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-v AUSTRALIA ,Α

Royal Commission into G R A IN STORAGE, H A N D LIN G A N D TRANSPORT

Volume 2 Supporting Papers

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

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND

VOLUME 2: SUPPORTING PAPERS

TRANSPORT

FEBRUARY 1988

Commonwealth of Australia 1988 ©

ISBN for set of three volumes: 0 644 07232 6 ISBN for Volume 2: 0 644 07740 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 1968, 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 COMMONWEALTH OF AUS ...... A PARLIAiviEN iA u . .. .

m 4 1 of 1988

Ordered to be printed by authority ISSN 0727-4181

Printed in Australia by Watson Ferguson and Co., Brisbane

CONTENTS

Page

VOLUME 2

GLOSSARY V

ABBREVIATIONS ix

SYSTEM OVERVIEW SUPPORTING PAPER 1

INSTITUTIONAL ARRANGEMENTS SUPPORTING PAPER 2

STORAGE AND HANDLING SUPPORTING PAPER 3

LAND TRANSPORT SUPPORTING PAPER 4

PORT SERVICES AND SEA TRANSPORT SUPPORTING PAPER 5

iii

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:

Despatch:

Economies of scale:

Economies of scope:

An amount paid as a penalty for

ship-loading times in excess of an agreed level.

An amount paid as a bonus for

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

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.

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.

v

Fixed costs: Costs that do not vary with the

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

f.o.b.: 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.

Incremental costs: see Avoidable costs.

Joint & common costs: Costs that are created jointly by the production of a number of

services but cannot be directly attributed to any individual

service.

Long run: Time period in which all costs are

variable with the level of

production.

Marginal costs: 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 driven: 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.

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

vi

Pooling: 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).

Predatory pricing: 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.

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:

Ramsey pricing:

Restricted grains:

Service driven:

Occurs where rail rates are based on the straight line (or 'as the crow flies

port. ’ ) distance from the nearest

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.

Grains that are restricted to

transport by rail with certain

exceptions. These grains are the statutory grains.

Where a predetermined level of

service drives the level of

resources applied and their physical disposition in the production

process.

vii

Short run:

Stand-alone costs:

Statutory agencies:

Statutory grains:

Unit trains:

Time period in which some costs are fixed irrespective of the level of service produced.

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

Organisations that are established under or supported by legislation.

Grains that are controlled by

statutory marketing boards.

Train loads that exceed 90 per cent of the capacity of a single

locomotive or 85 per cent of the

capacity of multiple locomotives.

viii

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 GRP 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

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

ix

NSWDA NSWFA ntkm

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

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 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

x

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

OVERVIEW OF EXISTING GRAIN STORAGE, HANDLING AND SYSTEM TRANSPORT

Supporting Paper 1 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. INTERNATIONAL AND DOMESTIC MARKET 2

ENVIRONMENT

2.1 Introduction 2.2 International market environment 2.3 Domestic market environment

3. OVERVIEW OF CURRENT SYSTEM

3.1 Introduction 3.2 Australian overview 3.2.1 Grain production 3.2.2 Storage, handling and transport 11

charges for wheat 3.2.3 Storage and handling 14

3.2.4 Land transport 18

3.2.5 Ports and port services 20

3.2.6 Shipping 21

3.3 New South Wales 22

3.3.1 Grain production 22

3.3.2 Storage and handling 22

3.3.3 On-farm storage 24

3.3.4 Land transport 24

3.3.5 Ports 24

3.4 Victoria 25

3.4.1 Grain production 25

3.4.2 Storage and handling 25

3.4.3 Land transport 26

3.4.4 Ports 27

3.4.5 Interstate grain flows 28

3.5 Queensland 28

3.5.1 Grain production 28

3.5.2 Storage and handling 28

3.5.3 On-farm storage 30

3.5.4 Land transport 31

3.5.5 Ports 32

3.6 South Australia 34

3.6.1 Grain production 34

3.6.2 Storage and handling 34

3.6.3 Land transport 35

3.6.4 Ports 36

3.6.5 Interstate grain flows 36

iii

CN (N LD CO CO CO CO

3.7 Western Australia 38

3.7.1 Grain production 38

3.7.2 Storage and handling 38

3.7.3 Land transport 39

3.7.4 Ports 40

4. MONITORING AND SCHEDULING 41

4.1 Introduction 41

4.2 Grain flows in Australia: an overall perspective 41 4.3 Forecasting and harvest planning 43

4.4 Country silo operations 45

4.5 Transport scheduling 46

4.6 Stock control systems 48

4.7 Ship scheduling and the 'fair share' rule 49

5. TECHNOLOGICAL CHANGE 51

5.1 Country storage and handling 51

5.2 Port terminals 51

5.3 Transport 52

5.4 Information management 52

6. LESSONS FROM ABROAD 53

6.1 Background 53

6.2 Overseas grain distribution systems 53

6.3 The institutional environment and efficiency potential of overseas systems

56

6.4 On-farm versus off-farm storage 59

6.5 Grain hygiene 60

6.6 Manning levels 62

6.7 Developments in overseas systems 62

APPENDICES

A Production of Australian grain by State 65

B A description of aspects of a number of overseas grain distribution systems 68

REFERENCES 88

TABLES

3.1 Production densities of wheat: five-year average, 1982-83 to 1986-87 11

3.2 Components of the export price of wheat: 12

Australia, 1986-7 and 1987-88

iv

3.3 13 Average rail freight and storage and handling charges deducted from growers' first advance, 1984-85 to 1987-88

3.4 Bulk handling agencies: country and port 15

storage profile, 1985-86

3.5 On-farm storage capacity, 1984-85 18

3.6 Average distances in the transport of grain 19

in Australia

3.7 Tonnages of grain railed, 1982-83 to 1986-87 19

3.8 Port capacities and maximum out-load rates 21

3.9 New South Wales grain production: five-year 23 average, 1982-83 to 1986-87

3.10 GHA country and port storage profile 23

3.11 Victorian grain production: five-year average, 25 1982-83 to 1986-87

3.12 Victorian country and port storage profile 26

3.13 Tonnages of grain railed: V/Line, 1982-83 27

to 1986-87

3.14 Victorian interstate grain flows, 1986-87 29 season

3.15 Queensland grain production: five-year 30

average, 1982-83 to 1986-87

3.16 BGQ country and port storage profile 31

3.17 Transport of permit and grower-to-buyer 33

wheat: Queensland, 1984-85 to 1986-87

3.18 Grain production in South Australia: 34

five-year average, 1982-83 to 1986-87

3.19 SACBH country and port storage profile, 35

1985-86

3.20 Receivals by road and rail: South 36

Australia, 1982-83 to 1986-87

3.21 Port terminal storage capacity: South 37

Australia, 1986-87

v

3.22 Port size and storage capacity: South Australia, 1985-86 37

3.23 Western Australian grain production: five-year average, 1982-83 to 1986-87 38

3.24 WACBH country and port storage profile, 1985-86 38

3.25 Receivals at port by road and rail: Western Australia, 1982-83 to 1986-87 39

3.26 Port terminal storage capacity: Western Australia, December 1987 40

3.27 Loading rate at port: Western Australia

FIGURES

40

2.1 Average production and disposal of various grains: Australia, 1982-83 to 1986-87 3

2.2 World supply, demand, stocks and trade of grain, 1980-81 to 1986-87 4

2.3 Australia's proportion of world sea-borne grain trade, 1980 and 1985 6

3.1 Production of Australian grain, by State, 1982-83 to 1986-87 9

3.2 Bulk handling agency grain storage in 1986 and production 1982-83 to 1986-87: Australia 16

vi

1. INTRODUCTION

In this supporting paper an overview of the current system for grain storage, handling, transport and port services in Australia is presented. The system is described from a national viewpoint after which the key features of each State's system are described.

In Chapter 2 the domestic and international market

environment within which the grain distribution system operates is outlined. This is followed in Chapter 3 by an overview of grain production, bulk storage and handling, on-farm storage, transport, ports and interstate grain flows,

from both a national and a State perspective. The monitoring and scheduling of grain flows and technological change in storage, handling and transport are examined in Chapters 4 and 5 respectively.

A number of other specific matters relevant to this overview of the storage, handling and transport system are covered in other supporting papers. Of particular note are Supporting Paper 9, which discusses grain hygiene, and Supporting Paper 10, which deals with industrial relations.

Chapter 6 of this paper provides a description of aspects of a number of overseas grain distribution systems. Information about the overseas systems was obtained by the Commission

during a visit to the countries concerned in September and October 1987.

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

indicated.

1

2 . INTERNATIONAL AND DOMESTIC MARKET ENVIRONMENT

2.1 Introduction

Grain storage, handling and transport services facilitate the movement of grain from harvester to either domestic or international purchaser. The demand for these services is

tied to the fluctuations in demand that occur in domestic and international markets. In particular, since a large proportion (approximately 70 per cent over the period 1982-83 to 1986-87) of Australia's grain production is exported (see Figure 2.1), the grain distribution system is necessarily closely linked to the international market and must be flexible and responsive to fluctuations in world demand and supply conditions.

2.2 International market environment

Changes in international markets require grain production and the distribution system to respond to variations in the demands for specific types and qualities of grain. For example, the Australian Wheat Board (AWB) has emphasised the importance, from a marketing viewpoint, of having a clean product free of live insects and chemical residues. Similar views have been expressed with regard to other grains. For example, the Australian Malt Exporters Committee submitted that malt 'specifications include a very low tolerance of matter other than barley (less than 0.5%) and a requirement

for the absence of pesticides residues' (AMEC submission, April 1987, p. 3). For sorghum and maize, the Central Queensland Grain Sorghum Marketing Board claimed that premiums of up to $5 per tonne can be made on the basis of delivery of high quality grain.

In regard to world supply and demand for grain, since 1984-85 contractions in world imports of wheat and some coarse grains have been exacerbated by world over-production, leading to increased stocks among major exporters and consequently reduced prices. Figure 2.2 reflects these influences, showing world demand and supply of grains, with the

difference between these being the levels of stocks. The figure also shows how world trade has changed over the period 1980-81 to 1986-87.

Demand and supply fluctuations have also occurred in individual importing and exporting countries. Import demand has been declining in some traditionally large importing nations such as China, Europe and India. Increased

production in these countries, resulting from greater efficiency and a policy encouraging self-sufficiency, has generated these declines. Soviet Union import demand also fell significantly in 1985-86, and this has resulted in exporters to that country, particularly the United States, seeking markets elsewhere.

2

16 000

14 0 0 0 -

1 2 000 -

10 000 -

° 8 000-

6 000- Domestic Market

Export Market

4 0 0 0 -

2 000 -

Barley Wheat Sorghum Rice

TYPE OF GRAIN

Oilseeds Legumes Maize

FIGURE 2.1 AVERAGE PRODUCTION AND DISPOSAL OF VARIOUS GRAINS: AUSTRALIA, 1982-83 TO 1986-87

Source: BAE 1987.

1986-87

FIGURE 2.2 WORLD SUPPLY, DEMAND, STOCKS AND TRADE OF GRAIN 1980-81 TO 1986-87

Note: does not include legumes.

Source: BAE 1987.

SUPPORTING PAPER 1

The impact of reduced import demand on stocks and prices has been aggravated by the effects of the United States and European Community farm support programs. The United States Export Enhancement Program has, since mid-1985, provided

large grain trading companies buying United States wheat for export with assistance in the form of commodity subsidies for specific markets (most large importers other than Japan). The European Community scheme provides exporters with subsidies (restitutions) which are intended to bridge the gap between European Community prices and (usually lower) world prices.

In this changing environment, Australia has largely maintained its proportion of the world market for grain, as shown in Figure 2.3, although there have been significant changes in the relative importance of various markets. In particular, exports of wheat to the Soviet Union, Egypt, Iran

and China have been increasing in recent years, while those to a number of Middle East countries (including Saudi Arabia, Iraq and Kuwait) and India have been declining.

In the case of other grains, the Middle East has become the major market for Australian barley during the 1980s, and Japan remains the dominant importer of Australian sorghum and the most stable market for oats.

2.3 Domestic market environment

In general, the domestic market for Australian grain is small relative to the demand from overseas buyers. However, this varies between grains, the domestic market being the dominant buyer of oats, oilseeds and maize. For a number of grains, the domestic market is controlled by statutory marketing boards. The role of these boards is discussed in detail in Supporting Paper 2. This section provides a brief outline of the disposal of the various grains onto the domestic market.

Considering wheat first, domestic use of wheat as a

proportion of total wheat sales has declined from 30 per cent in 1973-74 to 17 per cent in 1986-87, although in 1982-83 domestic sales amounted to 36 per cent of total sales due to drought in the eastern States.

Domestic demand for wheat can be. divided into three main categories: wheat for human consumption, industrial wheat, and stockfeed wheat.

Wheat for human consumption is purchased by flour millers for conversion into flour. Some 46 per cent of flour used domestically is used for bread making; the majority of the remainder is used for starch and gluten manufacture, and

biscuit and pastry production. The quality requirements of the wheat for this purpose vary according to end use; for example, most bread flours require over 11 per cent protein content and high water absorption characteristics, while

biscuit flours can use wheat with as little as 8 per cent

5

1985

(Total: 206.8)

SUPPORTING PAPER 1

protein content and with low water absorption

characteristics, In general, however, all such wheat is required to be homogeneous within grades, clean, and free of insects and excessive chemical residues.

These quality requirements impose the need for additional segregations on bulk handlers. Moreover, new season wheat is not suitable for milling immediately after harvest; millers introduce it gradually into their wheat blends (two or three months after harvest). To cater for this, bulk handlers must carry over grain from the previous season.

Australian demand for wheat for human consumption has remained relatively stable over time, at approximately 1.1 million tonnes per year. Demand for industrial wheat, which is used mainly for the production of starch, gluten and glucose, has been steadily increasing, from around

250 kilotonnes in 1978-79 to 315 kilotonnes in 1986-87.

The stockfeed wheat market is subject to considerable fluctuations in demand; the intensive livestock industries (pigs and poultry) are the principal users, although in drought periods large quantities are also fed to sheep and cattle. The large fluctuations are caused by a number of

factors, among them seasonal factors and relative prices of other feed grains.

In respect of barley, over the five years to 1986-87

approximately 25 per cent of barley produced was used domestically. Some 60 per cent of this barley was used for stockfeed. Malting is the other principal use. Stockfeed barley is responsible for the major fluctuations in domestic

demand (for reasons similar to those for stockfeed wheat) ranging from 76 kilotonnes in 1981-82 to 256 kilotonnes in 1982-83.

Demand for domestic malting barley in Australia has also fluctuated significantly; from 155 kilotonnes in 1982-83 to 220 kilotonnes in 1986-87. The major quality consideration for buyers of high quality barley for malting is that the grain be maintained such that seed germination is possible in

a large proportion of the grain during the malting process. This involves protection of the grain from moisture and insect pests, and storage at a temperature below 25°C.

Almost 85 per cent of oats produced in Australia (five-year average to 1986-87) is sold on the domestic market, some 83 per cent of this being for stockfeed purposes. Similarly,

virtually all sorghum sold on the domestic market is for stockfeed use, although the majority (over 70 per cent) of sorghum produced is exported. Quality control in these

grains is important in obtaining premiums in the export market.

The domestic market has been the predominant user of domestically produced oilseeds in the past, although in recent years exports have increased dramatically. Oilseeds are used mainly for the production of oils and oilseed meals.

7

3. OVERVIEW OF CURRENT SYSTEM

3.1 Introduction

This chapter provides an overview of grain production and storage, handling and transport in Australia and in the States. The national perspective is provided in Section 3.2 while information about each of the States follows in Sections 3.3 to 3.7.

3.2 Australian overview

3.2.1 Grain production

Grain production occurs in all mainland States, essentially within a belt stretching from central Queensland, through New South Wales to Victoria, South Australia and the

south-western 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 yields. The extremes range from the

Mediterranean-type climate of South Australia and Western Australia, which favours winter cropping (in particular wheat, barley and oats), to the temperate zones of northern New South Wales and Queensland, where both winter and summer cropping (sorghum and oilseeds in particular) are possible.

Over the five-year period to 1986-87, Australian grain production averaged 25 million tonnes, although production has fluctuated dramatically during this period, from a low of 14 million tonnes in 1982-83 (the drought year) to a high of

almost 33 million tonnes in 1983-84. Figure 3.1 shows the relative importance of each State to overall grain

production, New South Wales accounting for around 31 per cent of production, Western Australia 28 per cent, South Australia 15 per cent and the other two States accounting for approximately 13 per cent each. Production fluctuations

occur in all States but, as Figure 3.1 shows, they have tended to be less severe in Western Australia. Appendix A provides detailed figures on production by grain type in each State for the five years to 1986-87.

In addition to the size of the grain crop in each State, other aspects of grain production that have implications for the storage, handling and transport task include grain varieties and segregations, the intensity of grain production, crop yields and quality considerations such as susceptibility to weather damage, insect infestation and moisture content.

By far the dominant crop grown in Australia is wheat, which accounted for around 65 per cent of total grain production over the five years to 1986-87. The next-rankedcrop is barley (16 per cent), followed by oats (6 per cent), sorghum

(5 per cent) and oilseeds, lupins, maize, rice and legumes

8

12 0 0 0

10 000

8 000

2 6 000

4 000

2 000

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

Inv I Queensland

Ξ New South Wales

H I Victoria South Australia

D Western Australia

FIGURE 3.1 PRODUCTION OF AUSTRALIAN GRAIN, BY STATE, 1982-83 TO 1986-87

Source: BAE 1987.

SUPPORTING PAPER 1

(less than 5 per cent each). While significant fluctuations in 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).

In each State the dominant crop produced is wheat. 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 larger the range of crops, the greater the demand on the grain distribution system to make provision for keeping separate the various types of grain. This demand is

magnified by the requirement of marketing bodies that individual grain types be further segregated in order to enhance marketing prospects. For example, seven major wheat segregations based on variety, protein content and other criteria, were required in 1986-87. However, even within these major classifications further segregations are established. A number of summer crops such as sorghum, maize and sunflower, while single-grade grains, are frequently received as either dry grain or high moisture grain, thus resulting in two segregations.

Generally speaking, the density of grain production in Australia is quite low compared to many overseas

grain-producing areas, as shown in the case of wheat in Table 3.1. This low density results from a number of

factors, including poorer soils in some areas of Australia compared to overseas countries, rainfall limitations and the mixed crop/livestock farming system practiced in most of the grain production areas. Low densities are associated with more dispersed grain production and this affects the grain

storage, handling and transport task. Production densities vary markedly between Australian States, South Australia having the lowest yield and Victoria having the highest yield in the period 1982-83 to 1986-87.

Finally, grain is susceptible to deterioration for a number of reasons, and the degree to which this occurs varies between States. Among the main reasons for this

deterioration are damage from adverse weather conditions, grain moisture problems and insect infestations. Weather damage is important in all States but is particularly serious in Queensland and northern New South Wales, where summer storms can adversely affect standing grain. Adverse weather conditions can also lead to grain moisture problems. The establishment and use of grain dryers in some States

(particularly Queensland) has reduced this problem somewhat. The temperature and humidity conditions of northern New South Wales and Queensland are also highly conducive to the growth of insect populations, although insects are a problem in all States. Aspects such as these place particular demands on the storage, handling and transport system, especially on their ability to receive grain quickly and to operate effective quality control measures.

10

SUPPORTING PAPER 1

TABLE 3.1 PRODUCTION DENSITIES OF WHEAT: FIVE-YEAR AVERAGE, 1982-83 TO 1986-87

Country Tonnes per hectare

United States 2.49

Canada 1.93

Argentina 1.90

Australia 1.37

NSW 1.49

Vic 1.61

Qld 1.48

WA 1.38

SA 1.32

Source: BAE 1987.

3.2.2 Storage, handling and transport charges for wheat

Before considering the various components of the grain storage, handling and transport system, it is useful to relate the charges for these services to the returns from grain sales and thereby obtain a perspective of the

importance of the various components.

The significance of wheat storage, handling and transport charges can be gauged from Table 3.2. Combined storage, handling and rail freight charges represented 18 per cent of the overseas customers' price (cost, insurance, freight

(c .i .f.))in 1986-87 and 17 per cent in 1987-88. Sea freight rates increased considerably between 1986-87 and 1987-88, rising from 15 per cent of the c.i.f. price to 25 per cent. The other major cost component is AWB administration and interest costs which fell from 10 per cent of the c.i.f. price in 1986-87 to 6 per cent in 1987-88.

