, direct you, for the purposes of your inquiry and

recommendations, to give particular attention to the following matters, namely -(a) the standard of the grain storage, handling and transport services and port terminal services

sought by Australian grain marketing authorities and organizations and Australian grain growers and the appropriateness of those standards;

(b ) the institutional arrangements to which the organizations providing grain storage, handling and transport services and port terminal services are at present subject and any alternative arrangements that might be made;

(c) whether any of the institutional arrangements at present in operation have the effect of limiting the kinds of bodies that provide grain storage, handling and transport services and port terminal services;

(d) the capital and cost structures (including personnel levels and operating procedures) at present used by the organizations referred to in paragraph (b ) and -

(i) the effect of technological developments on those structures; and

(ii) the ability of those structures to adapt to technological developments;

(e) the present accounting practices of the

organizations referred to in paragraph (b ) and the present contractual arrangements, or other arrangements, between those organizations or between any of those organizations and Australian grain marketing authorities and organizations or Australian grain growers and the kinds of practices

190

and arrangements that might be adopted or made in order to promote the most cost-effective provision of such services;

(f ) the effect on Australian grain marketing

authorities and organizations and Australian grain growers of the present pricing and charging practices for grain storage, handling and transport

services;

(g) the costing and pricing methods that might be used to enable Australian grain marketing authorities and organizations and Australian grain growers to select the most cost-effective combination of

services;

(h) the use of on-farm storage and the location and operating practices of receival points,

sub-terminals, export ports and terminals for grain;

(i ) the present facilities for, and practices relating to, the transport of grain and any alternative facilities and practices that might be provided or adopted;

(j ) the benefits to Australian grain marketing

authorities and organizations and Australian grain growers likely to result from an efficient, cost-effective integrated system of services and the private and public costs involved; and

(k) the need to ensure that any system for providing grain storage, handling and transport services and port terminal services is sufficiently flexible to enable it to adapt easily and quickly to the

requirements of technological development and to meet changing service needs of Australian grain marketing authorities and organizations and Australian grain growers; and

(4) declare that, by virtue of this commission, you may in the execution of this commission do all the acts, matters and things and exercise all the powers that a Royal Commission may lawfully do and exercise, whether under the Royal Commissions Act 1966 or otherwise; and

191

(5) declare that you are authorized to conduct your inquiry into any matter under this commission in combination with any inquiry into the same or related matters that you are directed or authorized to make by any commission issued, or pursuant to any order or appointment made, by the Governor-General of the Commonwealth or the Governor of any other State.

GIVEN under my hand and the Public Seal of Western Australia, at Perth, on 4 November 1986.

By his Excellency's Command,

Brian Burke

PREMIER

GOD SAVE THE QUEEN!

SOUTH AUSTRALIA

HIS EXCELLENCY LIEUTENANT-GENERAL SIR DONALD BEAUMONT DUNSTAN, Knight Commander of the Most Excellent Order of the British Empire, Companion of the Most Honourable Order of the Bath, Governor in and over the State of South Australia and its Dependencies in the Commonwealth of Australia:

To

JAMES CARVEL McCOLL, B.Agr.Sc. , M.Agr.Sc., of 8 MacAlpine Close, McKellar, Australian Capital Territory, 2617.

Greeting:

I, the Governor, with the advice and consent of the Executive Council, DO HEREBY APPOINT YOU to be a Royal

Commission to inquire into the nature of the most efficient and cost-effective integrated system that might be instituted for the purpose of providing storage, handling and transport services and port

terminal services to grain marketing authorities and organisations and grain growers for the storage, handling and transporting of wheat and other grains.

AND I direct you to make such recommendations arising out of your inquiry as you think appropriate, including recommendations regarding the legislative or administrative changes, if any, that are necessary or desirable.

192

AND, without restricting the scope of your inquiry or in any way limiting the generality of the foregoing, I direct you, for the purposes of your inquiry and recommendations, to give particular attention to the

following matters, namely:

(a) the standard of the grain storage, handling and transport services and port terminal services sought by grain marketing authorities and organizations and grain growers and the

appropriateness of those standards;

(b ) the institutional arrangements to which the organizations providing grain storage, handling and transport services and port terminal services are at present subject and any alternative arrangements that might be made;

(c) whether any of the institutional arrangements at present in operation have the effect of limiting the kinds of bodies that provide grain storage, handling and transport services and port terminal

services;

(d) the capital and cost structures (including personnel levels and operating procedures) at present used by the organizations referred to in paragraph (b ) and-

(i) the effect of technological developments on those structures; and

(ii) the ability of those structures to adapt to technological developments;

(e ) the present accounting practices of the

organizations referred to in paragraph (b) and the present contractual arrangements, or other arrangements, between those organizations or between any of those organizations and grain

marketing authorities and organizations or grain growers and the kinds of practices and arrangements that might be adopted or made in order to promote the most cost-effective provision of such services;

(f) the effect on grain marketing authorities and organizations and grain growers of the present pricing and charging practices for grain storage, handling and transport services;

(g ) the costing and pricing methods that might be used to enable grain marketing authorities and

organizations and grain growers to select the most cost-effective combination of services;