Storage, handling and transport charges vary widely across States, as can be seen from Table 3.3. In 1987-88 the

combined charges for these services ranged from $24.72 per tonne in South Australia to $42.53 per tonne in New South Wales, which represents between 13 and 22 per cent of the export customers' c.i.f. price given in Table 3.2.

11

TABLE 3.2 COMPONENTS OF THE EXPORT PRICE OF WHEAT: AUSTRALIA, 1986-87 AND 1987-88

1986-87 1987-88

Per cent Per cent

Component $/tonne of c.i.f. $/tonne of c.i.f.

Customer price (c.i.f) Sea freight 186.70 27.70a 14.8

197.27 49.27° 25.0

Average f.o.b. port price AWB administration

159.00

17.94 9.6

148.00

11.01 5.6

& interest cost

Net pool contribution Storage and handling 141.06 14.94° 8.0

136.99 14.92° 7.6

Rail freight 17.88° 9.6 18.36° 9.3

Wharfage 1.12° 0.6 1.03° 0.5

Research levy 0.40 0.2 0.45 0.2

Ceres house 0.10 - 0.10 -

Farm gate return 106.62 57.1 102.13 51.8

a. Based on the freight rate applicable for a voyage between the east coast of Australia and Kuwait as at 28 November 1986 (US$18.00).

b. Based on the freight rate applicable for a voyage between the east coast of Australia and Kuwait as at 12 January 1988 (US$35.00).

c . Weighted State averages using charges and receivals for the applicable year.

Source: AWB, personal communication, 12 January 1988 and 3 February 1988.

12

SUPPORTING PAPER 1

TABLE 3.3 AVERAGE RAIL FREIGHT AND STORAGE AND HANDLING CHARGES DEDUCTED FROM GROWERS' FIRST ADVANCE, 1984-85 TO 1987-88 ($/tonne)

Charge NSW Vic Qld SA WA

Rail freight

1984-85 23.67 21.20 16.24 10.48 16.49

1985-86 24.59 22.52 15.84 11.18 16.02

1986-87 24.49 22.09 16.21 11.13 16.00

1987-88 25.83 22.63 16.13 12.96 14.24

Storage and Handling

1984-85 17.20 13.75 20.00 12.74 13.05

1985-86 16.70 13.80 19.00 11.93 13.05

1986-87 16.70 14.63 17.00 12.44 13.05

1987-88 16.70 15.43 17.00 11.76 13.70

Total charge

1984-85 40.87 34.95 36.24 23.22 29.54

1985-86 41.29 36.32 34.84 23.11 29.07

1986-87 41.19 36.72 33.21 23.57 29.05

1987-88 42.53 38.06 33.13 24.72 27.94

Source: AWB, personal communication, 12 January 1988,

13

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3.2.3 Storage and handling

Grain storage and handling in Australia is undertaken principally by five bulk handling agencies, one in each mainland State. On-farm storage and private organisations also play a role but the Commission estimates that at least

75 per cent of annual production is handled within the bulk handling system. The bulk handlers are the Grain Handling Authority (GHA) in New South Wales, the Grain Elevators Board (GEB) in Victoria, Bulk Grains Queensland (BGQ), Western Australian Co-operative Bulk Handling (WACBH), and South Australian Co-operative Bulk Handling (SACBH). Each of the

agencies has legislation outlining its objectives and responsibilities; the co-operatives have both legislation and articles of association governing their operations.

Each bulk handling agency has a network of country receival facilities connected by transport links to several seaboard terminals, either directly or, in the case of New South

Wales, through a number of regional terminals. The regional terminals are used to accumulate grain into relatively large volumes 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, 42 of the State's country storages

are designated as central receival points. Central receival points handle overflow grain from other silos in the area, accept grain under deferred delivery arrangements and usually have fast road receival and rail out-loading facilities. Unlike the regional terminals in New South Wales, central receival points do not normally assemble grain from

surrounding silos in order to load unit trains. Often, regional terminals and port terminals also perform the role of a country receival facility for growers located in close proximity.

Storage capacity of the five central systems totals some 36 million tonnes; the distribution of capacity between States is shown in Table 3.4. Half the storage capacity is in the form of permanent country storage, 15 per cent is permanent port storage, and the remaining 35 per cent is temporary storage (bunkers) both at port and in the country. Permanent storage in Western Australia is largely in the form of horizontal sheds, while in South Australia it is largely in the form of the vertical silos. In the remaining States, a mixture of horizontal and vertical storage is used.

As shown in Figure 3.2, total permanent and temporary storage capacity exceeds grain production levels for both the five-year average to 1986-87 and the record 1983-84 year. For permanent storage, capacity represents 90 per cent of average production and 70 per cent of production in the

record year.

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TABLE 3.4 BULK HANDLING AGENCIES: COUNTRY AND PORT STORAGE PROFILE, 1985-86

(Kilotonnes)

Vertical Horizontal Bunker Total

Queensland Port 265 ~ - 265

Country 895 629 2020 3544

Total 1160 629 2020 3809

New South Wales Port 297 - - 297

Country 2007 3799 5848 11654

Total 2304 3799 5848 11951

Victoria Port 290 720 - 1010

Country 1983 922 1652 4557

Total 2273 1642 1652 5567

South Australia Port 1581 320 478 2379

Country 1915 464 - 2379

Total 3496 784 478 4758

Western Australia Port 587 1123 106 1816

Country 242 5296 2458 7996

Total 829 6419 2564 9812

Australia Port 3020 2163 584 5767

Country 7042 11110 11978 30130

Total 10062 13273 12562 35897

Source: BGQ submission, March 1987; GHA 1987; GEB pers. comm. August 1987; SACBH 1987, WACBH pers. comm. June 1987. SACBH 1987; GHA 1987; GEB, pers. comm.; WACBH, pers. comm. September 1987; BGQ submission March 1987.

Similar comparisons for each of the State systems provide varying results. The permanent and temporary storage capacity of each State matches or is greater than average grain production levels. In the case of permanent storage only and the five-year average production level, capacity is

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 South Australia and 116 per cent in Victoria.

15

36 000

33 000

30 000 -

27 000 -

24 000

21 0 0 0 -

£ 18 0 0 0 -

15 0 0 0 -

1 2 000 -

9 000

6 000

3 0 0 0 -

-

NSW Old WA Australia

FIGURE 3.2 BULK HANDLING AGENCY GRAIN STORAGE IN 1986 AND PRODUCTION 1982-83 TO 1986-87: AUSTRALIA

Sources: BAE 1987; Bulk handling agency submissions.

tSSi Storage capacity in 1986.

Π Highest production L J 1982-83 to 1986-87. FT?) Five-year average of production L23 1982-83 to 1986-87.

SUPPORTING PAPER 1

This variation between States occurs for a number of reasons. In particular, in Queensland and parts of New South Wales both summer and winter cropping takes place, and hence there are two harvest periods each year. Consequently, grain harvested in one period can be at least partly cleared before the next harvest. The harvest in other States is mainly confined to one period of the year, which puts pressures on the system to provide sufficient capacity for

the whole of the harvest. Also, in New South Wales, the GHA has until recently been required to give preference to the storage and handling of wheat. Consequently, private storage and handling agents have played a significant role with

respect to other grains. The figures also reflect the number of grain segregations required (both in grain type and quality) as well as the average carryover level in each

State. The figures do not, however, take account of the capacity of private facilities or that of on-farm storage.

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 is a result the State's geography: most of the grain growing areas are close to the long

coastline and many growers deliver direct to port.

Finally, it is important to recognise the role of on-farm storage in the system. With respect to non-statutory grains and interstate trade in statutory grains, it provides marketing flexibility for growers; it acts as a buffer between harvest and delivery to offset any difference in the rate of harvest and rate of delivery at the local receival point (particularly where climatic conditions are a problem); and it enables growers to store grain for drying on-farm if the grain harvested has moisture levels that are unacceptable to receivers. Relative to grain production, on-farm storage capacity is greatest in New South Wales and Queensland, as shown in Table 3.5. In Victoria, on-farm storage capacity relative to grain production is

approximately equal to the average for Australia, while it is a significantly lower proportion of production in Western Australia and South Australia. On-farm storage in Western Australia and South Australia is low relative to other States because of the predominance of winter cereals that are sold by marketers who largely use the bulk handling system. In addition, in those States opportunities for stockfeed sales are limited by geographical distance from the large compound

feed manufacturers, which are in Sydney and Melbourne. Overall, on-farm storage is estimated at about 9.5 million tonnes for Australia as a whole, with an average of over 200 tonnes of storage per farm.

17

TABLE 3.5 ON-FARM STORAGE CAPACITY, 1984-85

NSW Vic Qld WA SA Australia

Average tonnes per farm 292 167 251 186 81 209

No. of farms 15 886 8 556 5 750 8 157 7 739 46 088

Estimated total on-farm storage (mt) 4 .64 1.43 1.44 1.52 0.63 9.66

Storage capacity as a percentage of harvested winter cereal

and sorghum production (%) 59 37 46 17 17 35

Percentage increase in storage capacity since 1978-79 (%) 24 56 97 39 64 40

Source: Howard & Lawrence 1986.

3.2.4 Land transport

Land transport plays a critical role in the grain

distribution system. Typically, the task is in 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 directly from farm to domestic customers, grain merchants or to receival

facilities at port; similarly, a small proportion of grain from country receival points finds it 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, as shown in

Table 3.6.

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TABLE 3.6 AVERAGE DISTANCES IN THE TRANSPORT OF GRAIN IN AUSTRALIA __________________________ ( kilometres ) ________________

NSW Vic Qld SA WA Australia

Grower to receival point 15 8 28 13 21 17

Receival point to export terminal 500 310 350 160 275 350

Source: IAC 1983; AN submission April 1987; BGQ, pers. comm. September 1987; SRA submission February 1987.

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. Table 3.6 shows that the average length of haul from receival point to export terminal for Australia is 350 kilometres. Again, there is considerable variation among the States, ranging from an average of 160 kilometres in South Australia to

500 kilometres in New South Wales. Tonnages railed in each State are shown in Table 3.7. 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

alternative rail served country receival point is the only option.

TABLE 3.7 TONNAGES OF GRAIN RAILED, 1982-83 TO 1986-87 ________________________ (kilotonnes ) _________________ __

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

Queensland 1 375 2 265 2 817 3 488 2 492

New South Wales 3 057 5 340 6 640 7 688 6 600

Victoria 1 346 3 084 4 155 3 302 3 182

South Australia 423 1 725 1 786 1 706 1 376

Western Australia 4 699 3 598 5 216 5 041 4 711

Total 10 900 16 012 20 614 21 225 17 374

Source: Rail authorities, pers. comm. January 1988.

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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 country storage is used to accumulate export cargoes for designated shipments and there is often a need for rapid grain

replenishment to the port.

3.2.5 Ports and port services

There are currently 18 operative grain ports in Australia. In Queensland, there are three, at Mackay, Gladstone and Brisbane (the Port of Brisbane has three terminals -

Fisherman Islands, Pinkenba 1 and Pinkenba 2); in New South Wales there are two, at Newcastle and Sydney; in Victoria there are two, at Geelong and Portland; in South Australia there are seven, at Adelaide, Ardrossan, Wallaroo, Port Pirie, Port Giles, Port Lincoln and Thevenard; and in Western Australia there are four, 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 'Panamax' size (55 000 to 80 000 deadweight tonnes) or larger vessels. A number of other ports can accommodate 'Panamax' size vessels but they are unable to be loaded fully because of depth of water limitations, and 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 and maximum out-loading rates are shown in Table 3.8.

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 can be

achieved but in practice rates fall well short of this for a number of reasons, including unproductive time during 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.

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TABLE 3.8 PORT CAPACITIES AND MAXIMUM OUT-LOAD RATES

Port

Vessel . a size

Partly loaded Fully loaded Maximum out-load rate

( dwt) __________________ (tph)

Pinkenba 1 50 000 35 000 1 200

Pinkenba 2 50 000 35 000 1 000

Fisherman Islands 60 000 60 000 2 400

Mackay 35 000 35 000 300

Gladstone 50 000 50 000 1 600

Newcastle 55 000 55 000 3 400

Sydney 55 000 55 000 2 000

Port Kembla 120 000 120 000 5 000

Geelong 60 000 35 000 1 600

Portland 60 000 55 000 1 000

Port Adelaide 45 000 40 000 1 450

Ardrossan 50 000 30 000 1 200

Port Giles 55 000 45 000 800

Wallaroo 65 000 30 000 700

Port Pirie 45 000 25 000 800

Port Lincoln 90 000 90 000 3 800

Thevenard 35 000 25 000 600

Albany 60 000 50 000 1 600

Geraldton 40 000 20 000 1 000

Esperance 45 000 30 000 800

Kwinana 80 000 70 000 5 000

a. A proxy for vessel size is its carrying capacity,

Source: Hetherington Wesfarmers Shipping Agency 1987; WACBH, personal communication, 12 February 1988; SACBH, personal communication, 11 February 1988.

Port services cover a range of areas and charges levied include Commonwealth light dues (including a pollution levy), survey fees, conservancy dues, berthage and tonnage rates, pilotage, port improvement dues, towage, mooring costs, gangway watchmen, wharfage and stevedoring costs. Charges

for such services are levied by the Commonwealth and State governments as well as port authorities and private contractors and with the exception of wharfage and

stevedoring costs, which are paid by the marketer, the remainder are paid by ship operators. Detailed information on these costs and charges is contained in Supporting

Paper 5.

3.2.6 Shipping

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

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the high proportion of Australian grain sales made on a 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 are handled by the marketing boards in consultation with purchasers, ship operators and the local bulk handling agency. The AWB and the Australian Barley Board (ABB) both 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 in respect of safety and hygiene.

The vast majority of Australian grain exports are undertaken in vessels in the 25 000 to 45 000 deadweight tonne range. Nevertheless, increased use of Panamax vessels is evident. Detailed information about the shipping of grain is contained in Supporting Paper 5.

3.3 New South Wales

3.3.1 Grain production

Table 3.9 provides information on average annual production of the main New South Wales grain crops over the period 1982-83 to 1986-87.

3.3.2 Storage and handling

The GHA is the bulk handling agency for New South Wales and is constituted under the New South Wales Grain Handling Act 1954. The GHA has sole responsibility for wheat, unless the wheat is sold through the permit system or taken interstate. All other grains can be stored and handled either privately or by the GHA. Table 3.10 provides a breakdown of the

current country and port storage types.

2 2

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TABLE 3.9 NEW SOUTH WALES GRAIN PRODUCTION: FIVE-YEAR AVERAGE, 1982-83 TO 1986-87®

Crop

Production

(kt)

Percentage of total production

Wheat 5 389 69

Barley 693 9

Rice 632 8

Oats 560 7

Sorghum 320 4

Oilseeds 149 2

Peas 48 1

Total 7 791 100

a. Preliminary figures for 1986-87

Source: BAE 1987.

TABLE 3.10 GHA COUNTRY AND PORT STORAGE PROFILE

_________________________ ( kilotonnes ) ___________

Storage Type

Location Vertical Horizontal Bunker Total

Country Ports

2 007 297

3 799 0

5 848 0

11 654 297

Total 2 304 3 799 5 848 11 951

Source: GHA 1987.

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The GHA has a storage capacity of 6103 kilotonnes in

permanent facilities and 5848 kilotonnes in temporary facilities, making a total of 11 951 kilotonnes capacity, as shown in Table 3.10. It has five sub-terminals (at Temora, Junee, Parkes, Werris Creek and Moree), with a total storage capacity of 916 kilotonnes, and 260 other country receival points, with total capacity of 10 737 kilotonnes.

3.3.3 On-farm storage

In New South Wales on-farm storage is used to store crops that are sold primarily through private traders and are destined mainly for the domestic market. It is also used to avoid weather damage. On-farm storage capacity for New South Wales amounted to an estimated average of 292 tonnes per farm

in 1984-85, or some 59 per cent of harvested winter cereal and sorghum production.

3.3.4 Land transport

The New South Wales transport sector is deregulated. However, because there are no road receival facilities at port terminals, all export grain is transported to port by rail. Road and rail compete freely for the transport of domestic grain. In 1986-87 the State Rail Authority (SRA) moved 6.6 million tonnes of grain to meet export and

domestic demands.

In addition to the SRA, V/Line operates grain trains in southern New South Wales. For the 1986-87 season,

252 kilotonnes of grain were railed from New South Wales to Victorian ports and 289 kilotonnes moved by road to Victorian ports. V/Line hauled 100 kilotonnes from GEB facilities in New South Wales and the SRA railed 152 kilotonnes to the border. In its submission the Queensland Government estimated that 280 kilotonnes of grain was transported by road from New South Wales to Queensland.

3.3.5 Ports

New South Wales has two grain export ports, Newcastle and Sydney, and a third is under construction at Port Kembla. There is also a private export facility at Newcastle, owned and operated by Toll Chadwick. Newcastle and Sydney ports

take ships up to 60 000 deadweight tonnes: when completed, Port Kembla will be capable of taking ships up to

120 000 deadweight tonnes.

Of the 297 kilotonnes of port storage in New South Wales, 143 kilotonnes are at Sydney and the remaining 154 kilotonnes at Newcastle. When the Port Kembla terminal is completed it will have 260 kilotonnes of storage. The maximum theoretical out-loading rates are 3200 tonnes per hour at Sydney and 4000 tonnes per hour at Newcastle, although practical

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limitations reduce this figure by approximately 20 per cent in each case.

Road receivai facilities capable of handling 200 000 tonnes per annum (on a normal operational basis) are under

construction at both Port Kembla and Newcastle.

3.4 Victoria

3.4.1 Grain production

Victorian grain production is dominated by wheat and barley, although oats and peas are also produced in significant quantities.

Table 3.11 provides information on the five-year average production for Victorian crops over the period 1982-83 to 1986-87.

TABLE 3.11 VICTORIAN GRAIN PRODUCTION: FIVE-YEAR AVERAGE, 1982-83 TO 1986-87

Crop Production

(kt)

Percentage of total

Wheat 2 408 72

Barley 476 14

Oats 316 10

Peas (field, cow and poona)

143 4

Total 3 343 100

Source: BAE 1987.

3.4.2 Storage and handling

The GEB is the bulk handling agency responsible for most Victorian grains, including oilseeds and grain legumes. Bulk handling storages outside the GEB system are permitted if used to store grain for stockfeed and flour mills. The GEB

provides the export port (Geelong) for all bulk shipments of New South Wales rice and some New South Wales barley.

Total GEB storage capacity is 5.6 million tonnes. The GEB operates 257 permanent country receivai points, of which 42 (as at 30 September, 1987) are central receivai points. These facilities have greater storage capacity than

fill-and-close silos and receive all grain types (in some cases a central receivai point 'pair' provides this

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service). They open for about 12 hours a day during the harvest and have enhanced in-loading and out-loading facilities, which significantly reduce grower receival queues and train loading times. They are strategically placed so that for most growers the round trip distance from the farm to the central receival point is no more than 60 kilometres. The remainder of the permanent country receival points are fill-and-close silos, which may be limited to one or more grain types and which will only open during those periods when there is a reasonable delivery rate. As the name

suggests, fill-and-close silos are normally closed once they have been filled at harvest time, whereas the central receival points are progressively out-loaded to rail throughout the harvest period.

The Victorian storage system is dominated by a high

proportion of country storage (82 per cent of total storage capacity). Bunker storage, introduced in 1978, accounts for 36 per cent of country storage. It is used at central

receival points to handle receival overflows that cannot be moved by trains at harvest time.

Table 3.12 shows a breakdown of the current country and port storage types.

TABLE 3.12 VICTORIAN COUNTRY AND PORT (kilotonnes) STORAGE PROFILE

Location Vertical Horizontal Bunker Total

Ports 290 720 0 1 010

Country 1 983 922 1 652 4 557

Total 2 273 1 642 1 652 5 567

Source: GEB, personal communication, 26 March 1987.

3.4.3 Land transport

V/Line is the statutory carrier of Victorian wheat, barley and oats for distances in excess of 60 kilometres from the point of consignment, unless a permit is obtained from the Road Transport Authority. Permits are issued only when V/Line is unable to cope with the transport task, which is rare, because it can utilise both rail and road transport services.

Primary producers may haul their own grain any distance in their own truck. Interstate grain may be carried into Victoria on vehicles registered either in another State or with interstate registration.

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Grain transport forms about one-third of V/Line's freight business. Table 3.13 shows the tonnages of grain hauled by V/Line from 1982-83 to 1986-87.

TABLE 3.13 TONNAGES OF GRAIN RAILED: V/LINE, 1982-83 TO 1986-87 ___________________________ ( kilotonnes ) __________________________

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

Wheat 1 059 2 453 3 456 3 005 2 882

Barley 255 583 589 272 257

Oats 32 48 110 25 43

Total 1 346 3 084 4 155 3 302 3 182

Source: V/Line submission, App. 1; V/Line, personal communication. January 1988.

V/Line is in the process of closing some light rail lines and upgrading five others. It will transfer grain from GEB silos located on closed lines by road transport to an on-rail central receival point for movement by rail to port.

3.4.4 Ports

There are two Victorian grain export ports, Geelong and Portland. Total storage capacity at Geelong is

845 000 tonnes and at Portland 165 000 tonnes. The

out-loading rate for shipping is being upgraded to

2200 tonnes per hour at Geelong and from 1000 to 3000 tonnes per hour at Portland.

The GEB is currently providing additional storage at Portland. At Geelong a continuous rail loop line enables rail wagons to be unloaded without shunting, and the transfer capacity of the terminal's rail in-loading system is currently being upgraded.

At present the Port of Geelong can only fully load vessels of up to 40 000 deadweight tonnes capacity because of channel depth limitations. Dredging to deepen the channel would be very expensive - at least $46 million to make it deep enough

for fully laden vessels of about 50 000 deadweight tonnes.

Geelong, however, can partly load vessels of up to

60 000 deadweight tonnes. These vessels need to be topped up at another port, generally Portland or Port Lincoln. By contrast, the Port of Portland can currently fully load vessels of 55 000 deadweight tonnes and with a relatively

small additional expenditure ($2 million) could fully load

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vessels of up to 70 000 deadweight tonnes. The necessary port works to accommodate these larger vessels are planned for completion by 1991.

3.4.5 Interstate grain flows

Victoria receives interstate grain from both New South Wales and South Australia. The New South Wales grain includes wheat from GEB silos located in southern New South Wales, barley from the New South Wales Barley Marketing Board, rice

from southern New South Wales, and some direct grower deliveries. In addition, grain from GHA silos is

occasionally shipped through Geelong. The GEB receives South Australian grain through direct deliveries from growers and from SACBH. This grain is shipped through Portland. The GEB

also sends some grain from its silos to South Australian ports and some Victorian growers in the western Mallee region deliver directly to South Australian silos or to Port Adelaide. Table 3.14 provides summary details of these

interstate grain flows for the 1986-87 season.

3.5 Queensland

3.5.1 Grain production

The climatic diversity of Queensland's grain-growing districts enables the production of both winter and summer grains and oilseeds and an extensive range of grades and varieties within those crops. Table 3.15 presents

information on average Queensland grain production for the years 1982-83 to 1986-87.

Over the last twenty years, grain production in Queensland has expanded at a faster rate than production for Australia as a whole. Given Queensland's climatic characteristics,

crops are susceptible to adverse weather conditions: excessive moisture levels can be a problem and temperature and humidity conditions are frequently highly conducive to the growth of insect populations.

3.5.2 Storage and handling

BGQ performs a major role in the storage and handling of a large proportion of grains and oilseeds produced in Queensland, and it receives significant quantities of wheat, sorghum and barley from NSW. On-farm storage and storages owned by private handlers are also of significance.

28

TABLE 3.14 VICTORIAN INTERSTATE GRAIN FLOWS. 198 6 -8 7 SEASON

Source of grain

Geelong Portland Domestic

receivals receivals out-turn SA

Road Rail Road Rail Road Rail Road Rail

NSW farms Vic farms

4 313 2 632

87 297

GEB facilities in NSW in Vic ill 778 99 753 50 621 5 460

18 052

GHA facilities 104 987 141 120

SACBH facilities 9 399 10 449

BMB for NSW 6 2 152

SA growers/ private facilities

10 746

NSW rice 5 450 10 341

Total 288 680 251 562 22 777 10 449 50 621 5 460 87 297 18 052

Source: GEB, personal communication, 20 January 1988

TABLE 3.15 QUEENSLAND GRAIN 1982-83 TO 1986-PRODUCTION: FIVE-87

-YEAR AVERAGE,

Production Percentage

Crop Production

(kt)

season of total

Wheat 1 367 Winter 33

Barley 519 Winter 19

Maize 147 Summer 5

Sorghum 1 035 Summer 38

Sunflower 94 Summer 3

Soybeans 52 Summer 2

Source: BAE 1987.

In 1985-86, BGQ received 3647 kilotonnes of grain, of which some 280 kilotonnes was estimated by the Queensland Government to have originated in New South Wales. After allowance for these interstate flows, the Commission estimates that in 1985-86 BGQ handled over 85 per cent of grain and oilseeds produced in Queensland. Over 90 per cent of this grain was received directly into country storage

facilities.

Total BGQ storage capacity, and the breakdown of storage capacity between country and port and between storage types (vertical, horizontal and pad) are shown in Table 3.16. A special feature of the Queensland system is the presence of a number of grain dryers constructed by the Central Queensland Grain Sorghum Marketing Board, four at BGQ country depots, two at Gladstone and one at Mackay; this allows growers to harvest sorghum at relatively high moisture levels. Overall, the Queensland storage and handling system has a high proportion of bunker storage, and a high throughput system at port terminals, with minimal port storage.

3.5.3 On-farm storage

On-farm storage capacity in Queensland has almost doubled since 1978-79. A recent BGQ survey found an average level of on-farm storage of 380 tonnes per farm, although this includes some 72 tonnes per farm of temporary storage and field bins. The amount of on-farm storage now appears to be around two-thirds of BGQ's permanent country storage

capacity.

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TABLE 3.16 BGQ COUNTRY AND PORT STORAGE PROFILE

Storage location and type Quantity

(kt)

Percentage of total production

Location Country (87 receival 3 544 93

points) Port (5 terminals) 265 7

3 809 100

Type Vertical 1 160 30

Horizontal 629 17

Bunker 2 020 53

Source: BGQ 1986.

There are a number of reasons for the high proportion of on-farm storage compared with production in Queensland. First, a greater range of crops is grown in Queensland

relative to most other States. In particular, large amounts of sorghum are grown in southern Queensland that can be traded freely because sorghum is not under the control of a marketing board. Second, climatic conditions in the cropping

areas tend to make crops susceptible to weather damage, encouraging growers to harvest as soon as possible. Third, some growers harvest before the moisture content is at an

acceptable level for delivery to the central system, and they dry their grain on-farm. Overall, a number of growers consider that the cost of on-farm storage is more than offset by the perceived marketing benefit and the avoidance of possible income losses from delays in harvesting or adverse weather conditions.

It is somewhat surprising that, despite Queensland's hot and humid weather conditions, which would encourage insect problems, Howard and Lawrence (1986) found that only 5 per cent of on-farm storage is sealed. This may be because most growers regard on-farm storage mainly as a buffer between the harvester and the central system, rather than as an aid to marketing. Alternatively, it could reflect the types of

insect control measures used on-farm (that is, widespread use of chemical rather than non-chemical methods).

3.5.4 Land transport

As is the case elsewhere in Australia, the transport of grain in Queensland can be divided into two phases. The first is transport from farm to receival point, which in the majority of cases is a BGQ country silo, although small quantities of grain are delivered to private merchants, BGQ port facilities

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or directly to purchasers. This phase is carried out by road transport. The second phase is transport from BGQ silo to port or domestic purchaser; this is mainly carried out by rail transport under legislation and supported by the Rail Freight Agreement.

Queensland Railways' railway lines are classified according to the maximum permitted axle load of rolling stock. Most of the lines serving BGQ storage depots have maximum axleloads of 12.2 tonnes or more, although there are still branch lines where lighter axleloads apply. There is also a wide variety of wagon types, ranging in capacity from 10.5 tonnes to 48.6 tonnes.

Apart from movement between farm and country receival points, the contribution of road transport to the grain haulage task is relatively minor, although it is difficult to assess

precisely. In recent years, the pricing policies of BGQ have been aimed at discouraging direct delivery to port from farms. According to BGQ, this was mainly because of lack of road receival facilities and small storage capacity at ports. Occasionally, BGQ uses road transport to ports to supplement rail transport.

There is, however, some movement of grain by road under grower-to-buyer and permit sale arrangements for wheat. Table 3.17 gives details of the quantities of permit and grower-to-buyer wheat moved by both road and rail for 1984-85

to 1986-87.

3.5.5 Ports

There are currently three grain ports in Queensland, at Brisbane, Gladstone and Mackay and five grain export terminals, three in Brisbane - Pinkenba 1, Pinkenba 2/Maynegrain, and Fisherman Islands - and one each at Gladstone and Mackay. Each port in Queensland is controlled by a separate port authority (Port of Brisbane Authority, Gladstone Harbour Board and Mackay Harbour Board). A year-round utilisation of grain terminals is being maintained, with wheat being shipped during the period March

to August and most barley through the remainder of the year. The principal export destinations for Queensland grains are Japan, the Middle East and East Asia.

Mackay currently has a very limited storage facility, and the port and berth can only handle vessels up to about

35 000 deadweight tonnes. A project is under development to establish a permanent grain export facility. This involves substantial capital expenditure by the Mackay Harbour Board and BGQ for dredging, wharf construction, and the

construction of a ship loader and additional port storage.

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TABLE 3.17 TRANSPORT OF PERMIT AND GROWER-TO-BUYER WHEAT: QUEENSLAND, 1984-85 TO 1986-87 _____________________________ (tonnes ) _____________________

Grower-to-buyer

Permit wheat wheat

Interstate Intrastate Intrastate

Year Rail Road Rail Road Road Rail

1984-85 • · 8 327 1 450 81 233 6 0

1985-86 • · 1 394 2 350 73 000 9 500 6 205

1986-87 1 800 4 073 77 493 16 451 7 825

.. Not applicable.

Source: Queensland Government submission, February 1987.

It is envisaged that the project will be completed by late 1988, at which time the new terminal could be able to handle vessels up to 60 000 deadweight tonnes and provide a load-out rate of 1000 tonnes per hour. The current throughput is

about 100 000 tonnes per annum and BGQ anticipates that from 1989 this will increase to about 400 000 tonnes per annum.

A major upgrading of the Gladstone terminal has taken place, giving the facility a load-out capacity of up to 1600 tonnes per hour and the ability to accommodate vessels of

50 000 deadweight tonnes. Current throughput is

approximately 1 million tonnes per annum.

The older established facilities at Pinkenba 1 and 2 are subject to draft constraints and are generally limited to vessels of about 35 000 deadweight tonnes. Pinkenba 2 has been upgraded, but the Commission understands that a decision has been taken not to upgrade Pinkenba 1 terminal, although the wharf has recently been strengthened. In the event of vessels in excess of 35 000 deadweight tonnes being required,

an additional $1.5 million expenditure would be necessary to upgrade the wharf.

The Fisherman Islands terminal commenced operations in early 1986, with a load-out capacity of 2400 tonnes per hour and a berthing capacity for vessels of 60 000 deadweight tonnes.

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3.6 South Australia

3.6.1 Grain production

Wheat and barley dominate grain production in South Australia. Oats and peas are also produced, although not on a large scale.

Table 3.18 provides details of average South Australian production of the main crops over the period 1982-83 to 1986-87.

TABLE 3.18 GRAIN PRODUCTION IN SOUTH AUSTRALIA: FIVE-YEAR AVERAGE, 1982-83 TO 1986-87

Crop Production

(kt)

Percentage of total

Wheat 1971 44

Barley 1531 48

Oats 127 4

Peas (field, cow and poona)

129 4

Source: BAE 1987.

3.6.2 Storage and handling

SACBH, a grower co-operative, has the sole receival rights for wheat, barley and oats delivered in bulk in South Australia. It operates 109 country silos and seven port terminals. Bunker storage has only recently been used at port terminals in South Australia and only as a form of temporary storage in years of high production or carryover. Table 3.19 shows a breakdown of the types of storage used in country and port storage and handling.

Vertical cell storage accounts for 82 per cent of all permanent SACBH storage. Permanent terminal storage accounts for approximately 40 per cent of total storage. There are no restrictions on road receivals at port, so a large percentage of grain is received direct from growers (47 per cent in

1986-87).

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TABLE 3.19 SACBH COUNTRY AND PORT STORAGE PROFILE, 1985-86 _________________________ ( kilotonnes ) ______________

Location Vertical Vertical Horizontal Bunker Total concrete steel

Ports 1 425 156 320 478 2 379

Country 1 331 584 464 2 379

Total 2 756 740 784 478 4 758

Source: SACBH 1987.

3.6.3 Land transport

South Australia is the only State without its own rail authority, other than for metropolitan services. The Commonwealth-owned Australian National competes freely with road transport, except for the imposition of a surcharge on grain conveyed by road between rail-served sites. The relatively short distances to port from a large proportion of the State's main grain growing areas make the option of direct

from farm-to-port delivery attractive to many growers. The mix of road and rail transport to port is shown in

Table 3.20. On average, over the five-year period ending 1986-87, some 54 per cent of grain received by SACBH was transported to port by road. Of this, some 82 per cent was transported directly from farm to port; the remainder

originated in road-served silos.

Australian National (AN) transports grain by rail from inland silos to port terminals for export and to domestic users for milling, malting and for stockfeed purposes. In addition, AN participates in the interstate carriage of grain into and out of South Australia. There are rail receival facilities at all ports except Port Giles and Ardrossan.

The rail system in South Australia is divided into two separate parts: the Eyre Peninsula system, which has narrow gauge rail track; and the remainder of the system, which has a mixture of broad and standard gauges. Wallaroo and Port Adelaide are served by both broad and standard gauge lines, Port Pirie is served only by standard gauge, and ports in the vicinity of the Eyre Peninsula - namely Port Lincoln and Thevenard - are served by narrow gauge lines.

Of the 1585 kilotonnes of rural products transported by rail in 1986-87, grain accounted for 1376 kilotonnes or 87 per cent. However, grain accounted for only 13 per cent of total freight in the same year. Twenty per cent of the total rail grain transport occured in six weeks during peak harvest time.

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Approximately 1100 kilometres of branch lines are devoted to grain transport.

TABLE 3.20 RECEIVALS BY ROAD AND RAIL: SOUTH AUSTRALIA, 1982-83 TO 1986-87 _________________________ (kilotonnes ) ___________________

__________ Road

inland

Farm to silo to

Year port port Total Rail Total

1982-83 579 60 639 448 1 087

1983-84 1 824 462 2 286 2 266 4 551

1984-85 1 715 379 2 094 1 672 3 765

1985-86 1 484 332 1 817 1 587 3 404

1986-87 1 825 439 2 264 1 639 3 902

Note: Rows may not add to totals due to rounding. Source: AN submission, March 1987 and pers. comm. January 1988.

3.6.4. Ports

South Australia has seven export ports. All except Ardrossan are owned and operated by the Department of Marine and Harbors. Ardrossan is owned and operated by BHP.

Table 3.21 shows the port terminal storage capacity of each of the seven South Australian grain ports.

Draft limitations at many South Australian ports make two-port loading a common feature. Port Lincoln is the State's only deep-water terminal, and is used as a top-up port for large vessels partly filled elsewhere. Table 3.22 shows maximum vessel size and maximum load size for each of the seven ports.

3.6.5 Interstate grain flows

In 1986-87 South Australia received 87 kilotonnes of grain by road from Victorian farms and 18 kilotonnes by rail. The Victorian port of Portland received 20 kilotonnes of grain

from South Australia by road and 10 kilotonnes by rail.

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TABLE 3.21 PORT TERMINAL STORAGE CAPACITY: 1986-87 _____________ (kilotonnes ) ______

SOUTH AUSTRALIA,

Permanent storage

Bunker Storage

Port Adelaide 404 67

Port Lincoln 397 89

Ardrossan 283 56

Wallaroo 233 176

Port Pirie 212 91

Thevenard 208 0

Port Giles 239a 0

Total 1 976 478

a. An additional 75 000 tonnes of storage became operational at Port Giles in the latter half of 1986. Consequently, total permanent storage shown in this table differs from that in Table 3.4 which relates to 1985-86.

Source: SACBH 1987, SACBH submission, March 1987.

TABLE 3.22 PORT SIZE AND STORAGE CAPACITY: SOUTH AUSTRALIA, 1985-86

Port

Maximum vessel load (t)

Maximum vessel size to 30 June 87 _____ (dwt)

Ardrossan Wallaroo Thevenard Port Pirie3

Pt Adelaide Port Giles Port Lincoln

25-30 000 25 000 16-17 000 20 000

36 750 47 000 88 620

46 800 61 000 35 000 42 500 45 800 47 000 116 100

a. Vessel size limited by channel characteristics, berth length and loader outreach.

Source: South Australian Government submission April 1987.

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3.7 Western Australia

3.7.1 Grain production

Wheat is the major grain grown in Western Australia, although significant quantities of barley, oats and lupins are also produced (see Table 3.23).

3.7.2 Storage and handling

Western Australian Co-operative Bulk Handling (WACBH), a grower co-operative, is the sole authorised receiver for wheat and barley and the licensed receiver for the GPWA for oats and lupins. WACBH operates 195 receival points and

five port terminals. The various types of storage used for country and port storage and handling in Western Australia are shown in Table 3.24.

TABLE 3.23 WESTERN AUSTRALIAN GRAIN PRODUCTION: FIVE-YEAR AVERAGE, 1982-83 TO 1986-87

Crop Production

(kt)

Percentage of total production

Wheat 5 233 75

Barley 915 13

Oats 440 6

Lupins 418 6

Total 7 010 100

Source: BAE 1987.

TABLE 3. 24 WACBH COUNTRY AND PORT STORAGE PROFILE, 1985-86 (kilotonnes)

Storage Type

Location Vertical Horizontal Bunker Total

Port 587 1 123 106 1 816

Country 242 5 296 2 458 7 996

Total 829 6 419 2 564 9 812

Source: WACBH, personal communication, 16 June 1987.

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Approximately 56 per cent of storage in Western Australia is permanent country storage (the highest percentage in Australia). A further 25 per cent of storage is temporary country storage, and 19 per cent of storage is at permanent

and temporary storage facilities at ports.

3.7.3 Land transport

Westrail serves about 70 per cent of Western Australian grain farmers. In the rail-served areas road haulage to ports is permitted only in the grower's own vehicle. In road-served areas, sole haulage rights from receival points are awarded by tender, and off-farm haulage is allowed in either

contractor's or grower's vehicles.

All the ports are served by rail facilities, and Geraldton, Esperance and Albany are also served by road. Kwinana does not have road receival facilities, but there are road receival facilities at the former Fremantle terminal and grain delivered to this site is then railed a short distance

to Kwinana.

The Western Australian rail system consists of both narrow and standard gauge tracks. Most of the country receival points with rail sidings are served by narrow gauge. Kwinana terminal is served by both narrow and standard gauge tracks. All other ports are served by either standard or narrow gauge

tracks. Depending on the point of destination, it may be necessary for grain to pass through one of the two transfer points at Merredin or Avon. Merredin has a storage capacity of 235 kilotonnes and Avon 233 kilotonnes. At these points grain is unloaded from narrow gauge wagons, stored for a

short period, and then loaded onto standard gauge wagons for delivery to port.

Table 3.25 shows the quantity of receivals at port by road and rail.

TABLE 3.25 RECEIVALS AT PORT BY ROAD AND RAIL: WESTERN AUSTRALIA, 1982-83 TO 1986-87 _________________________ ( kilotonnes ) ____________

Road Rail

Season receivals receivals Total

1982-83 1 486 4 432 5 918

1983-84 1 610 3 329 4 939

1984-85 2 446 5 710 8 156

1985-86 1 784 3 350 5 134

1986-87 1 622 4 477 6 099

Source: Westrail submission, April 1987.