193

(h) the use of on-farm storage and the location and operating practices of receival points,

sub-terminals, export ports and terminals for grain;

(i) the present facilities for, and practices relating to, the transport of grain and any alternative facilities and practices that might be provided or adopted;

(j ) the benefits to grain marketing authorities and organizations and grain growers likely to result from an efficient, cost-effective integrated system of services and the private and public costs

involved; and

(k) the need to ensure that any system for providing grain storage, handling and transport services and port terminal services is sufficiently flexible to enable it to adapt easily and quickly to the

requirements of technological development and to meet changing service needs of grain marketing authorities and organizations and grain growers:

AND I declare that you are authorized to conduct your inquiry into any matter under this Commission in combination with any inquiry into the same or related matters that you are directed or authorized to make by any Letters Patent or Commission issued, or pursuant to any order to

appointment made, by the Governor-General or any State Governor:

AND I require you as expeditiously and informally as possible to make your inquiry and to furnish to me:

(a) a report of the results of your inquiry not

later than 31 July 1987, or such later date as may be subsequently fixed;

and

(b ) your recommendations not later than 31 January 1988, or such later date as may be subsequently fixed.

Given under my hand and the Public Seal of South Australia, at Adelaide, this twenty-third day of October, 1986.

By Command,

T. Hemmings for Premier

GOD SAVE THE QUEEN!

194

In the new Letters Patent issued on 28 May 1987, the

paragraphs dealing with the changed reporting requirement read as follows:

WHEREAS

AND

I the Governor, did on 23 October 1986, appoint you to be a Royal Commission to inquire into certain matters relating to the storage, handling and transporting of grain and did direct you to furnish me with your report and recommendations on certain

specified dates AND WHEREAS I am of the opinion that more time is needed for the conduct of the inquiry: NOW I, the Governor, with the advice and consent of the Executive Council, DO HEREBY REVOKE the Commission dated 23 October 1986 AND DO HEREBY APPOINT YOU to be a Royal Commission to further

inquire into the nature of the most efficient and cost-effective integrated system that might be instituted for the purpose of providing storage, handling and transport services and port terminal

services to grain marketing authorities and organizations and grain growers for the storage, handling and transporting of wheat and other grains.

I require you as expeditiously and informally as possible to make your inquiry and to furnish me with a report of the results of the inquiry and with your recommendations.

195

APPENDIX B VISIT AND DISCUSSION PROGRAM

As part of the inquiry process the Commission conducted an extensive visit and discussion program. A summary of that program is provided below.

Preliminary visits

At the outset of the inquiry the Commissioner visited key government ministers and officials and senior representatives of storage, handling, transport and port organisations. Also included were visits to marketing boards, grower

organisations and unions, including the ACTU.

The purpose of these initial visits was to establish lines of communication and to obtain a preliminary view of the industry and likely inquiry issues. The discussions took place in Canberra, Melbourne, Sydney, Perth, Brisbane, Toowoomba and Adelaide during October, November and December 1987.

Team visits

Following the preliminary visits the Commissioner, accompanied by a number of staff members, undertook more detailed visits to each of the States. Those visits included discussions with people more at the operational level within

organisations having a direct involvement in the matters under inquiry. The opportunity was also usually taken to inspect facilities both in capital cities and outlying

districts.

Meetings with groups of growers were an important part of these visits and not only allowed the Commission to explain its approach to the inquiry but gave growers the opportunity to voice their views and concerns about the industry.

Victoria

Discussions were held with the Grain Elevators Board, V/Line, the Port of Geelong Authority, the Port of Portland

Authority, Ministry of Transport, Department of Agriculture and Rural Affairs, Victorian Farmers' Federation and the Australian Wheat Board.

Inspections were conducted at the ports of Geelong and Portland and at country facilities near Mitiamo and Swan Hill.

Informal meetings with grower groups were held at Shepparton, Horsham and Ouyen.

196

New South Wales

Discussions were held with the Grain Handling Authority, State Rail Authority, Maritime Services Board, New South Wales Farmers' Association, Prime Wheat Association, Patrick's Stevedoring Company and a number of private grain

traders and processors.

Inspections were conducted at the ports of Sydney, Newcastle and Port Kembla, the Roselle railway yard and country facilities at Boggabilla, Moree, Forbes, Parkes, Hilston and West Wyalong. On-farm storage was inspected at 'Overton',

Forbes.

Informal meetings with grower groups were held at Moree, Narrabri, Forbes and West Wyalong.

South Australia

Discussions were held with Co-operative Bulk Handling, Australian National, Department of Marine and Harbors, Department of Agriculture and United Farmers and Stockowners Association.

Inspections were conducted at the ports of Adelaide, Ardrossan, Wallaroo, Port Pirie, Port Lincoln and Thevenard and at country facilities between Adelaide and Port Pirie, and at Loxton.

Informal meetings with grower groups were held at Wallaroo, Port Pirie, Port Lincoln, Ceduna and Loxton.

Queensland

Discussions were held with Bulk Grains Queensland, Queensland Rail, Port of Brisbane Authority, Mackay Harbour Board, Gladstone Harbour Board, Queensland Graingrowers' Association and a number of private storage and transport operators.

Inspections were conducted at the ports of Brisbane, Gladstone and Mackay and country facilities at Goondiwindi, Toowoomba, Dalby, Moura, Dysart and McLaren.

Informal meetings with grower groups were held at Toowoomba, Miles, Moura and Clermont.

Western Australia

Discussions were held with Co-operative Bulk Handling, Westrail, the port authorities of Fremantle, Geraldton and Albany, Department of Agriculture, Department of Transport, the Western Australian Farmers Federation, Primary Industry Association, Grain Pool of W.A. and a number of private

storage and transport organisations.

197

Inspections were conducted at the ports of Fremantle (including Kwinana), Geraldton and Albany, and country facilities at Merredin and in the Katanning area. On-farm storage was inspected at 'Erragulla Downs', Merredin.

Informal meetings with grower groups were held at Geraldton, Merredin, Katanning and Albany.

Discussions on alternative systems

As the inquiry reached its halfway mark the Commission developed a set of alternative grain storage, handling and transport systems substantially based on proposals presented in submissions. It discussed the possible effects of implementing the alternative systems with representatives of key organisations in Brisbane, Sydney, Melbourne, Adelaide

and Perth during July and August 1987. A principal aim of the discussions was to gain knowledge about how industry organisations might respond to possible changes in their operating environment.

Additional discussions

Apart from the visits/discussions outlined above, the Commission held further discussions on specific matters as the need arose. These included the following:

. Australian Wheat Board - Melbourne (January 1987), Canberra (August 1987).

. ACTU (both in its own right and in its role as convenor of groups of relevant unions) - Melbourne (January and July 1987), Sydney (February 1987).

. Mr D. McKechnie, Chairman, 1981 Queensland Planning Committee on the Queensland Grain Distribution System - Brisbane (June 1987).

. Mr A. Carmichael, Chairman, Inquiry into the New South Wales Grain Handling System (1981) - Sydney (August 1987).

. Industries Assistance Commission - Canberra (April, August and December 1987)

. Inter-State Commission - Canberra (May 1987)

. Trade Practices Commission - Canberra (January 1988).

. Stevedoring Industry Review Committee - Canberra (March and August 1987), Sydney (November 1987).

. Australian Grain Exporters' Association - Canberra (July 1987)

. CSIRO - Canberra (December 1987).

198

North American visit Research Director

Over a two week period in April 1987 the Commission's

Research Director visited industry bodies, government organisations and universities in Canada and the United States of America. The itinerary included:

Canada

. Agriculture Canada

. Universities of Saskatchewan and Manitoba

. Canada Grains Council

. Grain Transport Authority

. Canadian National Rail

. Canadian Wheat Board

. Canadian Transport Commission

. Canadian Grain Research Group.

United States of America

. A meeting of the North Central Regional Committee for Grain Handling and Transport

. Economic Research Service of the United States

Department of Agriculture

. Office of Transportation, United States Department of Agriculture

. Interstate Commerce Commission.

Overseas Visit - Commissioner and Commission Secretary

The Commissioner and Commission Secretary visited a number of overseas countries over a four week period in September and October 1987. The main organisations and facilities visited in the various countries are included in a description of the visit in Volume 2, Supporting Paper 1.

199

New Zealand Visit Commissioner and Dr A. Beck

In December 1987 the Commissioner and Dr A. Beck visited the following in Wellington, New Zealand:

. The Treasury

. Department of Trade and Industry

. Minister for State-Owned Enterprises

. State Services Commission

. Ministry of Agriculture and Fisheries

. Ministry of Forestry

. Ministry of Transport.

200

APPENDIX C SUBMISSIONS TO THE INQUIRY

Parties that made submissions to the inquiry, either in writing or orally at the public hearings, are listed below. Parties having a particular State interest or emphasis are

grouped according to State; the remaining parties are listed under a national heading.

Submissions by the parties listed were in writing and were presented at the public hearings, unless otherwise indicated. Written submissions not presented at a hearing are indicated by (w) while oral submissions are indicated by

(o).

National

ACIL Australia Pty Ltd Australian Barley Board Australian Bureau of Agriculture and Resource Economics Australian Federated Union of Locomotive Enginemen Australian Grain Exporters Association (w) Australian Malt Exporters Committee Australian National Line (w) Australian Quarantine and Inspection Service Australian Railways Union Australian Road Research Board (w) Australian Road Transport Federation (w) Australian Wheat Board Australian Workers' Union Barrier Consolidated Industries Bureau of Rural Science (w) Bureau of Transport Economics Commonwealth Attorney-General's Department (w) Commonwealth Department of Transport Commonwealth Department of Trade (w ) CSIRO Division of Entomology CSIRO Division of Wildlife Research CSIRO Stored Grain Research Laboratory Dome Constructions Pty Ltd Dryacide Australia Pty Ltd (w)

Flour Millers' Council of Australia Grains Council of Australia National Health and Medical Research Council (w) National Union of Rail Workers of Australia Oilseeds Research Council (w)