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On average, over the five-year period ending 1986-87 rail receivals at port accounted for 70 per cent of total

receivals. In the case of road deliveries, some 55 per cent came directly from farm and the remainder from WACBH

facilities.

3.7.4 Ports

Albany, Esperance, Geraldton and Kwinana are the four major export terminals in Western Australia. Receival of grain at Bunbury for export is almost negligible. Kwinana is the

newest of the Western Australian grain terminals. Kwinana and Albany are often used as top-up ports for Esperance and Geraldton because of draft limitations at these latter ports. Storage capacity at Western Australian port terminals is shown in Table 3.26. Loading rates for each of the

terminals are shown in Table 3.27.

TABLE 3.26 PORT TERMINAL STORAGE CAPACITY: WESTERN AUSTRALIA, DECEMBER 1987

Port Storage Capacity Percentage

(kt) of total

Vertical Horizontal Bunker Total capacity

Albany 191 120 - 311 14

Bunbury 26 - - 26 1

Esperance 58 219 50 327 15

Geraldton 60 368 105 533 24

Kwinana 388 524 120 1033 46

Total 722 1231 275 2229 100

Source: WACBH, personal communication, 3 February 1988.

TABLE 3.27 LOADING RATE AT PORT: WESTERN AUSTRALIA ______________________ (tonnes per hour)_____________

Port Average Rate Maximum Rate

Kwinana 2 604 5 000

Albany 1 277 1 600

Geraldton 856 1 000

Esperance 675 800

Source: WACBH submission, April 1987.

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4. MONITORING AND SCHEDULING

4.1 Introduction

In this chapter the logistics of grain distribution are discussed and the critical components of the current scheduling and monitoring arrangements for the flow of grain from paddock to port are described. The monitoring and scheduling of grain flows is discussed first from an overall perspective and then with regard to each of the following

areas of activity:

. forecasting and harvest planning;

. country silo operations;

. transport scheduling;

. stock control systems;

. on-farm storage.

4.2 Grain flows in Australia: an overall perspective

The underlying philosophy of scheduling and monitoring grain movements varies between States largely as a result of differences in geography and the volume of grain required to be stored, handled and transported.

The grain scheduling approach of BGQ may be characterised as maximising throughput at the terminals and utilising rail transport to deliver grain from country silos once shipping requirements are known. The loading date of the vessel acts

as the catalyst for transport activity. As a result, the throughput ratios (volume handled/ port storage capacity) are higher for Queensland ports than for most other States.

A close analogy of the Queensland approach to grain

scheduling is the 'just in time' method of inventory control in manufacturing industry. In the same way that the

just-in-time strategy in manufacturing industry reduces investment in expensive inventories, the just-in-time grain scheduling approach reduces capital investment in expensive port storage facilities. Given that grain must be stored either at port or in the country, the extent of the reduced investment at port depends upon the differential between costs of port storage and country storage. However, a system with limited port storage capacity requires a highly co-ordinated logistics program for out-loading grain from country storages in order to meet a nominated shipping program. In particular, the transport system (predominantly rail) is required to effectively meet peaks and troughs in the shipping program.

The New South Wales grain scheduling approach is similar to that of Queensland, there being less than 5 per cent of

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storage at port. New South Wales has the longest freight lines because grain is transported to the seaboard from production areas across the Great Dividing Range. This geographical influence, together with freight and handling cost differentials between New South Wales and bordering States, has led to a significant movement of grain from

border areas of New South Wales into adjacent State systems.

While the proportion of New South Wales storage located at port is less than 5 per cent, the volume of port storage in absolute terms is significant, at around 300 kilotonnes. Consequently, in New South Wales it is possible to some extent to transfer grain by rail from the country to the seaboard on the basis of a formalised timetable.

In Victoria, the scheduling and monitoring of grain is influenced by two principle factors. First, the distances from the main growing areas to the ports of Geelong and Portland are relatively short. Second, the storage system contains very significant capacity (in excess of 1 million tonnes) at port terminals. The Victorian system utilises port storage to store as much overflow grain as possible, rather than storing it in bunkers in the country. It does this by transferring grain through its central receival points to port storage at harvest time, using unit trains operated by V/Line. Although this approach may have minimised the use of bunkers it has also resulted in a peak

load problem for V/Line. The Victorian Farmers Federation have pointed out that if V/Line' s grain movement task was distributed uniformly throughout the year less rolling stock would be needed.

After the harvest peak a steady 'scheduled movement' approach to shifting grain to the seaboard has been adopted. If there is a short-term requirement to move a particular class of

grain for a particular ship, then the relatively short haul distances and the capacity of the rail network allow a just-in-time approach to be used. This is particularly relevant in movements of barley, rice, oats and peas, which have much smaller shipping tonnages than wheat. In terms of scheduling management, the Victorian grain system has the

widest range of options of any in Australia.

The scheduling approach in Western Australia is to deploy available resources in a particular area, clear it, and then move on to the next area. This strategy can be used in

Western Australia because there are few segregations and quality variation is limited by the relatively uniform geographical and seasonal conditions. Using this approach enables rail transport to be organised without frequent relocation of equipment and personnel from region to region in order to satisfy a cargo requirement.

South Australia is the only State that allows extensive use of the road system as an alternative to the rail system for the shipment of grain from country to port. The system is therefore characterised as being at the discretion of growers, rather than being dictated by institutional

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controls. The ability of the South Australian system to handle deliveries of grain to port by road is assisted by a limited number of segregations of grain, which reduces the significance of any problems caused by unco-ordinated

deliveries. In addition, and perhaps more importantly, the South Australian system has a larger port storage capacity than other States. This enables SACBH to accumulate sufficient volumes of grain at port to cushion the impact of disruptions to grain transport, failure of ships to pass

survey, or the unanticipated arrival of ships. A system that does not have such buffer storage at port relies on its transport links to the country rather than reserves of grain at port for the assembly of cargo for shipping.

4.3 Forecasting and harvest planning

Efficiency in the storage, handling and transport of grain requires planning, and this in turn requires prior knowledge of the crops to be harvested, the likely volumes and grades of grain, and the timing of the harvest of the various grains. Grain production has historically been subject to

significant seasonal fluctuations, which makes the provision of accurate forecasts of grain receivals very important. Bulk handling agencies require estimates of the forthcoming harvest to assist them to determine the level of their charges, to enable them to plan which storages will be used

for different categories of grain, to undertake the preparation of temporary storage areas, and to order consumables such as chemical protectants for the coming harvest.

The crop forecasting sequence begins with growers registering their plantings of statutory grains. Bulk handling agencies and marketing boards then refine the initial estimates of crop potential. This information is used to formulate a seasonal plan which in the case of wheat can be developed some time between July and October. This plan is developed by the various bulk handling agencies in consultation with the relevant marketing boards and rail authorities and is progressively updated as more accurate information becomes available.

On the basis of the seasonal plan, the bulk handling agencies plan storage requirements for their silos and arrange for any consolidation of old grain. They also use the seasonal plans

to develop silo plans dealing with more detailed requirements such as manning levels, opening dates, temporary storage requirements and transport requirements. Information about

opening dates, segregations that will be accepted at silos, and other grower-related matters (such as decisions not to open a silo because of the likelihood of very low receivals) is communicated to growers through bulk handling agency field officers, marketing boards and grower organisations. Silo committees composed of local growers operate for each silo in certain States (Victoria, New South Wales and South Australia). In conjunction with the bulk handler these committees determine the arrangements under which the silos

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will operate. Such arrangements include the silo opening period, opening hours, weekend opening, and guidelines for queuing. The bulk handling agencies use the assessment of the likely intake to estimate the tonnage to be shipped through

the various ports and from these figures they determine the charges to be applied for the forthcoming season.

For non-statutory grains for which some of the bulk handling authorities provide warehousing and voucher services, there exists an additional level of uncertainty since it is unclear where (or indeed whether) such grain will be delivered. The

essence of warehousing is that the bulk handlers receive and store the grain on behalf of a grower or country merchant for a specified period until the grain is sold. The advantages to the grower are principally associated with a reduced need for on-farm storage. For the purchaser, a warehousing system provides the advantage of guaranteed grain quality and access and, for export sales, an absence of transport logistical problems since the bulk handlers take responsibility for moving export grain to port. Warehousing services are provided in Queensland for southern Queensland sorghum, in South Australia for peas, and in Western Australia for oats.

In Victoria, the GEB has operated a voucher system which, unlike the warehousing system, requires growers to nominate the future purchaser of the grain upon presentation for storage, although the purchaser does not immediately have equity in the grain. The GEB has not provided warehousing services in the past, but it is considering providing warehousing services in 1988-89 in addition to the voucher

system. New South Wales has not provided warehousing services in the past, although it could do so in the future.

Forecasting of non-statutory grain receivals is carried out by all States except Western Australia; such forecasting is largely based on crop estimates. In general, storage requirements are estimated on the basis of bulk handling agency discussions with traders.

Interstate flows of grain represent an additional source of grain throughput in Victoria, Queensland and South Australia, though the extent of these flows in any particular year is uncertain. Various methods are used by the different States to estimate interstate grain flows. In Queensland, an estimate is made of the total crop of grain from the region that might be regarded as the interstate catchment area. It is then assumed that the interstate proportion of the crop will remain about the same as in previous years.

In Victoria, the GEB makes an assessment of the expected capacity utilisation of its handling system in the

forthcoming year, based on estimates of Victorian crop yields. This assessment enables the GEB to determine the quantity of interstate receivals it will try and attract from neighbouring States. There is a formal arrangement between SACBH and the GEB, and a parallel arrangement between Australian National and V/Line, regarding the flow of grain

from certain parts of north-western Victoria to Port Adelaide and from areas of south-east South Australia to Portland.

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The consequence of these arrangements is that grain movements from Victoria to Port Adelaide are about half the size of grain movements from South Australia to Portland.

Ideally, more information would be desirable to assist in planning for receival of interstate and non-statutory grains.

4.4 Country silo operations

The main aspects of interest in this part of the scheduling and monitoring system are global management issues such as the distribution of delivery patterns throughout the year, segregation requirements, and out-turn strategies.

Grain is not delivered to bulk handlers in a steady stream throughout the year, but rather in a concentrated manner during a short post-harvest period. This peak in the

demands on the storage, handling and transport systems increases pressures for careful scheduling and monitoring.

Some bulk handling agencies have implemented policies designed to flatten the harvest peak. In Victoria, there is a discounted storage and handling charge for delivery in a short post-harvest-peak period which is designed to provide an incentive to delay peak harvest deliveries. The GHA has advocated strategies designed to influence the timing of growers' deliveries over both the receival period and during the course of a given day. BGQ has also been progressively

introducing policies to modify receival patterns. These policies include restricting daily operating hours and weekend work, restricting the period during which deliveries to a country receival point can be made, and introducing

late-delivery fees for grain delivered to country storages after the harvest is complete. However, BGQ has pointed out that policies designed to moderate the flow of grain

deliveries to silos are beneficial only up to a certain point. Flattening the frequency of receivals beyond this point poses significant problems, such as a greater chance of

insect infestation from late deliveries.

A solution that has been used by the bulk handling agencies to overcome the problem of harvest peaks and above average production include the use of bunker storages. The GEB stated:

A low capital cost storage solution was required for the peak tonnages and in 1978 the first bunker storages were incorporated into the system. Such storages with associated high operating costs offer an acceptable

storage (and receival) solution in association with other facilities when there is an infrequent (annual basis) requirement, or where annual production variation would result in a low degree of utilisation of the permanent storage. (GEB submission, March 1987, p. 13)

Taking into account these various factors, the Commission agrees with the strategy of avoiding over-capitalisation to

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meet a peak demand. The Commission is also of the view that the introduction of peak-load pricing policies may enhance the efficiency of storage, handling and transport, as discussed in Supporting Paper 6.

Turning to segregation requirements, it is clear that where the quantity of grain received is less than the capacity of the storage facility into which it is placed, there will be a reduction in the usable storage available at the receival point. This is frequently the case, and the greater the number of segregations, the greater this problem becomes.

However, even districts that traditionally have few segregations can face problems as a result of factors such as adverse weather. Consider the problem confronting a silo manager whose district receives heavy rain just prior to the wheat harvest. The manager will expect to receive a

significant quantity of weather-damaged wheat but may also expect that the majority of grain delivered will not be down graded. A decision may be taken to place undamaged wheat in the major storage facility and weather-damaged wheat in a smaller facility. If the district then receives further rain, so that the pattern of deliveries is not in accordance with these expectations (more weather-damaged wheat is delivered), then the larger facility will have a significant amount of storage space wasted.

With regard to out-turn strategies, two points are worth noting. First, in some storage facilities (particularly horizontal sheds), out-turn must be progressive: grain nearest the out-loading door must be removed first. With this sort of facility it is clearly most important to know what grain type will be first required at port. For example, in some States an attempt is made to ship barley (which is usually harvested before wheat) before the wheat is shipped. In this case the placement of the barley would be most important.

The second aspect of out-turn strategy that must be

considered when allocating country storage space is that out-loading bunker storage can be both time consuming and weather dependent. If a bulk handler is operating on a just-in-time basis it is necessary to ensure that not all grain of a particular type is stored in bunker storage, since

shipping could be significantly delayed while bunkers wait to be unloaded.

4.5 Transport scheduling

In all States, bulk handling agencies and rail authorities have arrangements to expedite the scheduling and monitoring process. For instance, the GEB and V/Line formally develop the operational plan for each harvest, which identifies interactions and the responsibilities of each party during the harvest period. In conjunction with the harvest plan the information systems of both organisations are shared. Similar interaction between the rail and bulk handling

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agencies occurs in New South Wales, where officers of the GHA and the State Rail Authority work closely to facilitate the scheduling of grain movements.

In Queensland, the just-in-time system relies on the rapid movement of large quantities of grain, principally by rail, from country storages to ports for assembly as cargoes and more or less immediate export. This requires very close

co-ordination between the activities of the marketers (who are responsible for providing the shipping), BGQ and Queensland Rail. The rail out-loading program from country depots is determined in regular meetings between BGQ and QR. There are separate BGQ/QR liaison committees in both central

and southern Queensland, which meet (with different membership) on a quarterly, weekly and daily basis. In addition, changes to plans are discussed informally as often as required, and silo and terminal personnel are advised of

any revisions to the rail loading program. Selection of the BGQ silo to be out-loaded is based on a number of criteria, including the need to clear bins to take in other grains and the need at some stages of the year to out-load some grains to avoid the risks of insect infestation or deterioration of grain quality. Other factors that are important in the

selection of depots include the desirability of minimising temporary storage requirements and the requirement for double handling to be kept to a minimum.

Road deliveries from country silos can play a useful supplementary role to rail receivals at port. However, the monitoring and scheduling implications could be expected to be more complicated than is the case for rail because of the

larger number of road operators required to move a given tonnage of grain. Given the limited storage capacity at port, BGQ believes that direct (un-scheduled) delivery from farm to port is an unviable option in Queensland, since the grain delivered will usually not correspond to the cargo

assembly needs of forthcoming shipments.

In Western Australia, Westrail proposed potential improvements in scheduling and monitoring of grain and sought WACBH co-operation on a ' six point plan'. This plan

recommended the following:

. minimum continuous production runs at country bins;

. 24-hour per day availability of country bin wheat loading;

. port discharge always available to trains, or

alternatively on eight hours' notice from Westrail;

. homogeneous product discharge at port while trains are in queue;

. port unloading not to be interrupted whilst trains are in queue;

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. grain loaded at country bins to be homogeneous by train and consistent with homogeneous unloading.

Westrail expected that introduction of these initiatives would lead to significant savings in the transport system. It estimated a reduction in locomotives from 43 to 25 and a reduction in wagons from 1210 to 500. There would have been additional costs to WACBH through additional shift manning but the major requirement would have been for improved schedules. The plan was not implemented, primarily because of the additional costs and operational constraints that would have been imposed on WACBH and instead a ' compromise plan1 is currently being trialled. The essence of this plan

is to use unit trains to systematically shift all the grain from a regional area, and then move on to the next area and repeat the exercise. This approach avoids the piecemeal loading of trains that occurred previously. Westrail and WACBH expect these initiatives, together with extended operating hours at loading points and regular shift operations at port terminals, to result in lower costs for both organisations.

4.6 Stock control systems

Stock control systems are necessary for all distribution networks, but particularly so for grain for two reasons: the geographic dispersion of the commodity compared with manufactured commodities; and the centralised control of the distribution task.

In New South Wales, storage capacity at port is approximately 300 kilotonnes, so that considerable disruptions may arise when ships arrive out of sequence. The difficulties encountered in planning grain sales and despatch are exacerbated by the large variety of grades and sub-grades of wheat, uncertainty of ship arrival times, and industrial practices. The GHA stated that a computer-based management information and control system involving the AWB, SRA and itself 'offers the opportunity to significantly improve the quality and timeliness of decision making in this very complex control of grain movements' (p. 54).

In Queensland, records of grain stocks in BGQ's country silo are maintained on a central computer system. Each day, information concerning the intake and out-turn of grain at the different silos is provided to the regional silo, which in turn passes the information on to the BGQ central office so that the 'summary of grain stocks' computer listing can be produced. Each silo prepares a weekly 'bin status report', which depicts grain disposition in considerably more detail. These reports are forwarded to the BGQ central office and are used to assist in the selection of out-loading sites. Grain that is warehoused for private agents or growers is held on a separate warehouse records system. BGQ produces a report three times a week, showing the stock holding of merchants that are currently transacting business using the BGQ warehousing facility.

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For the railways, the important stock variable that must be controlled is the disposition of rolling stock. The efficiency of QR wagon utilisation has been significantly enhanced by the introduction of Rolling stock Information Control System (RIGS). RICS is a fully computerised rolling stock control system that records full details of the movement of all rolling stock throughout the QR network. RICS provides QR management and operations officers with

access to data to assist with rolling stock control that will ensure optimum usage of the rolling stock fleet. In the future it is planned that major clients of QR, including BGQ, will have direct access to RICS.

The Victorian grain distribution system also operates with a strong information network. Information on receivals of all grains at all silos is forwarded to GEB regional offices on a daily basis. By the next morning, GEB management can assess the previous day's receivals and current stock levels at all positions. The system provides information about the disposition of grain types, the unused capacity at different

sites, and the intake rates at central receival points and along rail lines. Such information is of considerable use in regard to planning the rail out-loading strategy. V/Line, the AWB and the ABB also have access to the data contained in the system.

Generally, for each State there would seem to be some advantages within the current system in developing a computer data base of shared information, which would be available to the bulk handling agencies, railways and marketers. A common data base such as this should enable the co-ordination of shipping, rail and grain storage activities to be undertaken more easily and may also allow computer optimisation programs to be developed which would facilitate rail out-loading decisions and decisions concerning ship arrival times.

4.7 Ship scheduling and the 'fair share' rule

Shipping is generally arranged by the marketing

organisations, including private traders. Notice of impending vessel arrivals vary considerably between marketers, with the AWB providing an indicative twelve-month program. The tendency is for shipping to be arranged by the overseas importer rather than by the export marketer.

For wheat shipments, the AWB's shipping allocation program is based on the 'fair share' principle. This principle endeavours to allocate export shipping to States on the basis of the export availability of wheat from that State as a proportion of Australia's total export availability. The rationale behind the principle is to treat the States as equitably as possible. At times however, it has been necessary to override the fair-share principle due to, for example, serious stoppages of grain throughput caused by industrial activity.

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The current ship scheduling arrangements for wheat are formulated by the AWB in close co-operation with the bulk handling agencies. The process begins with the AWB

submitting a plan to the bulk handling agencies, specifying the expected monthly shipments from each State. The bulk handling agencies modify this plan to take into account the requirement for other grain shipments, and as a result of this process an agreed monthly throughput target is

determined. As part of its planning process, the AWB

provides estimates by grain classification of the shipping program for the forthcoming three-month period. This information is of some assistance in forward planning, although it is generally not accurate enough to enable out-turn programs to be organised more than a couple of weeks in advance. Detailed shipping information is normally supplied fourteen days in advance of the ship arriving, although on occasions there have been unanticipated ship arrivals. In these cases the bulk handling agency concerned is usually given the choice of declining to accept the ship or special demurrage terms.