Prime Minister's Country Task Force (w) Stewart Wrightson Aust Ltd (w) Strarch International Ltd (w) Trade Practices Commission (w) Wellcome Australia Limited Westpac Banking Corporation (w)

201

New South Wales

Australian Federated Union of Locomotive Enginemen - Dubbo Branch (w) Burns, L.K. (w) Cabonne Shire Council

City of Newtown (w) Community Transport Concern (w) Council of City of Wagga Wagga (w) Council of the Shire of Urana (w) Department Main Roads, NSW (w) Federated Engine Drivers and Firemen's Association

- Illawarra Sub Branch, NSW Friends of Wolli Creek (w) Grain Handling Authority, NSW Grain Sorghum Marketing Board, NSW Griffith Shire Council Crosby, J.R. representing a group of Moree farmers Hard and Soft Wheatgrowers Association Hoskinson, E.J. (w) Jerilderie Shire Council Kikoira Silo Committee (w) Kywong Silo Committee (w) Laird, P. Local Government and Shires Association of NSW Lockhart Shire Council Maritime Services Board, NSW May, T.F. McGuire, J.J. and J.T. Moree Plains Shire Council (w) Morgan, T. (Joint submission with J.C. Ridley) Murray Valley League (w ) New South Wales Department of Agriculture (w) New South Wales Farmers' Association New South Wales Farmers' Association - Eugowra Branch New South Wales Farmers' Association - Forbes Branch New South Wales Farmers' Association - Kikoira Branch New South Wales Farmers' Association - Tallimba Branch (w ) New South Wales Road Transport Association (w) Oats Marketing Board of NSW (w) Oilseeds Marketing Board, NSW O'Hare, P.J. (w) ~ O'Neill, K. (w) Port Kembla Harbour Task Force Prime Wheat Association Ltd Public Accounts Committee - New South Wales (w) Rawsthorne, K. (w) Ridley, J.C. (Joint submission with T. Morgan) Residents for Environment Protection (w) Roberts, P. (w) Rock/Urana Combined Silo Committee Rural Marketing & Supply Association (w) Shire of Parkes (w) Staggs, B . State Rail Authority of New South Wales Tocumwal, Finley, Berrigan and Jerilderie Silo Committees Tootool Silo Committee Transport Workers Union of Australia - Newcastle Branch (w)

202

Walgett Silo Committee Warren Shire Council Warren Silo Committee Welsh, D. (w)

Wollongong City Council (w) Womens Rural Action Committee

Victoria

Austin, A .F . City of Portland (w) Eastern Mallee Silo Zone Flour Millers' Council of Victoria (w) Goroke Silo Committee (w) Griffiths, P.J. (W) Holland, A .H . (w) Hynam, F. Jones, N. & J . (w) Kooloonong and Natya Silo Committee Laharum Bulk Handling Company Landwehr, S.V. Loeliger, L. and C. (w) Marmalake Receival Zone Committee McClelland, W. McGrath, W.D. Molyneaux, J. (w) Mott, G.R. Municipal Association of Victoria

Tocumwal/Mangalore/Geelong Railway League Transport Workers Union of Australia - Victorian Branch (w) Peel, R. Port Phillip Sea Pilots (w) Potter, K. (w) Price, J.A. Riverina Grain Handlers Association Rural Marketing Supply Association

Saunders, L.B. Shire of Bannockburn (w) Shire of Lowan Shire of Walpeup (w) Sudholz, J.D. (w) Tippett, G.T. and M.T. Toomer, W.F. (w) Victorian Farmers and Graziers Association (w) Victorian Farmers Federation Victorian Farmers Federation - Detpa Branch Victorian Farmers Federation - Glenorchy Branch (& Glenorchy

Silo Committee) Victorian Farmers Federation - Goroke Branch Victorian Farmers Federation - Horsham South Branch Victorian Farmers Federation - Millewa District Council (w) Victorian Farmers Federation - Minyip Branch Victorian Farmers Federation - Natimuk Branch Victorian Farmers Federation - North West District Victorian Farmers Federation - Sheephill's Branch Victorian Farmers Federation - Tempy Branch Victorian Farmers Federation - Wimmera District Council Victorian Farmers Federation - Woomelang Branch (w)

203

Victorian Government: - Ministry of Transport - Grain Elevators Board - V/Line - Geelong and Portland Port Authorities - Department of Agriculture and Rural Affairs Victorian Oatgrowers Pool Wyld, J.

Queensland

Barley Marketing Board, Queensland Bulk Grains Queensland Carrigan, R.A. (w) Central Queensland Grain Sorghum Marketing Board Conaghan, R.E. Department of Main Roads, Queensland (w)

Department of Primary Industries, QLD Gladstone Port Authority (w) Jenyns, H.W. (w) Nitschke, M.E. and J.L. Queensland Graingrowers Association Queensland Graingrowers Association - Allora Branch Queensland Graingrowers Association - Moura Branch Queensland Produce Seed and Grain Merchants (w) Queensland Road Transport Association

State Wheat Board, Queensland Taylor, D.C.

South Australia

Australian National Anderson, V.A. (w) Booth, L,A. Cameron, A. Chandler, I.A. (w) City of Port Pirie Cleve District Council Cooper, L.T. Department of Environment and Planning (w) District Council of Orroroo District Council of Pirie (w) District Council of Snowtown District Council of Tumby Bay (w) Eyre Peninsula Road Transport Gypsum Resources Australia Pty Ltd Heath-Well Agencies and Design (w) Llewelyn, J. Mann, I.R. (w) McLean, D.J. (w) Mid North Regional Organisation, SA

The Millers Produce Company, SA Niemz, R.M. (w) Nelshaby Branch of Agricultural Bureau (w) Orroroo Silo Committee Rusden, G. (Joint submission with T . Young) (w) Sceale Bay Deep Sea Port South Australian Co-Operative Bulk Handling Limited

204

South Australian Department of Agriculture Southern Mallee Grains Council (w) United Farmers and Stockowners of South Australia United Farmers and Stockowners - Bordertown Branch United Farmers and Stockowners - Zone 1 and District Council

of Murat Bay United Farmers and Stockowners - Zone 2 and 3 Wakelin, B . Wallaroo Deep Seaport Committee Young, T. (Joint submission with G. Rusden) (w)

Western Australia

Agricultural Protection Board (w) Albany Port Authority Bayly, R.T.L. (o) BHP Steel (w)

Brandenburg, I. and S. Burdon. G.L. and J.R. (w) Central South Regional Council (w) Commodity Exports Western Australia

Country Shire Councils' Association Co-operative Bulk Handling, Western Australia Crook, W.L. David Bedbrook & Associates (w) Esperance Direct Drilling Company (w ) Esperance Port Authority

Fremantle Port Authority Grain Pool of Western Australia (WA Maltsters) Harvey, B . Kennedy, P.R. (o) Ministry for Transport and Small Business, WA Morton, I. (w) O.D. Transport Pty Ltd

Shire of Corio (w) Shire of Greenough (w) Shire of Mullewa Shire of Narembeen Smith and Son, J . and L. Southern & South Eastern Freight Association Tuckey, W. (w) Western Australian Department of Agriculture Western Australian Farmers' Federation Western Australian Farmer's Federation

- Corrigin Zone Council Western Australian Farmers' Federation - Esperance Zone Council (w) Western Australian Farmers' Federation - Hyden Branch Western Australian Farmers' Federation

- Lake King/Camm Branch (w ) Western Australian Farmers' Federation - Lake Grace Zone Council (w) Western Australian Farmers' Federation - Merredin Zone Western Australian Farmers' Federation

- Northern & North Midlands

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Western Australian Road Transport Association (w) Westrail Whalsten, A.P. Yilgarn Shire Council (w)

206

During the course of the inquiry, the Commission conducted

APPENDIX D PUBLIC HEARINGS

two rounds of public hearings, the hearings are listed below. The locations and dates of

First round

. New South Wales: . Queensland:

- Sydney

2 March 1987

- Toowoomba 16 March 1987

- Gunnedah

4 March 1987

- Emerald

18 March 1987

- Wagga Wagga

5 March 1987

- Brisane

19 March 1987

. Victoria: . South Australia:

- Horsham

30 March 1987

- Adelaide

13 and 14 April 1987

- Melbourne 1 to 3 April 1987 - Port Lincoln 15 April 1987

. Western Australia: . ACT:

- Perth

28 and 29 April 1987

- Merredin

30 April 1987

- Canberra

13 and 14 May 1987

Second round

. Queensland: . New South Wales:

- Brisbane

2 November 1987

- Sydney

5 November 1987

. Victoria: . Western Australia:

- Melbourne 11 November 1987

. South Australia:

- Adelaide 19 November 1987

- Perth

16 November 1987

207

APPENDIX E RESEARCH CONSULTANTS AND THEIR TASKS

Consultants engaged by the Commission on research tasks, and the nature of those tasks, are listed below.

Consultant Nature of consultancy

Australian Shipping Consultants Pty Ltd Report on Australian and international aspects of port services and sea

transport of grain

Centre for Transport Policy Analysis, The University of Wollongong

The cost impacts of restrictive work and management practices in Australia's grain distribution system:

A quantitative analysis.

David Bedbrook and Associates

An evaluation of on-farm grain storage and road transport costs from paddock to port.

Group led by Professor B.S. Fisher of The University of Sydney and including Dr R. Batterham,

Mr J.C. Quiggin, Dr R.R. Piggott, Dr E.M. Fleming and Dr T.G. MacAulay

An analysis of the characteristics of the Australian grain storage, handling and transport industries.

GHD-Planner West Pty Ltd Assessment of opportunities for and implications of technological change.

Michael Read and Associates

Aspects of road and rail transport of grain in Australia.

Peat, Marwick, Mitchell and Associates The financial reporting and accounting practices of bulk handling agencies

and rail authorities.

Operating procedures used to monitor and schedule grain flows.

Travers Morgan Pty Ltd Capital and cost structures. Analysis of alternative systems for storage, handling and transport of grain.