Changes in vessel times, whether they be unexpected arrivals or delays, have the potential to cause significant

difficulties for all scheduling strategies, but particularly for a just-in-time strategy. Unexpected arrivals will probably require additional movement of grain from country silos to port (unless suitable grain is already in storage at port), thus delaying ship loading and raising the possibility of demurrage. On the other hand, unexpected shipping delays

will mean that the grain that has been assembled in port storage for a particular ship will not be able to be loaded as quickly as originally anticipated. These occurrences may

not present significant difficulties where there is a considerable store of grain at port or close to the port. However, where port storage is limited, the terminal will be holding grain for the delayed shipment and will not be available in the meantime to assemble cargoes for other immediate shipments.

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5. TECHNOLOGICAL CHANGE

5.1 Country storage and handling

The Commission has found that the bulk handling agencies have generally been responsive to the introduction of new technology in country storage and handling. Co-operation between the bulk handlers in developing new technologies is good: information and operational experience are freely shared. Frequently, one bulk handler will conduct trials or experiments in a particular area and, if successful, other bulk handlers may follow but make modifications or vary the concept to suit particular needs and avoid any problems observed in the initial installation. In this manner the experimental phases of new concepts are shared between the bulk handling agencies (although not necessarily equally) and this has helped the refinement of design concepts over a relatively short time. This is particularly true for the development of bunker technology, such as fabric covers and in-loading and out-loading devices, where Australian technology appears to be at the forefront.

The bulk handling agencies have assessed the benefits of alternative storage and handling technologies (for example, Strarch arches, concrete domes, aerobelts and conveyors (for

example, tube, pipe and sidewall conveyors). In most cases these alternatives have not been found to be cost effective and existing systems have been maintained. However, where

the bulk handlers consider a net benefit exists they have implemented the new technology (for example, in Western Australia WACBH has used a Strarch structure at Jerdacuttup).

5.2 Port terminals

Port terminal technology in Australia varies considerably and reflects the time at which the terminals were constructed. The two newest terminals, Fisherman Islands and the soon-to-be-completed Port Kembla, are as technologically

advanced as terminals elsewhere in the world. Older terminals such as Sydney (circa 1930) are not.

Similarly, terminals with relatively low annual throughputs do not usually have the most advanced technology. For example, Thevenard has an out-loader designed for

approximately 500 tonnes per hour and an annual grain shipment task of 150 000 to 300 000 tonnes. Out-loaders designed for 2500 to 5000 tonnes per hour are in use in

Australia but would not be cost effective at Thevenard. That is, the technology employed, whilst not ' state of the art', is more appropriate. Larger, more technically advanced systems, are only cost effective when high annual throughput is achieved.

Similarly, the automation of older style terminals that have a large number of small cells is technically possible but not financially feasible.

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5.3 Transport

Road transport operators have endeavoured to use the most advanced technology available to improve efficiency. For example, B-doubles have a cost per net tonne-kilometre approximately 10 per cent less than six-axle articulated

trucks (see Supporting Paper 4). However, the use of some forms of road technology, such as B-doubles, is restricted in some States due to vehicle size and mass exceeding State limits or inadequate roads in some areas. For example, in Queensland B-doubles are restricted to specified roads.

The use of new technology within the rail systems varies considerably. New hopper-style wagons with higher payloads and more powerful locomotives are being introduced but operational and financial constraints are restricting their introduction. For example, some branch lines and bridges cannot take the high axle loadings associated with heavier wagons and locomotives and it is often not cost effective to upgrade these lines. As a consequence, older and smaller wagons are retained in railway fleets to service these areas.

Rail authorities have acknowledged that improvements in rail efficiency are possible by implementing new technology.

5.4 Information management

An area in which considerable development has taken place over the last 15 years is computing and computer

applications. Organisations within the grain storage, handling and transport industries have implemented computer technology to varying degrees.

Computers have enabled improved information processing, inventory and production control, and office automation. The ability to process large volumes of data in an accurate and timely manner is especially important because it is a necessary condition for improved management performance. The GEB, for example, has implemented a data processing system that aids management in identifying potential problem areas during harvest. Similarly, QR has a system for wagon tracing and location.

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6. LESSONS FROM ABROAD

6.1 Background

Grain production is a widely undertaken activity around the world and, like Australia, a number of grain producing nations are also major grain exporters. In assessing Australia's grain distribution system, it is instructive to

examine how the task is undertaken in other exporting nations.

Information about grain distribution internationally was submitted during the inquiry. Further information was obtained by the Commission when it visited a number of other

countries. These visits provided a first-hand appreciation of how other countries undertake the grain distribution task and a better basis for assessing the sometimes conflicting

claims of inquiry participants about particular aspects of overseas systems.

In the time available the Commission could not undertake a far-reaching study of overseas grain storage, handling and transport systems. Nor did it attempt to verify submitted cost comparisons of grain distribution in Australia and a number of other countries. Fundamental differences in factors such as geography and input costs detract from the usefulness of such comparisons.

Rather, the Commission concentrated on a number of specific matters of relevance to the inquiry. Of particular interest were the relationship between the nature and degree of legislative and administrative control and the scope for efficiency improvement in grain storage, handling and transport, and developments in overseas systems that could have a bearing on Australia's competitive position in the international grain market. Also of interest were such questions as on-farm versus off-farm storage, grain hygiene, and manning levels at port terminals and on board vessels during loading.

Before discussing these matters, it is useful to outline the essential features of grain distribution in the overseas countries visited.

6.2 Overseas grain distribution systems

The world's major exporter of grain is the United States, followed by Canada, the European Community, Australia and Argentina. The Commission examined the grain distribution systems in the United States, Canada and Argentina and also visited port terminals in the United Kingdom, the Netherlands

and the United Arab Emirates.

An outline of the United States, Canadian and Argentine systems follows. A fuller description of each system is set out in Appendix B .

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In examining the United States, Canadian and Argentine systems, the Commission also considered the export marketing of grain in each country since marketing is closely linked to the storage, handling and transport task.

The United States Grain marketing and distribution in the United States is largely free from specific government or administrative control, although a number of government agricultural programs do have an impact on these activities. The

marketing and distribution system is highly competitive, involves many participants and consists of a complex network of marketing and distribution paths from grower to customer. Grain frequently changes ownership as it moves along the distribution chain and a particular feature of the system is the high degree of grain blending undertaken to maximise returns while still meeting customer specifications.

The following are other characteristics of the United States system:

. Export marketing - this is mainly undertaken by the large international traders, many of whom are vertically integrated into storage and handling and sometimes into transport.

. Country storage and handling - about 65 per cent of country storage capacity is located on farm, providing growers with substantial marketing flexibility. Most off-farm storage facilities are owned by local grower co-operatives and, excluding the storage of

government-owned grain stockpiles, are run as throughput facilities. Regional storage and handling terminals are mainly owned by associations of local grower

co-operatives and by the international traders, and they function largely as assembly points for forwarding grain to export terminals.

. Land transport - the distances from growing areas to export ports vary considerably but in many cases are substantial (1000 kilometres or more). Privately owned rail and barge lines compete for the longer hauls; barge

lines, utilising the extensive inland waterways, are particularly competitive. Road haulage is a further option over shorter distances.

. Port terminals - most export marketers own export terminals at various points around the United States coast and Great Lakes system. The terminals operate as throughput facilities, with barges providing substantial back-up storage and in effect substituting for permanent storage at port.

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Canada Although the major part of the storage, handling and transport system is privately owned, the marketing and distribution of export grain in Canada is highly regulated. The Canadian Grain Commission licenses and sets maximum storage and handling charges for both country and port elevators; the Canadian Wheat Board is the sole receiver and marketer of 'board' grains (wheat, oats and barley); and the Grain Transportation Agency plans and co-ordinates western Canada's rail transportation, which is heavily subsidised by the Canadian Government.

The number of grain export paths is limited largely because of Canada's geography. Following a period of storage on farm, most grain becomes the property of the Canadian Wheat

Board and is moved by rail, through the private storage and handling system, from the inland production areas in Western Canada to export elevators. A particular feature of the

Canadian system is the additional investment at port elevators in equipment for cleaning grain. Growing and harvesting practices result in the accumulation of relatively high levels of foreign material such as weed seeds, straw and chaff.

The following are other characteristics of the Canadian system:

. Export marketing - this is dominated by the Canadian Wheat Board, although private traders frequently act as agents for the Board and also market non-board grains.

. Country storage and handling - most grain is initially stored on farm, being called under a quota scheme into the country elevator system as required by the

marketers. Country elevators, which are increasingly operating as throughput facilities, are either owned by a number of grower co-operatives or by private traders.

. Land transport - the main grain production area is geographically remote (on average 1500 kilometres) from export ports to the east and west. The transport task is undertaken by two rail companies, one privately owned and one publicly owned. There is little competition between the two companies and charges are determined and subsidised by government. As there is no price

mechanism to allocate rolling stock, government agencies are involved on a daily basis in allocating rail cars to port and country elevators, mainly to ensure an

equitable share between the Canadian Wheat Board and the private traders.

. Port elevators - operators of country facilities also own port elevators for shipping grain accumulated in the country on behalf of the Canadian Wheat Board or for shipping non-board grains on their own account.

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Argentina The grain marketing, storage and handling system in Argentina is under the control of the National Grain Board, which also involves itself in these activities. In addition, grower

co-operatives and private traders perform various aspects of the task. Growers can generally choose how and when to market their crop.

The following are other characteristics of the Argentine system:

. Export marketing - this is undertaken by a number of participants, including the large international traders, smaller traders and the National Grain Board. In recent years the Board has sold about 20 per cent of exports, mainly under government-to-government arrangements.

. Country storage and handling - on-farm storage is not used extensively and upon harvest grain is either warehoused by a country operator or sold to such

operators or the National Grain Board. Country operators are either grower co-operatives or independent dealers and together they attract about 90 per cent of deliveries.

. Land transport - the average distance from country storage to port is about 200 kilometres. Grain is not regulated to any particular transport mode and the bulk of the task is performed by private road hauliers.

. Port terminals - these are operated by both export

marketers and the National Grain Board. The Board, which loads about 60 per cent of the grain for export, competes with the private terminals except at one major port, Bahia Blanca, where it has the only permanent

facility.

6.3 The institutional environment and efficiency potential of overseas systems

In the light of its terms of reference, the Commission was particularly interested in examining the extent to which the institutional environment in overseas countries promotes efficient grain storage, handling and transport. Although unable to quantify this in any way, the Commission has used a number of observable characteristics of overseas systems as a proxy for efficiency and has formed a judgment on that basis.

Having regard to the criteria established in Chapter 4 of Volume 1, the characteristics of interest include the number of service providers, the extent of freedom to set prices

commercially, the ability of the system to adapt to changing circumstances, and the level of choice available to users. While not necessarily conclusive, such characteristics

influence the level of competitiveness and flexibility in a system and hence can be regarded as indicative of system efficiency.

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The substantially unregulated institutional environment in the United States is associated with a highly competitive and flexible grain marketing and distribution system. The system involves a large number of marketing and distribution participants, prices are set commercially, the system has the

flexibility to continuously adjust to changing circumstances, and growers are free to choose how and when to market their crop.

The high degree of regulation exercised in Canada over grain marketing and distribution results in a substantially different system. In regard to marketing, the sole receival and marketing rights of the Canadian Wheat Board limit the number of seller participants as well as limiting growers' options in terms of disposing of board grains.

The transportation of grain from country to port elevator is assured for rail through a substantial government subsidy applied to it and denied to road transport. Even though the

rail task is undertaken by two major railroads, competition between them is minimal because their networks do not overlap to any great extent and the rail rates are in fact set by government.

Despite the extensive regulation of the elevator system by the Canadian Grain Commission, in practice the country sector, and to a lesser extent the port sector, have many of the characteristics of a competitive and adaptive system. For example, the country elevator system comprises the privately owned facilities of a large number of participants

who compete for grain through competitive pricing for storage and handling and the provision of services. Actual charges for services appear to be below the maximum allowed by the Canadian Grain Commission. Growers are required to deliver board grains to a licensed receiver, but they generally have

a choice of receiver. In addition, the country elevator system has undergone and is continuing to undergo significant adjustment as a result of economic pressures.

The situation at port elevators is not so clear cut since grain received at a company's country elevator represents guaranteed throughput for its port elevators. Even though

there are many participants with privately owned facilities at port, competition is minimal, with pricing apparently being up to the maximum allowed by the Canadian Grain Commission. In these circumstances, if statutory charges are set to accommodate the least competitive operator, system efficiency is likely to be compromised.

Government intervention in the Canadian grain distribution system has a long history and stems from demands by growers that government safeguard their interests against what were often perceived as the unscrupulous practices of private marketers and service providers in regard to grain pricing, weighing and sampling for foreign material. In the case of

transport, the long distances involved virtually guaranteed a

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monopoly to rail and government's decision to subsidise the rail cost made its involvement almost inevitable.

The situation in Argentina is somewhat akin to that in Canada in that extensive central control can be exercised over the marketing and distribution system. In practice, however, there is little evidence of direct constraints on system participants, although the National Grain Board is itself involved in country and port elevator operations and export marketing.

Growers are free to choose how and when to market their crop and privately owned country receival facilities compete with each other and the National Grain Board to purchase grain from growers. The country operators are not restricted to any particular mode of transport to port and, in spite of the existence of a State-run railway, road transport is used extensively because of the acknowledged inefficiency of the

railway system. A number of privately owned port terminals compete with National Grain Board terminals and the crop is marketed by both the private companies and the Board.

The nature of the present system indicates a competitive environment, but the National Grain Board has substantial power to influence the direction of the system. In addition, at the geographically remote port of Bahia Blanca the Board has a monopoly (in terms of permanent facilities) and has refused permission for the establishment of a private terminal. On the other hand, at other locations private terminals are applying competitive pressure on Board terminals because of government-imposed restrictions on labour shedding at those terminals.

In summary, the systems examined provide interesting examples of institutional environments, unregulated in the United States, extensively regulated in Canada and somewhat less so in Argentina. An added dimension in the case of Argentina is that the regulatory body itself is involved in undertaking a number of the service tasks.

A noteworthy lesson from the study is that, even in the regulated systems, competition in the provision of many services and freedom of choice for growers is evident. Although this is perhaps least so in the case of transport in Canada, it is apparent for storage and handling in Canada and

in storage, handling and transport in Argentina. Of course, in the deregulated United States environment substantial competition and freedom of choice exist.

In relating the overseas situation to Australia, the difference in the form of regulation is quite apparent. Whereas in the regulated systems overseas the role of government agencies is often as a 'watchdog' over a system or parts of a system in which competition occurs, the form of regulation in Australia is such as to exclude the opportunity for competition. Hence the Australian system - having few participants, prices generally not set commercially, little

flexibility in adapting to changing circumstances, and little

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choice for growers - appears to be at a disadvantage in terms of having an environment conducive to an efficient grain distribution system.

6.4 On-farm versus off-farm storage

During the inquiry the Commission focussed considerable attention on the role of storage facilities, on farm, in the country or at port. As discussed in Chapter 2 of Volume 1, little use appears to be made of on-farm storage in

Australia. Also, the extent of port, as compared to country, storage varies across States, depending on factors such as proximity of growing areas to port and the storage philosophy of the individual bulk handling agencies. In regard to port terminals, comparisons of storage-to-throughput ratios between Australian ports and a number of overseas ports were put forward.

Each of the overseas systems examined is characterised by off-farm storage capacity being substantially less than average annual production. Approximate ratios of average

annual production to off-farm storage (at both country and port) are 1 to 0.3 for Canada, 1 to 0.6 for the United

States, and 1 to 0.7 for Argentina. These compare with a ratio of about 1 to 1.4 for Australia. One explanation of this difference appears to be a greater dependance overseas on the use of on-farm storage.

A variety of factors influence the use of on-farm storage of grain overseas. There is commercial pressure in a

competitive environment to operate off-farm storage facilities on a throughput rather than longer term storage basis. This pressure exists in each of the overseas systems examined. Another is the greater flexibility that on-farm storage provides for growers in a deregulated marketing environment, as in the United States.

In addition, incentives exist in Australia for not holding grain on farm which generally do not apply overseas: delivery to a licensed receiver triggers an advance payment to the grower, and the storage and handling charge is often the same regardless of whether delivery is to a country facility or to

a port terminal. In contrast, delivery by growers to country elevators in Canada is restricted by a quota scheme, and in the United States growers are often able to obtain loans against grain held on farm.

One reason frequently advanced during the inquiry for minimising on-farm storage in Australia involved grain hygiene. It was interesting to note that even though

climatic conditions overseas, particularly in Argentina and in the central and southern United States, are also conducive to growth in insect populations, on-farm storage is

nevertheless used to a greater extent than in Australia. The manner in which such overseas systems deal with the hygiene question is discussed in Section 6.5.

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A number of inquiry participants pointed to the substantially higher throughputs achieved at overseas terminals. Such comparisons were generally provided to support a view that Australian terminals were less efficient than their overseas counterparts. The unit costs of port terminals are

substantially influenced by throughput in relation to port storage capacity.

The Commission believes that realistic comparisons, particularly on the basis of a port storage-to-throughput ratio, are difficult to make for a number of reasons. In Australia, because of the proximity of many ports to production areas, considerable port storage is provided for deliveries direct from farm. Hence a proportion of the storage could be regarded as not being directly related to the grain assembly and ship-loading operation. Overseas, the amount of port storage in a number of systems does not fully describe the actual situation. For example, in the United States substantial storage capacity is provided in barges, while in Canada demurrage-free rail wagons also provide a large amount of storage capacity.

Having regard to these factors, it is not at all clear that there is a substantial difference in port

storage-to-throughput ratios between ports observed overseas and a number of ports in Australia.

The Commission observed a highly efficient port operation at Rotterdam, a port with fixed storage capacity of around 100 000 tonnes and which tranships 20 million tonnes annually. The port handles a variety of grains and other feed products, receives in a range of vessels and despatches in an even larger range of water vessels, trucks and rail. The port maintains its reputation as a rapid and reliable grain port by means of efficient monitoring and scheduling and an appropriate set of financial incentives.

Another port terminal the Commission visited and which has some interesting characteristics is located at Tilbury, near London. The facility is owned by the Port of London

Authority and operates as a common-user facility, with a published set of charges for storing and handling grain. A private marketer leases part of the storage and has installed its own road receival facilities adjacent to the storage. The marketer hires the facility's ship-loading equipment as required. A number of grain processors have also established themselves adjacent to the storage facility and utilise the facility's storage under commercial arrangements.

6.5 Grain hygiene

The question of grain hygiene developed as a major inquiry issue, particularly in the context of proposals for a less regulated storage and handling system in Australia. The Commission did not undertake a detailed examination of the hygiene question overseas, but a number of observations can be made.

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In Canada, the cold climate is not conducive to insect breeding, and long-term storage of grain, either on farm or commercially, presents few problems with insects.

In Argentina, the climate is similar to that in parts of Australia and insects can be a problem. Argentina, however, tends to sell its crop in as short a period as possible and each year clears all stocks. The fairly frequent throughput of grain reduces the likelihood of significant outbreaks of infestation. Where the problem does arise, it is normally dealt with by fumigation.

It is interesting to note that Argentina's ports do not have facilities for treating infested grain. Given the diversity of grain sources at the ports, careful attention to sampling and checking deliveries for freedom from insects is undertaken upon delivery and any infested loads are turned

away for treatment prior to acceptance.

The situation in the United States is also of interest because the generally poor perception of that country's grain quality and hygiene is usually explained as the inevitable outcome of a deregulated marketing, storage and handling system. The United States climate, particularly in the central and southern parts of the grain belt, is like Australia's, conducive to insect population growth.

Legislation prohibits the use of contact chemicals in the bulk handling system and treatment must be undertaken by other means, principally fumigation.

United States grain exports amount to around 100 million tonnes, more than five times those of Australia. It is not surprising that the United States has developed a range of

markets covering grain in a range of conditions. Marketers presumably have determined that returns can be maximised by such an approach; in effect, trading off quality and price. The United States is able to, and does, export high quality and clean grain although this is only a small proportion of its total exports.