208

During the course of its inquiry the Royal Commission released the following publications:

Information Booklet on Inquiry Approach and Procedures, December 1986.

Issues for the Royal Commission's Inquiry, Discussion Paper No. 1, December 1986.

Institutional Framework for the Australian Grain, Storage Handling and Transport System, Discussion Paper No. 2, June 1987.

Pricing Practices in the Australian Grain Storage, Handling and Transport System, Discussion Paper No. 3, July 1987.

Aspects of Road and Rail Transport of Grain in Australia, Discussion Paper No. 4, August 1987.

Preliminary Findings and Options, Discussion Paper No. 5, September 1987.

APPENDIX F ROYAL COMMISSION PUBLICATIONS

The following working papers were published in support of Discussion Paper No. 5:

Overview of Existing System, Working Paper No. 1, September 1987.

Institutional Arrangements, Working Paper No. 2, September 1987.

Cost Structures, Working Paper No. 3, September 1987.

Competition and Contestability, Working Paper No. 4, September 1987.

Pricing Practices, Working Paper No. 5, September 1987.

Land Transport, Working Paper No. 6, September 1987.

Evaluation of Alternative Systems, Working Paper No. 7, September 1987.

In addition, the Royal Commission published 12 issues of its information bulletin.

209

APPENDIX G STAFFING AND SPECIALIST CONSULTANTS

Staffing of the Commission is worked for the Commission for included.

Secretariat

Harry Tys (Commission Secretary)

John Wharton

Peter Eveille

Terrie Bovis

Jeanette Robinson

Kathy Sandison (from April 1987)

Glenys Beauchamp (February to March 1987)

Georgie Moudakis (from May 1987)

Betty Warner (November 1986 to January 1987)

Jennifer Richards (December 1986 to May 1987)

Sarah Graham (from March 1987)

set out below. Persons who less than one month are not

Research unit

Bernard Wonder (Research Director)

Tony Beck

Richard Pickering

Russell Phillips

Paul Morris

Michael Murphy (from November 1987)

Brett Levy (June to November 1987)

Stuart Fitch (from October 1987)

Peter Grundy (April to October 1987)

Patricia Pascuzzo (June to September 1987)

Lisa Young (from October 1987)

Melissa Boag (October to November 1986)

Christine Krikowa (from August 1987)

James Wilson (October 1986 to March 1987)

Zarko Tancevski (March to August 1987)

Sharon Matthews (November to December 1986)

The Commission also employed consultants to assist staff in the following specialisations:

. industrial relations advice . editorial . ADP systems

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APPENDIX H LEGISLATIVE AND ADMINISTRATIVE CHANGES

This appendix details the major legislative and

administrative changes identified by the Commission as being necessary to implement its recommendations. The list is indicative of major changes and is not necessarily

exhaustive. Where legislative impediments are believed to exist these have been identified by the appropriate section in the legislation; in some cases, changes may be indicated where in fact no such need exists.

The appendix is divided for ease of reference into the Commonwealth and States. Each of these is divided into three sections addressing respectively measures to facilitate efficiency in the distribution system, measures to facilitate competition in grain storage and handling, and measures to

facilitate competition in grain transport.

Commonwealth

The Australian Wheat Board derives its powers from

complementary Commonwealth-State legislation and any changes to the Wheat Marketing Act 1984 (Commonwealth) in this section may require corresponding changes to the Wheat Marketing Acts in participating States.

1. To facilitate efficiency in the distribution system, require the Australian Wheat Board to:

(a) minimise storage, handling and transport costs

. Wheat Marketing Act 1984, (Commonwealth);

(b) disaggregate port service and sea transport charges to growers

. Wheat Marketing Act 1984, (Commonwealth), pooling under Part III, s.56, s .57.

2. To facilitate competition in grain storage and handling:

(a) remove requirement for the Australian Wheat Board to appoint only the ' State corporation' as the ' authorized receiver' in each State, and provide for the Australian Wheat Board to appoint one or more authorised receivers

. Wheat Marketing Act 1984, (Commonwealth), s.3(1) (definitions), s.lO(l), 10(2), s . 19 , s. 24;

(b ) remove Australian Wheat Board involvement with bulk grain handlers' charges under grower-to-buyer and permit wheat sales

211

. Wheat Marketing Act 1984 (Commonwealth), s.26(6)

. Wheat Tax (Permit) Act 1984, s.6(6)(ii ).

3. To facilitate competition in grain transport:

(a) remove the Australian National surcharge on movement of grain between rail-served silos in South Australia;

(b ) allow Australian National to close uneconomic rail lines

. Review of The Schedule, Clause 9(1), Railways (Agreement) South Australia Act 1975;

(c) ensure that Australian National is subject to the provisions of the Trade Practices Act 1974

. Australian National Railways Commission Act 1983;

(d ) provide opportunity for Australian National to engage in a range of commercial activities

. Australian National Railways Commission Act 1983.