Export grain must be inspected by the Federal Grain

Inspection Service, which certifies the grade and

classification of grain as well as certain other aspects such as moisture content and evidence of insect infestation. Where the grade or condition of the grain does not meet the customer's specifications, the Service would not normally prevent the export of that grain but the inspection

certificate would record the grade and condition as presented.

In the circumstances, it is up to the marketer to solve the problem, one possible strategy being the negotiation of a lower price. The United States also exports grain which, while infested when loaded, is fumigated en route to the overseas customer. A number of these overseas markets are ones into which Australia also sells its grain.

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The United States Government could set higher export standards for all grain and, in fact, is examining this question at present. However, the cost of achieving this could mean that the United States becomes uncompetitive in markets that did not particularly want the high quality grains. Australia, with its smaller volume of grain, has a niche in the market which requires clean grain. It is clear that any storage and handling system put into effect would need to be able to meet the standards determined by

Australian marketers as being appropriate to maximise returns.

6.6 Manning levels

Another issue in the inquiry relates to port terminal and stevedore manning levels. Comparisons are difficult to make because of the many considerations that would need to be taken into account. Nevertheless, is is clear that

overmanning at port terminals and on board vessels is a widespread problem. In each of the countries the Commission visited, including the United Kingdom and the Netherlands, overmanning in these situations was often said to occur for a variety of reasons. These include official directions preventing the reduction of labour, management agreement to higher than necessary manning levels as part of wider negotiations with labour, and union power preventing reductions.

The lowest manning levels appear to occur at the United States gulf ports where, for example, on-board vessel loading is undertaken by terminal employees and there are three employees for two out-loading spouts.

6.7 Developments in overseas systems

Overseas grain storage, handling and transport systems are continuing to adapt to changing circumstances. It is worth being aware of these changes, not only because of what can be learnt but also because changes overseas are likely to affect the competitiveness of Australian grain on international markets.

Although it is now deregulated, until 1980 the United States rail system was constrained in its operations. Essentially, rail charges required government approval and rail companies were unable to differentiate between rail users on the basis of charges. In other words, the companies were unable to negotiate particular rates with particular clients for particular tasks.

These constraints were seen as a contributor to rail's declining competitiveness and loss of market share. The passing of the Staggers Act in 1980 stabilised the decline by providing rail with greater flexibility in rate-setting and

freedom to enter into commercial agreements with clients. In addition, it is now easier for railroads to sell all or part

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of their networks or to abandon lines. Such changes have occurred and are continuing to occur as part of greater emphasis on rail's efficiency rather than social obligations.

The United States Congress recently tightened up standards relating to grain quality, with the result that the addition of material such as grain dust or dockage to export grain is now prohibited. In addition, the Office of Technology Assessment is currently examining the extent to which grain hygiene standards influence the competitiveness of the United States.

In Canada the country elevator system has been undergoing extensive rationalisation and this is continuing. The Government's contribution to rail haulage is set to

progressively decline in real terms, which means that, other things being equal, Canadian grain may become less

competitive on world markets. However, the decreasing subsidy will place pressure on the railways to increase efficiency and this may partly or fully offset reduced government subsidies. One avenue of rail efficiency improvement is closure of uneconomic branch lines, pressure

for which continues as the country elevator system is rationalised towards fewer, higher throughput facilities. Canada is also considering cleaning its grain closer to the

farm to remove the inefficiency of hauling screenings from farm to port.

In Argentina an inquiry is under way to examine methods of improving the efficiency of agriculture generally, and more specifically of grain production. The Government has also taken a decision to privatise state-owned ports, and an

inquiry is currently investigating the most appropriate approach. When this occurs, ports should operate more efficiently in view of the substantial overmanning that is currently acknowledged to exist at the public terminals. Plans are also under way to improve rail's efficiency, which could reduce the cost of the overall land transport task, and improvements in and development of the facilities at the port of Bahia Blanca are also likely to result in a more efficient operation.

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APPENDIX A PRODUCTION OF AUSTRALIAN GRAIN BY STATE

82-83 83-84 84-85 8 5 -8 6 8 6 -8 7 Five year As per cent (a) average of Aust five (kt) (kt) (kt) (kt) (kt) (kt) year average

New South Wales Wheat 1499 8961 5805 5916 4765 5389

Barley 189 941 915 821 600 693

Oats 135 1120 402 538 605 560

Sorghum , , Oilseeds b 192 489 319 299 300 320

48 99 185 208 206 149

Lupins 6 23 34 53 39 31

Maize 48 56 74 90 60 66

Rice , ,

Legumes'

498 613 844 674 530 632

2 5 7 16 54 17

Total 2617 12307 8585 8615 7159 7857

31 17 38

24 42 6 30 97

6

Victoria Wheat 394 3971 2666 2250 2761 2408

Barley 75 758 '638 476 431 476

Oats , , 98 495 343 300 344 316

Oilseeds' 3 21 30 54 57 33

Lupins , , 4 16 21 30 35 21

Legumes' 3 62 87 138 319 122

Total 577 5323 3785 3248 3947 3376

15 11 21 9

4

43

APPENDIX A (Cont'd)

8 2 -8 3 83-84 84-85 8 5 -8 6 8 6 -8 7 Five year (a) average

(kt) (kt) (kt) (kt) (kt) (kt)

Queensland Wheat 754 1922 1579 1691 889 1367

Barley 268 542 704 810 273 519

Oats 9 19 14 26 20 18

Sorghum ,,, Oilseeds' 758 1387 1043 1109 880 1035

113 180 241 161 93 158

Lupins - - - - 1 -

Maize 87 175 207 176 90 147

Rice (c) 21 21 20 13 19 19

Legumes' 4 18 23 49 70 33

Total 2014 4264 3831 4035 2335 3296

tern Australia Wheat 5534 4316 658Ο 4362 5373 5233

Barley 717 797 1431 1024 604 915

Oats ,,, Oilseeds 534 456 460 338 411 440

3 2 3 4 6 4

Lupins 180 314 503 411 682 418

Rice . .

Legumes'

3 " - - - -

2 2 4 3 10 4

Total 6973 5887 8981 6142 7086 7014

As per cent of Aust five year average

8

12 1

76 45

66 3 12

32 22 30 1 84

1

APPENDIX A (Cont'd)

82-83 83-84 84-85 8 5 -8 6 86 -87 Five year As per cent (a) average of Aust five (kt) (kt) (kt) (kt) (kt) (kt) year average

South Australia Wheat 692 2843 2031 1944 2346 1971

Barley 668 1817 1836 1709 1623 1531

Oats Oilseeds

65 180 132 110 150 127

5 9 14 22 13 13

Lupins , . Legumes'

9 25 23 29 40 25

26 74 79 120 222 104

Total 1465 4948 4115 3934 4394 3771

Australia^ ^ Wheat 8876 22016 18666 16167 16139 16373

Barley 1939 4890 5554 4868 3551 4160

Oats 848 2296 1367 1330 1541 1476

Sorghum , , . Oilseeds 958 1885 1362 1416 1184 1361

172 311 473 447 374 355

Lupins 199 379 581 524 797 496

Maize 139 238 291 278 158 221

Rice 519 634 864 687 549 651

Legumes 39 162 202 328 679 282

Total 13689 32811 29360 26045 24972 25376

12 37 9 4

5

37

a Preliminary estimates. b. Oilseeds include rapeseed, linseed, safflower, sunflowerseed and soybeans. c. Legumes include field peas, chick peas, faba beans, mung beans, navy

beans and cow peas. d. Columns may not add due to rounding. e. Includes production for Tasmania and Northern Territory.

Source: BAE, 1987.

APPENDIX B A DESCRIPTION OF ASPECTS OF A NUMBER OF OVERSEAS GRAIN DISTRIBUTION SYSTEMS

This appendix provides a summary of aspects of the export grain marketing and distribution system in each of the United States, Canada and Argentina. The appendix is based largely on information obtained during a visit by the Commission to the countries concerned.

B .1 United States

This summary draws on:

. various publications which deal with aspects of the grain industry, by organisations such as the Federal Grain Inspection Service, the American Association of Railroads and the Interstate Commerce Commission;

. discussions in the US between the Commission and a

number of organisations and individuals, including:

- United States Department of Agriculture (Office of Transportation, Federal Grain Inspection Service, Agriculture Stabilisation and Conservation Services)

- Interstate Commerce Commission

- American Association of Railroads

- Continental Grain

- Chicago Board of Trade

- Union Equity Co-operative Exchange

- Atchison, Topeka and Santa Fe Railway Company;

- Elders Grain; and

. inspection of:

- Columbia grain terminal, Portland, Oregon

- Kurzweil farm, Missouri

- Elders grain terminal, rolling stock repair

workshop and corn mill, Atchison, Missouri

- Continental grain terminal, Westwego, Louisiana.

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B.1.1 Introduction

Grain production is the major agricultural industry in the United States. Its grain exports account for more than half of the volume of grain traded internationally.

The marketing and distribution of grain takes place in a highly commercial environment with ownership of storage, handling and transport systems totally in private hands. In this environment, growers have a high degree of flexibility as to when and how to market and move their crops.

Because of this flexibility, the US marketing and

distribution system is a particularly complex one involving many traders and service providers, and a myriad of grain paths from grower to overseas customer.

For the purposes of this outline, a typical path for export grain is taken as one in which the grower delivers and sells his crop to a country receival facility, often after a period of on-farm storage. In turn, the country receiver sells the grain, which may be delivered by road or rail, to a regional

terminal where larger quantities of grain are accumulated. The regional receiver normally sells the grain, for delivery by barge or rail, to an overseas marketer with an export terminal. From the terminal, grain is outloaded onto vessels

for overseas destinations.

Apart from the highly interactive nature of the US system, another particular feature is the high degree of grain blending undertaken at virtually all stages of the grain pipeline. Storage and handling operators endeavour to maximise returns through price margins obtained by the

skilful blending of parcels of grain.

The key elements of the US system are outlined below under the headings of production and exports, the institutional environment, marketing, country storage and handling, inland transport, port terminals, and grain standards, quality and inspection.

B.1.2 Grain production and exports

Grain production in the US occurs mainly within a wide inland belt stretching from the Canadian border in the north to the Gulf of Mexico in the south. Much of the growing area is remote from export ports but good river and land transport systems connect the growing areas to ports. Climatic conditions range from cold in the north to hot and dry in the south. Production density is generally high by international standards.

The US produces on average 375 million tonnes of grain per year. Corn is by far the predominant crop (accounting for about 55 per cent of total grain production), followed by wheat and soybean (each accounting for about 15 per cent) and

sorghum (about five per cent).

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About one quarter to one fifth of US grain production is exported. The main export crop is corn although significant quantities of a wide range of crops are sold into an

extensive range of overseas markets.

B.1.3 The institutional environment

With few minor exceptions, the US has a fully deregulated marketing, storage, handling and transport system. A large number of participants compete for the marketing and

distribution requirements of growers who, as a consequence, have at their disposal a wide range of choices in terms of the timing and method of marketing their grain. The most direct government involvement in the system occurs through the Federal Grain Inspection Service which, prior to export, samples and certifies the grade and other characteristics of the grain to be exported.

The existing competitive environment for grain marketing and distribution has in large part always been a feature of the US system. The main exception relates to rail transport where, until the passing of the Staggers Act in 1980, privately owned railways required government approval for rail charges and were constrained in negotiating commercial agreements with clients. The impact of rail deregulation is discussed later under the heading of inland transport.

Certain government policies, while not targeted at the grain marketing and distribution system, nevertheless have an impact. For example, the volume of grain available for

storage, handling and transport through the system is influenced by acreage reduction programs in which growers reduce their planted acreage of crop. Although such programs are mostly voluntary, participation is required for eligibility to other agricultural programs such as the loan rate scheme. This scheme helps maintain the viability of grain producers by allowing growers, when market prices fall below a specified minimum price, to forfeit their crop to the government at that minimum price.

B .1.4 Export marketing

The export marketing of grain is undertaken by the large international traders such as Continental, Cargill and Bunge, a number of smaller traders and several associations of grower co-operatives, such as Union Equity.

The larger marketers tend to be vertically integrated into the storage and handling system, owning for example country, regional and/or port facilities. In some cases, links into the transport system also exist through the ownership, for example, of a barge line.

Marketers have a variety of arrangements for sourcing grain. Some sourcing occurs under forward contracts with growers but

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attracting grain at country receival facilities is also important. In addition, grain is purchased from competitors at various points in the distribution chain, for example at a regional or port terminal, or even while in transit on rail or barge.

B.1.5 Country storage and handling

An important feature of the country storage system is the high proportion of storage located on farm. Of an estimated 550 million tonnes of country storage, some 63 per cent or 345 million tonnes is located on farm. This obviously provides growers with a considerable amount of flexibility in terms of marketing decisions.

Just under 14 000 off-farm grain storage facilities account for the remaining 205 million tonnes of country storage. While many of these facilities are relatively small serving local areas, others are regionally based and have substantial storage capacity. The largest regional facility is believed to be in Kansas with a storage capacity of half a million tonnes.

Most off-farm country storages are owned by local grower co-operatives. The co-operatives set prices on a commercial basis and, as most have separate ownership, little or no pooling of costs occurs. The co-operatives purchase grain outright or offer growers a warehousing service. A high proportion of the co-operatives' grain is sold to regional

associations of co-operatives which either market the grain or, in turn, sell it to international traders.

A major influence on country storage capacity has been US Government programs which resulted in the continuous accumulation of grain stocks by the Government. Grain may be

held in such stockpiles for a number of years and currently amounts to some 75 million tonnes. These stocks are stored both on farm and in private facilities throughout the country at rates negotiated between the Government and the storer. The 1985 Farm Bill reduced the extent by which US Government

arrangements supported domestic (and world) grain prices and appears to have taken some pressure off the country storage system.

B.1.6 Inland transport

The inland transportation of grain is highly competitive with many areas having the choice of three modes: rail, barge and road. Although the balance fluctuates, on a tonne-kilometre basis rail carries about 45 per cent of grain, barge 35 per cent and road 20 per cent.

The transport of grain by rail is undertaken on a standard gauge track by a handful of major, privately owned, rail companies (such as the Atchison, Topeka and Santa Fe Railway Company, Burlington Northern, Union Pacific) and many more

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regional or smaller railways, also privately owned. Each company owns its track and locomotives but approximately half of the wagons, typically 100 tonne capacity hopper cars, have separate owners.

The Association of American Railroads performs the task of ensuring that the many railroads function as a single system when inter-company movements are involved. A typical rail charge for a 600 to 700 mile (1000 to 1150 kilometres) journey was quoted as US$15 per tonne, equivalent to about two cents (Australian) per net tonne kilometre (at an exchange rate of US$1 = A$0.70).

Barges are used for grain transportation on the extensive navigable waterways which flow through a large part of the grain production area. Barges, generally of 1500 tonne capacity, are owned by private barge lines, a number of which are in turn owned by the larger grain companies.

Given the distance to be covered, journeys by barge can take from two to three weeks from loading point to port terminal. Many millions of tonnes of grain are on the water at any particular time and hence represent a considerable buffer stock for the port terminals. Barge transport was quoted as being highly cost effective, with a rate of about one-third that of rail.

Road transport by growers is undertaken in farm trucks, typically of 10 to 12 tonne capacity. Contract grain vehicles are about twice this size and are generally used for hauls of less than 300 miles (500 kilometres).

While the choice of transport mode has always been available, rail transportation was until relatively recently subject to regulations which constrained its operation. Before 1980, rail companies were required to seek government approval for their rates and to provide services to all comers at those

rates. With the passing of the Staggers Act in 1980, rail obtained greater flexibility in rate setting and freedom to enter into commercial agreements with clients. In addition, while the emphasis of rail had been on social obligation

rather than efficiency, it is now easier for railroads to sell all or part of their networks or to abandon lines.

An indication of the impact of the Staggers Act can be gauged from the following. Before 1980, rail's share of all freight tonnes had declined from 60 to 37 per cent. A factor in the decline was that the trucking industry was also undergoing deregulation and the interstate highway system was being developed.

Since 1980, rail's share has stabilised and rail rates have declined in real terms. Also, parts of the rail system have changed ownership, one consideration apparently being the

ability of new owners to operate lines under more favourable manning, pay and working conditions. The number of rail employees has fallen from 500 000 to 200 000.

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While in practical terms rail is now deregulated, a

' watchdog' role is maintained by the US Government through the Interstate Commerce Commission. The ICC's charter is to ensure competitive, efficient and safe transport for shippers, receivers and consumers. In relation to rail, two main areas of interest to the ICC relate to pricing and rail

line abandonment.

In relation to pricing, an ICC examination would be likely if evidence of excessive rail charging arose. Following a review, the ICC is able to direct that rates be reduced to ' reasonable' levels and that recompense be made for past

'unreasonable' rates.

In relation to rail line abandonment, a process lasting about 10 months is required to be followed during which time the matter is examined by the ICC. The ICC can reject the

proposal if it believes that the line can be operated

profitably or the public interest requires continued operation.

B.1.7 Port terminals

The US has grain export ports on the Atlantic and Pacific coasts, on the Gulf of Mexico and on the Great Lakes system. Most ports have a number of terminals and most are owned either by private traders or co-operative associations. While vessel size capacity varies, many ports are capable of

loading the largest of vessels engaged in the international grain trade.

Outloading and storage capacity at terminals also varies as does the degree of operating sophistication. Some of the more modern facilities outload 10 million tonnes or more per year while others have substantially lower capacities. The Commission saw a number of the more modern plants with a high degree of automation but understands that many facilities with less modern equipment are also in use.

Ratios of annual throughput-to-storage at port for US terminals tend to be very high and, in one case, was assessed at around 100 to 1. However, as noted earlier, substantial de facto port storage is provided by barges both during their often long passage to the terminal and upon their arrival. Having regard to this factor, the apparently high

throughput-to-storage ratios reduce substantially and, in the case referred to above, to around 20 to 1.

Another factor is the speed with which grain can be delivered and unloaded at the port terminal. Additional investment in such aspects will have a bearing on the amount of port storage required for efficient operation. The port terminals inspected by the Commission appeared to be well equipped with inland transport and unloading facilities.

Annual output per terminal employee, including export inspection staff, was about 40 000 to 50 000 tonnes. Manning

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on vessels at all but the Gulf port terminals was said to be around 13 for two outloading spouts. This level was

considered excessive, particularly compared with the manning at Gulf terminals of three operators for two spouts.

B.1.8 Grain standards, quality and inspection

Official US standards for grain cover aspects such as grade, class and condition. The US Grain Standards Act requires that export grain sold by grade be inspected and weighed. The inspection and weighing task is undertaken by the Federal Grain Inspection Service except in eight States where this is undertaken under FGIS supervision.

The FGIS certifies the grade and classification of the grain inspected as well as certain other aspects such as moisture content and evidence of insect infestation. Where the grade or condition of the grain does not meet the customer's specifications, the FGIS would not normally prevent the export of the grain but the inspection certificate would record the grade and grain condition as presented. In these circumstances, it is up to the marketer and customer to resolve the position, one possible strategy being the

negotiation of a lower price.

The Environmental Protection Agency disallows the use of certain fumigants; for example, ethyl dibromide and carbon tetrachloride, as a means of containing insect infestations. Such fumigants as ethyl bromide and aluminium phosphide are employed. Insects detected during export loading of grain are normally dealt with by fumigating the ship's hold during the delivery voyage, a practice said to be acceptable to most overseas customers.

The FGIS reported that it received 42 quality complaints and three quantity complaints in 1986, compared to 71 quality and three quantity complaints in 1985. In 1986, the tonnage involved in foreign complaints represented 1.84 per cent by weight of the total tonnage exported, compared to 2.15 per cent in 1985.

There has been some concern recently about the export quality of US grain and the 18 per cent decline in US grain exports. As a consequence, the Grain Quality Improvement Act of 1986, which became effective from 1 May 1987, prohibits:

. dockage or foreign material once removed from grain from being recombined with any grain;

. dockage or foreign material from being added to grain; and

. reintroduction of dust to grain once removed.

In addition, the US Congress has has initiated an inquiry by the Office of Technology Assessment to investigate this matter. The matters being looked into are:

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evaluating US grain competitiveness in terms of quality rather than price;

extent to which quality and handling has contributed to the decline in US exports; and

the classification of wheat.

B .2 Canada

This summary draws on:

. various publications which deal with the grain industry, including:

- Grains and Oilseeds:____ Handling, Marketing,

Processing, Canadian International Grains Institute, Third Edition (Revised)

- Background Paper No. 2: Grain Transportation, A System Description, Western Transportation Advisory Council;

. discussion in Canada between the Commission and various organisations and individuals including:

- Canadian Grain Commission

- Canadian Wheat Board

- Grain Transportation Agency

- Transport Canada

- External Affairs Canada

- Dr James Leibfried

- Cargill Limited

- CP Rail

- Western Transportation Advisory Council; and

. inspection of:

- Cargill grain terminal, Thunder Bay, Ontario

- a Cargill country elevator, near Winnipeg, Manitoba

- Prince Rupert grain terminal, British Columbia

- Pioneer grain terminal, Vancouver, British Columbia.

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B .2.1 Introduction

Grain production in Canada is an important industry, particularly through its contribution as one of the country's top export earners. In terms of international trade, Canada ranks second only to the United States of America in the volume of grain exports.

The marketing and distribution of export grain in Canada is highly regulated. Marketing of the major cereal grains is undertaken by a sole government agency, the Canadian Wheat Board; storage and handling, although largely undertaken by private enterprise, is highly regulated by another government body, the Canadian Grain Commission; and the rail transport

function is controlled and co-ordinated by the Grain Transportation Agency.

Most export grain is grown in western Canada and typically moves from on-farm storage into the country elevator network from where it is railed to a port elevator either on the

Pacific Coast or the St Lawrence Seaway.

The key elements of the Canadian grain system are described below under the headings of production and exports, institutional environment, marketing, country storage and handling, land transport, port terminals and recent

developments.

B.2.2 Grain production and exports

Almost all of Canada's export grain is produced on the prairies in the western provinces of Alberta, Saskatchewan, Manitoba and in north-eastern British Columbia. The growing area is well removed (on average 1,500 kilometres) from the export ports to the west on the Pacific coast, and to the east on the St Lawrence Seaway. Canada's grain production occurs under cold climatic conditions and, by international standards, production density is moderate.

A particular feature of Canada's grain production is crop swathing as an aid to the grain ripening process. This results in an accumulation of admixtures such as weed seeds, straw and chaff with the grain which must subsequently be removed. Unlike the position in a number of other countries, Canada's cold climate is not conducive to growth of insect populations and hence grain infestation is not a major problem.

In recent years western Canada has produced on average about 43 million tonnes of grain per year of which the main crops - wheat and barley - account for about 55 and 25 per cent respectively. Although production volumes vary significantly

from year to year, total grain production has shown a continuously upward trend for many years.

Canada's exports of major grains and oilseeds have averaged about 27 million tonnes per year. Principal export crops are

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wheat and barley and the main export destinations are the EEC, Eastern Europe, the Middle East and Asia.

B .2.3 Institutional environment

Despite having substantial private involvement, the marketing and distribution of western Canada's grain is highly regulated.

Government involvement in the industry has prevailed since production of grain in western Canada commenced more than a century ago. It stemmed from the demands by growers that government safeguard their interests against what were often perceived as the unscrupulous practices of private marketers

and service providers in regard to grain pricing, weighing and sampling for foreign material, and in respect of transport charges. The nature and extent of control has varied with the passage of time and changes have been

associated with a succession of inquiries, many of them Royal Commissions of Inquiry.

Numerous Federal Government organisations play a role in the grain selling and movement task, some more so than others. The main functions of the three organisations having the greatest direct involvement can be summarised as follows:

. The Canadian Grain Commission - established in 1912, administers the Canada Grain Act which regulates handling, transportation and storage of grain in Canada. The Commission:

- establishes grades and standards for grain;

- licenses country and terminal elevators and grain dealers;

- establishes maximum allowable storage and handling charges at country and terminal elevators; and

- inspects, weighs and certifies shipments of grain prior to export.

. The Canadian Wheat Board - established in 1935, is the sole export marketing agency for wheat, oats and barley grown in western Canada. The Board plays a major role in the transportation system by initiating grain deliveries from farm to country elevators.

. The Grain Transportation Agency - established

temporarily in 1979 and permanently in 1983, is

responsible for planning and controlling rail car movements and for allocating rail cars between the Canadian Wheat Board and private traders to ensure that each commercial interest receives a fair share of the

available rail cars.

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Another Federal Government agency which has a regulatory role is the National Transportation Agency (formerly the Canadian Transport Commission), which is authorised to make final decisions on branch line abandonment in western Canada, administers the Federal Government's rail subsidy program and, on the basis of specified costing procedures, determines rail freight rates and the extent of the Federal Government's contribution to these rates under the Western Canada Grain Transportation Act.

B.2.4 Marketing

The export marketing of the majority of Canadian grain is through a central agency system in which the Canadian Wheat Board has sole receival and marketing rights over 'board grains': wheat, oats and barley. A number of producer co-operatives and international grain traders export the lower volume non-board grains such as rapeseed, rye and flaxseed, and act as agents for the Canadian Wheat Board in marketing board grains overseas. The Canadian Wheat Board also controls the domestic marketing of board grains if for human consumption.

The Canadian Wheat Board operates a number of revenue pools and growers are paid according to the type and grade of grain delivered, less a number of deductions for items such as

dockage, moisture and administrative charges. Growers receive an initial payment upon delivery to a licensed country elevator, and a final payment after the close of the crop year.

B.2.5 Country storage and handling

A significant feature of the country elevator system is its progressive transition from a storage to a largely throughput system. This process, which has resulted in the number of country elevators being halved in just the last 10 years, has been ongoing for more than 50 years. Increasing costs of operating fragmented receival points with limited annual throughput continues as the main impetus for the process.

The declining storage capacity off farm means that upon harvest most grain is initially stored on farm. As grain is required to meet sales commitments, the Canadian Wheat Board calls for deliveries from growers into the country elevator system under a delivery quota scheme. This scheme is designed to give all growers a fair and equal opportunity to sell their crop each year.

Eight major and several minor handling companies operate country elevator facilities. Four of the major handlers are grower co-operatives while the remainder are privately owned. The companies have just under 2000 licensed country elevator units with some 7.5 million tonnes of storage. Elevators are required to be licensed by the Canadian Grain

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Commission which also sets maximum allowable storage and handling charges.

Country elevators compete for growers' business as many

growers have a choice of elevator within reasonable driving distance. Grain accumulated in the country represents

guaranteed throughput for the company's port terminal which, even though the Canadian Grain Commission sets maximum

allowable charges, is generally the more profitable part of the operation. Of interest is the fact that, while

individual growers benefit from competitive pricing at the country elevator stage, the costs of non-competitive pricing at the terminals are pooled across all growers.

B .2.6 Iniand transport

Rationalisation of the number of country elevators has meant that the distance between farm and country elevator has progressively increased. The average distance today is around 30 kilometres compared with 15 kilometres less than

10 years ago. The initial movement of grain is either by the grower's own truck or by a commercial contractor.

Almost all export grain moves from country elevator to export port by rail. This task is performed by two railways

(privately owned Canadian Pacific and government owned Canadian National) in a fleet of about 19 000 hopper cars of 60 to 90 tonne load capacity and some 4000 box cars which are being progressively eliminated from service. The hopper cars have been provided to the railways by the Canadian Government

(15 000 cars), the Canadian Wheat Board (2000) and the provincial governments of Alberta and Saskatchewan (1000 each).

Although there is extensive duplicated track over certain routes, the opportunity for competition between the two railways is not as great as might appear. Canadian National has most of its network in the north while Canadian Pacific has the majority of its network in the southern part of the growing areas. Even though both railways serve all ports

(with the exception of Churchill and Prince Rupert) the catchment areas do not overlap to any great extent.

Rail's stranglehold on the country-to-port haulage task quite likely stems from rail's natural cost advantage over road given the distances involved (on average 1,500 kilometres). Another consideration, however, is the substantial Federal Government subsidy provided to the railways, and not road hauliers, to move western Canada export grain from the prairies to port.

Until recently, the maximum rates which the railways could charge growers were fixed by federal statute at 1897 levels. The difference between these statutory grain rates, known as the Crow rates, and actual, costs was met in part by Federal Government subsidies and to a large extent was absorbed by the railways themselves.

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With railway costs escalating and the fixed grower

contribution representing a decreasing proportion of rail costs, the Federal Government sought to alter the cost sharing arrangement between itself and growers with the passage in 1983 of the Western Grain Transportation Act. The Act established a mechanism for determining new rail rates annually, and for apportioning the rate between growers and the Federal Government.

In 1986-87 the average rail rate for moving grain was

$C30.94 per tonne, of which the Government's share was $24.97 or 81 per cent. Under the provisions of the Act, the Government's share is expected to progressively decline to 57 per cent by 1991-92. The Act commits the Government to

continuing subsidisation of the rail rates.

The Government's transport subsidy is quite selective in that it applies only to rail movements of export grain in western Canada. Transport by road or vessels on the Great Lakes is

not eligible. As a means of minimising transport distortions and to encourage crop diversification, the Government is under pressure to pay the subsidy direct to growers for use in respect of either rail or road transport.

The rationalisation of country elevators, particularly along branch lines, has reduced the transport task on many lines and has thrown into doubt the economics of keeping them in

service. While the railways would like to close such lines in order to improve their efficiency, some 25 000 kilometres of branch line are guaranteed (by Cabinet order) for non closure until the year 2000. There is a changing climate of opinion which may permit closure before 2000. However, the process of rail rationalisation is quite onerous and can

involve public hearings if there are any objections to the closure.

The Grain Transportation Agency has an ongoing involvement in the weekly allocation of rail cars amongst the various commercial interests requesting shipping from the country elevator system. The Agency undertakes this task in

conjunction with the Canadian Wheat Board, co-operatives, grain companies and the railways and the process is designed to maximise the efficiency of rail car use while achieving equity in access to rail transport amongst users.

The role of the Grain Transportation Agency in the allocation process arose in order to make an equitable allocation of available rolling stock to meet the competing demands of the Canadian Wheat Board and the private marketers. One view on this aspect was that the absence of a demurrage charge on rail cars results in the cars substituting for fixed storage, particularly at port, thereby reducing the effective use of the rail fleet. The average car cycle time from country elevator to port terminal and return is around three weeks for west coast ports and around two weeks for the lakehead terminals at Thunder Bay.

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Most grain delivered to Thunder Bay on Lake Superior is transported by a fleet of 80 'lakers', vessels typically of about 25 000 dwt, along the Great Lakes system to transfer terminals some 2000 kilometres away on the St Lawrence River and east coast. Large export vessels are unable to navigate the lakes which incorporate a series of locks. Some Thunder Bay grain is transported to the transfer stations by rail, particularly to cover the three or so winter months when the

lakes are frozen. The Federal Government Crow rail subsidy does not apply to rail movements east of Thunder Bay.

B.2.7 Port terminals

Like the country elevator system, port terminal elevators are owned and operated by private companies and the grower co-operatives. The facilities are required to be licensed by the Canadian Grain Commission which also sets maximum charges

for the services provided.

Canada has 23 port terminals located at four ports: Prince Rupert and Vancouver on the west coast with one and five elevators respectively; Thunder Bay on Lake Superior with 14 elevators; and Churchill on Hudson Bay with one elevator.

Total storage at these ports is 3 million tonnes. A further 3 million tonnes of storage is located at 24 transfer elevators situated at 17 Great Lakes, St Lawrence and east coast ports. These elevators transfer prairie grain delivered by rail or lake vessel into ocean-going export

vessels and handle Eastern grain for export.

The Canada Grain Act declares the terminals to be facilities for the general advantage of Canada for the common use of all shippers. As such, they are required by law to accept all grain delivered to them. The grain accumulated in country

facilities is railed to port facilities on the instruction of the Canadian Wheat Board (for board grains) or the private marketer for other grains. The terminals may receive grain from their own primary elevators or those of other companies but they are guaranteed to receive grain at least in

proportion to what they originate in the country. The Prince Rupert terminal is owned and operated by a consortium of six main grower co-operatives and private companies receiving grain from all shippers, and operates more along the lines of

a common user facility.

A particular function of Canadian port terminals is the cleaning and drying of grain to export standard. As

previously mentioned, Canadian grain contains relatively high levels of foreign material and the removal of this material at terminals is a major and comparatively expensive operation. Part of this cost is met by growers while

terminal operators recover the balance from the sale of the screenings, usually in pelletized form for stockfeed purposes.

Grain shippers' clearance associations which represent shippers, terminal elevator operators and exporters exist in

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Vancouver and Thunder Bay and match shipping orders with vessel information and allocate individual vessels to particular terminals for loading. The relative volumes that may be handled at the four major Western Canadian ports are

19 million tonnes (50 per cent) at Thunder Bay, 12 million tonnes (32 per cent) at Vancouver, 4 to 5 million tonnes (13 per cent) at Prince Rupert, 0.75 million tonnes (2 per cent) at Churchill and about 1 million tonnes (3 per cent) to miscellaneous destinations.

Two Vancouver terminals are capable of handling ships of 100 000 dwt. The St Lawrence transfer terminals are

restricted to 45 000 dwt ships with the notable exception of Quebec City and Port Cartier which can handle vessels of up to 100 000 dwt. The Prince Rupert terminal is able to

accommodate ships up to 65 000 dwt.

There has recently been a shift in the proportion of grain shipped through west coast terminals as compared to those at Thunder Bay. New markets in closer proximity to the west coast and the new terminal at Prince Rupert have resulted in a significant shift in grain through the west coast and raises questions about the extent of future utilisation of Thunder Bay facilities.

Manning levels, including Canada Grain Commission inspection and weighing staff, at the port terminals inspected indicates an annual output per employee of around 40 000 to

50 000 tonnes. For comparison purposes with other systems, account would need to be taken of the grain cleaning task undertaken in Canadian terminals. The annual

throughput-to-storage ratio of the terminals was about 25 to 1. As previously mentioned, however, no account has been taken of the significant de facto storage provided by rail cars.

B.2.8 Recent developments

The main developments likely to occur in the Canadian system are seen as the continued rationalisation of country receival facilities in order to reap the benefits of larger but fewer country elevators. This may see greater consolidation of grain onto main lines by road as pressures increase to close rail branch lines carrying reduced volumes of grain.

Rail is also likely to come under further pressure as the growers' contribution to rail rates increase under the new cost sharing arrangement with the Federal Government. This, combined with the possibility of growers having the option of using the subsidy for either road or rail transport, may well see some shift in the transport mode although this is likely to be marginal.

Consideration is also being given to the cleaning of grain in the country so as to reduce the tonnage requiring to be transported from country to port.

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B.3 Argentina

The following summary draws on:

an information booklet published by the National Grain Board in January 1987;

discussions in Argentina between the Commission and a number of organisations and individuals, including:

- the National Grain Board

- Macdonald Wagner

- Interamerican Institute for Co-operation in Agriculture

- Cargill

- Federation of Independent Grain Elevator Companies;

a port terminal inspection at Bahia Blanca.

B .3.1 Introduction

Grain production is a major economic activity in Argentina and the country's grain exports place it amongst the world's top five grain exporting nations.

The marketing and distribution of export grain takes place in a largely competitive environment although the State-owned National Grain Board (NGB) has at its disposal extensive powers of control and involvement in the selling and movement of grain.

A typical path for export grain is as follows. Upon harvest, grain is delivered and sold by the grower to one of a number of competing country receival facilities. The country operator sells the grain to an international marketer and arranges for its delivery, generally by road, to a port terminal. The terminal operator outloads the grain onto

vessels for overseas destinations.

The key elements of the Argentinian system are outlined below under the headings of production and exports, the

institutional environment, marketing, country storage and handling, land transport, port terminals, grain standards and hygiene, and recent developments.

B.3.2 Production and exports

Grain production in Argentina is concentrated in the central and north east (Pampas Region) of the country in areas reasonably accessible to export ports. To a certain extent grain production has also developed in the north west.

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Density of production is moderate by international standards and a favourable climate in the growing area has neither the extremes of cold nor heat experienced in a number of other grain producing countries.

Argentina produced in the last four years an average of 40 million tonnes of grain. The main crops are wheat, corn and soybeans, which together comprise nearly 70 per cent of the harvest, and sorghum and sunflower, which together account for a further 15 per cent.

About half of Argentina's annual grain production is exported. Exports, which comprise significant proportions of each of the main crops, are destined for a range of markets including the USSR, the EEC and countries in South America,

Asia and the Middle East.

B.3.3 Institutional environment

Grain marketing and distribution in Argentina is under the control of the NGB. The Board, whose members include representatives of government, growers' co-operatives and private marketing organisations, has extensive powers to supervise and undertake grain marketing and distribution.

Despite these extensive powers, in practice the NGB' s involvement in marketing, storage, handling and transport is quite limited. Grain co-operatives, private companies and State-owned organisations combine to undertake the marketing and distribution task in a largely competitive environment. The present system has been in place for a number of decades except for the end of the 1940s, and a brief period in the mid 1970s when greater involvement by the State was

reintroduced but was subsequently abandoned following a marked decline in the efficiency of the system.

B.3.4 Marketing

The marketing of export grain is undertaken by the NGB, private traders and associations of grower co-operatives. These co-operatives - the ACA, FACA and AFA - are umbrella organisations of groups of local co-operatives. (The initials stand for: Asociacion de Cooperativas Argentinas

(ACA), Federacion Argentina de Cooperativas Agrarias (FACA) and Agricultores Federados Argentines (AFA).)

Over recent years, the bulk of overseas sales have been made by the two latter groups with NGB sales accounting for about 20 per cent of total grain exports. Board involvement is generally limited to situations where the importing country prefers to deal on a government-to-government basis.

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B.3.5 Country storage and handling

Competition for growers' grain occurs amongst country facilities operated by grower co-operatives, independent country dealers and the NGB. Although the NGB establishes a

grain support price, country operators set their own charges for receiving, cleaning, conditioning and storing grain. Growers are mainly paid more than 95 per cent of the purchase price when sale is formalised, the balance being payable upon delivery, once adjustments for dockage and moisture have been settled.

Growers have a reasonable capacity to store grain on farm with farm storages accounting for about 20 per cent of total country storage of some 31 million tonnes. Alternatively,

growers can utilise the warehousing services offered by the co-operatives and commercial off-farm operators, whose storages account for some 20 and 35 per cent respectively of total country storage. NGB storage represents a further

10 per cent while the remaining 15 per cent is owned largely by industrial users such as flour mills and oilseeds crushers.

The NGB's involvement in country storage has been

substantially reduced over recent years. When the Board sold off much of its country storage some eight years ago, legislation limited its sales to grower co-operatives and producers' associations. However, other organisations are not prevented from constructing their own country storages. The NGB limits its current involvement in the country to developing production areas where private companies or co-operatives are not yet established.

B.3.6 Land transport

Delivery from farm to country silo is undertaken by growers in portable bins or large trailers, of about 7 to 20 tonnes capacity, as few growers have their own trucks. On average, the distance from farm to silo is between 20 and

40 kilometres.

Local co-operatives and country dealers sell grain destined for export to marketing organisations on a delivered-to-port basis. Hence the onus is on country operators to minimise transport costs from their country facility to port. The NGB, which is itself an export marketer, calls up grain to port from country facilities as required.

Land transport is not regulated to any particular mode and about 80 per cent of the grain transport task is captured by road. This is despite an extensive rail network and rail tariffs being generally well below those of road. Rail's

lack of competitiveness is attributed to slow journey and unloading times resulting from a number of factors including insufficient locomotives, poor tracks and outmoded wagons.

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A typical road vehicle comprises an 8 tonne truck and

20 tonne trailer, the majority of which are run by

owner-operators. The average length of haul from country to port is about 200 kilometres. A major problem with road transport was said to be the chronic overloading of vehicles.

B.3.7 Port terminals

Grain is exported from some 12 ports having around

30 terminals. Ten of the terminals are owned by private traders or associations of grower co-operatives, the remainder being owned by the NGB.

Total storage at port amounts to some 1.5 million tonnes. Storage at individual terminals varies significantly with the largest facilities, at Buenos Aires, Rosario and Bahia Blanca, each having storage in excess of 100 000 tonnes while about half of all terminals have storage capacity of 20 000 tonnes or less.