New South Wales

1. To facilitate efficiency in the distribution system, require State marketing boards to:

(a) minimise storage, handling and transport costs

. Marketing of Primary Products Act 1983, s .54;

(b ) disaggregate port service and sea transport charges to growers

. Marketing of Primary Products Act 1983.

2. To facilitate competition in grain storage and handling:

(a) remove sole receival rights of the Grain Handling Authority and provide marketing boards with authority to appoint one or more licensed receivers

. Wheat Marketing Act 1984, (NSW), s .3(1 )

(definitions), s.6, s.9;

(b) remove Grain Handling Authority charges for grower- to-buyer and permit wheat sales

. Wheat Marketing Act 1984 (NSW), s .12 and s .13;

212

(c ) remove impediments to commercial operation of the Grain Handling Authority

. remove non-commercial practices and welfare provisions from legislation

- Grain Handling Act 1954, s.l2(d)(ii)

. remove limitations on appointing board

membership

- Grain Handling Act 1954, s.7(3)

- Marketing of Primary Products Act 1983, s .8(2), s .11(4 ), s .40(5)

. remove powers of Ministerial direction

- Grain Handling Act 1954, s.7(2)(c);

(d) ensure that the Grain Handling Authority is subject to the provisions of the Trade Practices Act 1974

- Grain Handling Act 1954;

(e) provide opportunity for the Grain Handling

Authority to engage in a range of commercial activities

- Grain Handling Act 1954.

3. To facilitate competition in grain transport:

(a) commercialise the rail freight operations of the State Rail Authority

. remove powers of Ministerial direction

- Transport Authorities Act 1980, s .11(c )

. remove common carrier obligation in Government Railways Act 1912, s.33

. provide opportunity for the State Rail

Authority to engage in a range of commercial activities

- Government Railways Act 1912, broaden s.24(3) and (4) and 24A to remove

restrictions on more widespread

competitive pricing;

(b) ensure that the State Rail Authority is subject to the provisions of the Trade Practices Act 1974

. Government Railways Act 1912.

213

Victoria

1. To facilitate efficiency in the distribution system, require State marketing boards to:

(a) minimise storage, handling and transport costs

. Marketing of Primary Products Act 1958

. Barley Marketing Act 1958;

(b) disaggregate port service and sea transport charges to growers

. Marketing of Primary Products Act 1958

. Barley Marketing Act 1958.

2. To facilitate competition in grain storage and handling:

(a) remove sole receival rights of the Grain Elevators Board and provide marketing boards with authority to appoint one or more licensed receivers

. Wheat Marketing Act 1984, (Victoria), s .6

. Grain Elevators Act 1958, s .10(2 );

(b ) remove Grain Elevators Board charges for

grower-to-buyer and permit wheat sales

. Wheat Marketing Act 1984 (Victoria), s . 12 and s. 13;

(c) remove impediments to commercial operation of the Grain Elevators Board

. remove non-commercial practices and welfare provisions from legislation

- a detailed examination of the Grain

Elevators Act 1958 will be necessary

- Annual Reporting Act 1983 and associated regulations

. remove limitations on appointing board

membership

- Grain Elevators Act 1958, s .5(2)

. remove powers of Ministerial direction

- Grain Elevators Act 1958, s.10(1);

(d ) remove port handling monopoly for export grains

214

Grain Elevators Act 1958, s.10 and s . 12;

(e) ensure that the Grain Elevators Board is subject to the provisions of the Trade Practices Act 1974

. Grain Elevators Act 1958;

(f ) provide opportunity for the Grain Elevators Board to engage in a range of commercial activities

. Grain Elevators Act 1958.

3. To facilitate competition in grain transport:

(a) remove legislative or administrative arrangements requiring use of rail

. Transport Act 1983, s.189;

(b ) commercialise rail freight operations of V/Line

. remove non-commercial and social obligations

- Transport Act 1983;

remove powers of Ministerial direction

- Transport Act 1983, s. 14 Clause 1; and Schedule 2,

provide opportunity for V/Line range of commercial activities to engage in a

- Transport Act 1983;

(c ) ensure that V/Line is subject to the provisions of the Trade Practices Act 1974

. Transport Act 1983.

Queensland

1. To facilitate efficiency in the distribution system, require State marketing boards to:

(a) minimise storage, handling and transport costs

. Primary Producers' Organisation and Marketing Act 1926-1987 ~

. Wheat Pool Act 1920-1984;

(b ) disaggregate port service and sea transport charges to growers

215

L

Primary Producers' Organisation and Marketing Act 1926-1987.

2. To facilitate competition in grain storage and handling:

(a) remove sole receival rights of the Queensland State Wheat Board and provide marketing boards with authority to appoint one or more licensed receivers

. Wheat Marketing Act 1984, (Queensland), s.10

. Wheat Pool Act 1920 - 1984, s .6(1);

(b ) remove bulk handling charges for grower-to-buyer and permit wheat sales

. Wheat Marketing Act 1984 (Queensland), s .17

. Wheat Pool Act 1920 - 1984, s.6A;

(c) remove limitations on appointing board membership

. Queensland Grain Handling Act 1983, s .7;

(d) remove powers of Ministerial direction

. Primary Producers' Organisation and Marketing Act 1926-1987, S.13C and S.34F;

(e) remove port handling monopoly for export grains

. Queensland Grain Handling Act 1983, s.26;

(f ) ensure that Bulk Grains Queensland is subject to the provisions of the Trade Practices Act 1974

. Queensland Grain Handling Act 1983;

(g) provide for Bulk Grains Queensland to have freedom to engage in a range of commercial activities

. Queensland Grain Handling Act 1983.

3. To facilitate competition in grain transport:

(a) remove legislative or administrative arrangements requiring use of rail

. State Transport Act 1960-1981, s.49;

(b ) commercialise the rail freight operations of Queensland Rail

. remove non-commercial and social obligations

- Railways Act 1914-1982, s.108(1). (2). (3)

216

remove powers of Ministerial direction

- Railways Act 1914-1982, s .6(2)

. provide opportunity for Queensland Rail to engage in a range of commercial activities

- Railways Act 1914-1982;

(c) ensure that Queensland Rail is subject to the provisions of the Trade Practices Act 1974

. Railways Act 1914-1982.

Western Australia

1. To facilitate efficiency in the distribution system, require State marketing boards to:

(a) minimise storage, handling and transport costs

. Grain Marketing Act 1975;

(b ) disaggregate port service and sea transport charges to growers

. Grain Marketing Act 1975.

2. To facilitate competition in grain storage and handling:

(a) remove sole receival rights of Co-operative Bulk Handling of Western Australia and provide marketing boards with authority to appoint one or more licensed receivers

. Bulk Handling Act, 1967 s .39

. Wheat Marketing Act, 1984 (Western Australia), s. 8

. Grain Marketing Act 1975, s.34;

(b ) remove Co-operative Bulk Handling of Western Australia charges for grower-to-buyer sales

. Wheat Marketing Act 1984, s.15;

(c) remove impediments to commercial operation of Co-operative Bulk Handling of Western Australia

. remove non-commercial practices and welfare provisions from legislation

- Bulk Handling Act 1967, s .9(1)(a ), s. 19, s.20-24, s .42

217

- Wheat Marketing Act 1984, (Western

Australia), s.28

- Grain Marketing Act 1975, s .22z s. 25

. remove powers of Ministerial direction

- Bulk Handling Act, 1967, s.20-23;

(d) ensure that the Co-operative Bulk Handling of Western Australia is subject to the provisions of the Trade Practices Act 1974

. Bulk Handling Act 1967.

3. To facilitate competition in grain transport:

(a) remove legislative or administrative arrangements requiring use of rail .

. Transport Co-ordination Act, 1966. S.33-42;

(b) commercialise the rail freight operations of Westrail

. remove powers of Ministerial direction

- Government Railways Act 1904

- Transport___ Co-ordination___ Act 1966, Division 1

. remove common carrier obligation in Government Railways Act 1904, s.37

. provide opportunity for Westrail to engage in a range of commercial activities

- Government Railways Act 1904

- Transport Co-ordination Act 1966;

(c ) ensure that Westrail is subject to the provisions of the Trade Practices Act, 1974

. Government Railways Act 1904.

South Australia

1. To facilitate efficiency in the distribution system, require State marketing boards to:

(a) minimise storage, handling and transport costs

. Barley Marketing Act, 1947;

218

(b ) disaggregate port service and sea transport charges to growers

. Wheat Marketing Act 1984 (South Australia)

. Barley Marketing Act, 1947.

2. To facilitate competition in grain storage and handling:

(a) remove sole receival rights of South Australian Co-operative Bulk Handling and provide marketing boards with authority to appoint one or more licensed receivers

. Bulk Handling of Grain Act 1955, s .12

. Wheat Marketing Act, 19B4 (South Australia), s . 6;

(b ) remove South Australian Co-operative Bulk Handling charges for grower-to-buyer wheat sales

. Wheat Marketing Act 1984 (South Australia), s. 13;

(c ) remove impediments to commercial operation of South Australian Co-operative Bulk Handling

. remove non-commercial practices and welfare provisions from legislation

- Bulk Handling of Grain Act, 1955, s.10, s.14, s .22, s.29 and s .34(3)

. remove powers of Ministerial direction

- Bulk Handling of Grain Act, 1955, s .18;

(e) ensure that South Australian Co-operative Bulk Handling is subject to the provisions of the Trade Practices Act, 1974

. Bulk Handling of Grain Act, 1955;

(f) ensure that port loading charges are disaggregated on a port basis

. Harbors Act 1936, regulations under s.125(1).

219

3. To facilitate competition in grain transport:

(a) remove the Australian National surcharge on movement of grain between rail-served silos in South Australia;

(b ) allow Australian National to close uneconomic rail lines

Review of The Schedule, Clause 9(1), Railways Agreement (South Australia) Act 1975.

220

REFERENCES

Advisory Council for Inter-Government Relations 1984, 'Responsibilities and resources of Australian local government', Report No. 7, AGPS, Canberra.

BAE 1987, Wheat Marketing and Assistance, submission to IAC inquiry, AGPS, Canberra.

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