NGB port facilities are run on a common-user basis under a published schedule of charges; the use of private facilities by other than the owners is subject to negotiation. Most ports have a number of terminals or are within reasonable proximity to provide a measure of competition. The main exception to this could be the geographically remote port at Bahia Blanca which is served by NGB facilities. Recently, direct loading facilities started operations in this port and their use by private companies represented approximately 20 per cent of total shipments through Bahia Blanca during 1987.

In order to minimise congestion at port, a trader wishing to ship grain through a NGB facility is able to borrow grain already at the terminal on the basis of a certificate showing that an equivalent quantity and standard of grain is owned in the country system. The borrower is then required to

replenish the terminal within a specified time.

NGB terminals are coming under increasing competitive pressure from private terminals as a result of government regulations which prevent the shedding of labour at public

terminals. Employment at public terminals, for example, is believed to be more than double the numbers required for efficient operations. Overmanning was also said to occur on vessels during grain loading, the labour for which is provided by the terminals.

The NGB facilities at Bahia Blanca had an annual

throughput-to-storage ratio of about 40 to 1 before an explosion in 1985 damaged part of the storage. That ratio now is about 20 to 1. On the basis of its acknowledged high

level of manning, the annual output per employee was about 10 000 tonnes and has decreased to about 4 000 tonnes.

A number of the ports are located on the Parana-Plate river system which restricts access to vessels of about

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20 000 dwt. A transhipment facility anchored near the river mouth is supplied by large barges and is used to top up vessels partially loaded at the river terminals. The largest port in terms of vessel size is at Bahia Blanca which can

accommodate vessels of around 50 000 to 60 000 dwt.

B.3.8 Grain standards and hygiene

The NGB sets the grades and standards for grain and samples. Private Arbitration Chambers, entities related to Grain Exchanges but under the control of the NGB, perform the analysis of export grain. On the basis of such results, the NGB certifies the quality of all grain prior to export. It

also certifies weight.

Temperature and humidity conditions in the growing areas are generally conducive to growth in insect populations and infestations both in the country and at port are controlled by aeration, fumigation or application of pesticides to grain depending on conditions. Grain hygiene is considered to be

satisfactory with practically no official complaints by importing countries.

B.3.9 Recent developments

At the time of the Commission's inquiry, the Argentine Government had commissioned a number of inquiries relating to grain marketing and distribution. One is a study by the Interamerican Institute of Co-operation for Agriculture,

funded by the World Bank, into modernisation of the Argentine farming sector. Another is a study being undertaken by private organisations on approaches to the privatisation of the management and administration of State-owned port terminals. It appears that the latter initiative is aimed at solving the overmanning situation at the NGB terminals.

The Commission also understands that a World Bank development program, being undertaken by a consortium comprising Macdonald Wagner and local companies, is well advanced for

upgrading and expanding the NGB terminal at Bahia Blanca. In addition, proposals are under way to significantly improve the performance of rail in relation to grain haulage.

87

REFERENCES

BAE 1987a, Commodity Statistical Bulletin, December, AGPS, Canberra.

____ 1987b, Wheat Marketing and Assistance, submission to IAC Inquiry, AGPS, Canberra.

BGQ 1986, Operations Information Report 1985-86.

GHA 1987, Annual Report 1985-86.

Hetherington Wesfarmers Shipping Agency 1987, Australian Grain Ports : Port Information, ed 3, March, Sydney.

Howard P and Lawrence M 1986, 'Australian grain storage capacity', Quarterly Review of the Rural Economy, 8(4), 330-334 AGPS, Canberra.

IAC 1983, 'The wheat industry1, Report No. 329, AGPS, Canberra.

Ocean Shipping Consultants 1986, The Grain Market to 2000, Middlesex, UK.

QR 1986, Annual Report 1985-86.

SACBH 1987, Annual Report 1985-86.

8 8

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

INSTITUTIONAL ARRANGEMENTS

Supporting Paper 2 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. THE GRAIN MARKETING, STORAGE, HANDLING AND TRANSPORT INDUSTRY: AN OVERVIEW 3

2.1 Industry characteristics in the different 3 States 2.2 Operations and responsibilities of the key State participants 3

3. PRINCIPAL LEGISLATION AND AGREEMENTS AFFECTING GRAIN MARKETING, STORAGE, HANDLING AND TRANSPORT 24

3.1 Bulk handling legislation 24

3.2 Marketing legislation 30

3.2.1 Wheat marketing 30

3.2.2 Marketing of grains other than wheat 32

3.3 Legislation affecting transport 33

3.4 Other legislation 36

3.5 The grain storage and handling agreement 36 3.6 Handling agreements for grains other than wheat 43

3.6.1 New South Wales 43

3.6.2 Victoria 44

3.6.3 Queensland 44

3.6.4 South Australia 44

3.6.5 Western Australia 45

3.7 Rail freight agreements 46

3.7.1 New South Wales 46

3.7.2 Queensland 47

3.7.3 South Australia 48

3.7.4 Western Australia 48

3.8 The Australian Wheat Charter 49

3.9 Agreements with private organisations 50 3.10 The Flour Millers Agreement 51

4. ECONOMIC IMPACT OF LEGISLATION AND THE VARIOUS AGREEMENTS 52

4.1 Economic impact of grains industry legislation 52 4.1.1 Administered competition 54

4.1.2 The scope of the legislation 57

4.1.3 Ambiguous areas of legislation 59

iii

60 4.2 Economic impact of the various agreements 4.2.1 Agreements to extend market powers and their economic effect 60

4.2.2 Agreements that are proxies for market forces 61

4.2.3 The economic effectiveness of market proxy agreements 64

4.2.4 Agreements to improve co-operation and co-ordination 69

4.2.5 The economic effectiveness of co-operation and co-ordination 70

APPENDICES

A The present financial reporting and accounting practices of bulk handling agencies and rail authorities 73

REFERENCES 80

TABLES

2.1 Queensland grain industry participants, by commodity 5

2.2 New South Wales grain industry participants, by commodity 7

2.3 Victorian grain industry participants, by commodity 8

2.4 South Australian grain industry participants, by commodity 10

2.5 Western Australian grain industry participants, by commodity 12

2.6 Legislation, agreements and administrative arrangements: Queensland 14

2.7 Legislation, agreements and administrative arrangements: New South Wales 16

2.8 Legislation, agreements and administrative arrangements: Victoria 17

2.9 Legislation, agreements and administrative arrangements: South Australia 20

2.10 Legislation, agreements and administrative arrangements: Western Australia 22

iv

3.1 Bulk handling authority legislation: a summary 25

3.2 Major marketing legislation for grains other than wheat 34

3.3 Compensation rates applicable to ship loading 43

3.4 Days allowed to load vessels under the Australian Wheat Charter 49

4.1 Victorian central receival point freight rate anomalies 72

FIGURES

2.1 Interaction of legislation and typical State agreements for a 4

3.1 Maximum carryover rates Wheat Board allowed by Australian 39

4.1 Victorian radial rating map 56

1. INTRODUCTION

In assessing the performance of any industry it is important to understand the basic institutional and structural characteristics. Without such background knowledge it is difficult to appreciate the reasons for current practices in grain storage, handling and transport, and even more difficult to suggest specific areas where change may be beneficial.

The question of the appropriateness of institutional arrangements in the grain handling, storage and transport industries is identified several times in the Commission's terms of reference. For example, the Commission is required to investigate

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.

Although this paper encompasses port terminal services it does not extend to legislation or agreements affecting the relationship between port terminal operators and the port authorities.

The institutional arrangements provide for separate statutory agencies for grain handling and rail transport in each State, most of the States exerting monopoly power over the storage, handling and transport of some grains and reducing the number of alternatives available to growers for other grains. The monopoly power is normally granted by legislation, although

in a few cases a monopoly position has been created by means of restrictive agreements with other agencies.

The extent to which these agencies are economically efficient is difficult to assess, although it is worth noting that in general the absence of competition removes an important incentive for optimal efficiency. In some cases the

different bulk handling, transport and marketing authorities have made agreements in an attempt to introduce performance incentives and more efficient operations. Such agreements

are used as proxies for market forces by providing a set of rewards and penalties to encourage more efficient operating practices and resource allocation decisions.

The objective of this paper is to describe the legislation and agreements in place, and examine the extent to which they either promote or restrain competition and efficient economic performance in the grain storage, handling and transport industries. This information will be useful when alternative options for changes to the current system are considered. Of course, detailed examination of all the institutional arrangements, legislation and various agreements that have a

bearing on the grain storage, handling and transport sector is a formidable task, and in undertaking it the Commission

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SUPPORTING PAPER 2

has benefited significantly from information submitted by a number of industry participants.

In Chapter 2 the main participants (both public and private) in each State involved in the grain storage, handling and transport sector are outlined. Because of the very close interaction of these organisations with the marketing of grain, information about the main grain marketing boards in each State is provided. The principal functions performed by the various storage and handling, transport and marketing organisations are described and a list of the main agreements

and administrative arrangements is provided.

In Chapter 3, the legislation underpinning the operations of statutory agencies in the different States is discussed. Sections of the legislation that provide statutory

authorities with monopoly powers or provide for other constraints on competitive behaviour are identified, as is a range of agreements (both formal and informal) and

administrative arrangements that have emerged from the legislative structure. Those agreements and administrative arrangements have a direct bearing on the operational efficiency of the organisation concerned.

In Chapter 4, the various agreements and legislative constraints are evaluated. The economic impact of different types of agreement is assessed, with particular reference to policy instruments designed to create an economically efficient system by administration rather than through the operation of competition and market forces. Administrative efficiency is discussed in terms of internal efficiency

(achieved by management and operating practices as well as public accountability) and 'system interface' efficiency (achieved by agreements and other arrangements).

The current institutional environment has played a significant role in determining the present accounting practices of the bulk handling agencies and rail

authorities. In its terms of reference the Commission is required to consider the appropriateness of these accounting practices. To do this the Commission engaged a consultant to examine and report on the financial and accounting practices of bulk handling agencies and rail authorities in each State. The results of this investigation are provided in Appendix A.

2

2. THE GRAIN MARKETING, STORAGE, HANDLING AND TRANSPORT INDUSTRY: AN OVERVIEW

2.1 Industry characteristics in the different States

The grain marketing, storage, handling and transport task is dominated by a number of national and State marketing authorities and a bulk handling agency and railway authority in each State. Private marketers exist for some minor grains, although the extent of their activities varies significantly between States. Private storage and handling

facilities are also present to some degree in all States. Road transport operators are active in all States, although the extent of their operations is frequently constrained by State legislation and by various agreements.

Figure 2.1 illustrates the relationship between grain storage, handling, transport and marketing activities for a typical State. Tables 2.1 to 2.5 summarise the participants for each of these activities and commodities on a State basis.

2.2 Operations and responsibilities of the key State participants

Tables 2.1 to 2.5 identify for each State the statutory agencies with responsibilities for various marketing, storage and handling, or transport functions in the grain industry. Each of the statutory agencies has legislation outlining the objectives and responsibilities of the organisation; the grower co-operatives have both legislation and articles of

association governing their operations. Furthermore, each organisation has significant interactions with growers and other participants providing services to the grains

industry. Where these interactions are with other

organisations, the arrangements are frequently set out in the form of agreements, both of a formal and an informal nature. In contrast, where the organisations interact with growers, the nature of the relationship is usually set out in the form of administrative arrangements, pricing policies, and operational procedures. In some cases, however, grower organisations have entered into agreements on their members' behalf.

Tables 2.6 to 2.10 set out the main legislation, agreements and administrative arrangements that apply to the statutory agencies (including grower co-operatives) in the different States.

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TABLE 2.1 QUEENSLAND GRAIN INDUSTRY PARTICIPANTS, BY COMMODITY

Marketing

Grain organisations

Storage and handling Transport

organisations organisations

Wheat The State Wheat Board (SWB) is the sole authorised receiver of wheat

(other than wheat for permit sales). The Australian Wheat Board (AWB)

is responsible for marketing but the SWB retains

certain powers over feed wheat and the determination and distribution of premiums.

SWB appoints Bulk Grains Queensland (BGQ) as its sole handling, storage

and shipping agent. Until 1994 BGQ has a legislative monopoly at ports

at which it owns or operates facilities.

Queensland Rail is the only authorised carrier for SWB grains. There are three exceptions to this provision: road may be used up to 120km from a point of SWB origin; grain for export may be carted by road to port within a radius of 120km from port; and where rail capacity

is inadequate. Road haulage from farms is limited to 40km, or the nearest silo if none exist within 40km.

Barley The Barley Marketing Board (BMB) compulsorily acquires all barley other than

that for inter­ state trade (no permit scheme).

The BMB appoints As for wheat. BGQ as its major receival handling and shipping agent.

BGQ has a legislative monopoly at port until 1994.

Sorghum The Central Qld Grain Sorghum Marketing Board (CQGSMB)

compulsorily acquires sorghum grown in central Qld. Southern Qld

sorghum is handled privately, either direct to end users through merchants or to grain traders, the major grain trader being

Elders-QGGA.

CQGSMB appoints BGQ as its sole receival,

handling and shipping agent. BGQ has until 1994 a legislative monopoly over all

sorghum exported from ports at which it owns or operates

facilities.

For central Qld sorghum, transport as for wheat; southern Qld sorghum may be moved by road.

Signatories to the Rail Freight Agreement (including Elders-QGGA) cannot use road for grains destined for

export in excess of 120km from port.

5

TABLE 2.1 (cont'd)

Storage and

Marketing handling

Grain organisations organisations Transport organisations

Maize The Atherton ATMMB has its own

Tableland Maize storage facilities Marketing Board and has shipped (ATMMB) maize from Cairns,

compulsorily BGQ has shipped acquires maize in maize on behalf of the Atherton Table- ATMMB through the land area. All Mackay terminal, other maize is privately marketed.

ATMMB is a signatory to the Rail Freight Agreement and hence is subject to its provisions.

Rice Rice Marketing (RMB) Board compulsorily acquires rice grown in Qld.

Lower Burdekin Rice Producers Co-op. Association Ltd. is the RMB's licensed receiver.

RMB is a signatory to Rail Freight Agreement and hence is subject to its provisions.

Minor crops

Private merchants and grain traders market a range of oilseed, grain and legume crops. Some marketing

boards have affiliated co-operatives that are involved in marketing.

BGQ may handle these crops and has a legislative

monopoly for most of them at ports where it owns or operates facilities until 1994.

Unrestricted grains may be moved by rail or road unless received or marketed by a

signatory to the Rail Freight Agreement.

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

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TABLE 2.2 NEW SOUTH WALES GRAIN INDUSTRY PARTICIPANTS, BY COMMODITY

Grain

Marketing organisations

Storage and handling organisations

Transport organisations

Wheat The Australian Wheat Board has the exclusive right to acquire wheat

except for permit sales (for stockfeed).

The Grain Handling Authority of New South Wales is the the authorised

receiver (permit wheat and grower- to-buyer sales

excepted).

The State Rail Authority (SRA) is the primary carrier of

export wheat. At present there are no road receival

facilities at ports. Domestic wheat mostly goes by rail but some goes by road.

Barley The Barley Marketing Board compulsorily acquires and markets barley.

GHA is an authorised receiver. BMB has some of its own storage but uses primarily private storage on contract.

SRA is used for some movements but approx. 75 per cent goes by road to domestic users. Most export shipments

through NSW ports go by rail but exports through Toll's Newcastle facility use

road transport.

Oats Oats Marketing Board of NSW compulsorily acquires and markets oats.

Mostly via GHA although some private storage is used.

Export oats via rail; domestic sales principally by road.

Rice Ricegrowers Co-operative/ Rice Marketing Board compulsorily acquire and market rice.

Storage owned by the co-operative; some GEB facilities used at Geelong.

Principally road; some use of V/Line, less use of SRA.

Sorghum Sorghum Marketing Board of NSW compulsorily

acquires and markets sorghum.

Principally private storage; GHA is an

authorised receiver.

Primarily road.

Oil­ seeds

Oilseeds Marketing Board compulsorily acquires and markets oilseeds.

Principally private storage. Primarily road; significant amounts

of cottonseed moved by rail.

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

7

TABLE 2.3 VICTORIAN GRAIN INDUSTRY PARTICIPANTS, BY COMMODITY

Grain

Wheat

Barley

Oats

Peas

Marketing Storage and handling Transport organisations organisations organisations

The Australian Grain Elevators Wheat Board has Board (GEB) is the only the exclusive authorised receiver right to acquire for wheat other than wheat except for permit wheat and permit and grower- grower-to-buyer sales, to-buyer sales. GEB contracts some

some storage and handling to private agents in Victoria and southern NSW in those areas where it does not currently have facilities.

The Australian GEB is the licensed Barley Board (ABB) receiver for ABB has the exclusive barley. right to acquire NSW Barley Board Victorian barley utilises GEB terminal other than that facilities.

for interstate sale or sales made with approval of ABB.

Victorian Oat- VOP has 18 sites, but Growers Pool (VOP) exports through GEB competes with terminals, private merchants. GEB also receives on VOP exports have behalf of VOP or recently been private marketers. 90 per cent of

total Victorian exports. Domestic oats sales are usually arranged directly with growers

Private merchants and VOP compete for pea exports. Domestic sales are organised by

growers and the Peagrowers Co-op.

Storage by VOP, private merchants, GEB and the Peagrowers Co-op. Bulk export is exclusively through GEB facilities.

V/Line is only commercial carrier of wheat for distances in excess of 60km from the point of consign­ ment. Primary producers

are able to use their own vehicles for wheat cartage. V/Line can use rail or road. Road transport is also used for interstate wheat, direct to Victorian destinations.

V/Line, as for wheat. Road transport of NSW barley to Victorian ports.

V/Line, as for wheat. Road transport of interstate oats to Victorian ports.

Principally road transport of bulk peas. V/Line

transports some containers of peas.

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SUPPORTING PAPER 2

TABLE 2.3 (cont'd )

Grain Marketing organisations Storage and handling organisations

Transport organisations

Rice NSW Ricegrowers' Co-operative Ltd. GEB provides terminal storage and handling.

Road and rail transport from NSW.

Minor crops Private merchants and VOP.

Private storage arrangements and GEB. Principally road.

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

9

TABLE 2.4 SOUTH AUSTRALIAN GRAIN INDUSTRY PARTICIPANTS, BY COMMODITY

Grain Marketing organisations

Storage and handling organisations Transport organisations

Wheat

Barley

Oats

Australian Wheat Board has the exclusive right to acquire wheat except for permit sales (for

stockfeed)

SACBH is the only authorised receiver of wheat (other than permit wheat and grower-to-buyer

sales)

Australian National (AN) competes with road transport for grain freight. Competition is free except

for $2.50 per tonne surcharge on grain transferred by SACBH between rail served facilities

Australian Barley Board (ABB) compulsorily acquires barley other than

for interstate sales or sales made with the approval of ABB.

SACBH is the only authorised receiver of barley.

AN and road transport, as for wheat.

ABB acquires oats other than oats purchased for buyers' use or resale in a processed form.

SACBH is the only authorised receiver of oats for export. Oats for domestic use or processing are received by SACBH and private buyers.

AN and road transport, for wheat. as

TABLE 2.4 (Cont'd)

Grain Marketing

organisations

Storage and handling organisations Transport organisations

Minor crops

Private companies; crops include peas, beans, lupins, rape seed.

Private companies and SACBH. AN and road transport. SACBH offers storage, handling and exporting facilities to private operators. Some leasing

of SACBH facilities by private operators.

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

TABLE 2.5 WESTERN AUSTRALIAN GRAIN INDUSTRY PARTICIPANTS, BY COMMODITY

Grain

Marketing organisations Storage and handling

organisations

Transport organisations

Wheat The Australian Co-operative Bulk Westrail transports Wheat Board has Handling (WACBH) is in areas regulated the exclusive the only authorised to rail. Road right to acquire receiver for wheat transport firms wheat except for (other than permit (under licence) permit sales (for wheat and direct transport for areas stockfeed). grower-to-buyer

sales).

not regulated to rail. For other than permit wheat first preference is for rail, then road can be utilised.

Barley Grain Pool of WACBH is the only As for wheat. Where WA (GPWA) is sole marketing authority for barley, for export and domestic markets, but may

authorise domestic sales by growers.

authorised receiver. permits are granted by GPWA an option exists to use rail or road transport under licence. Farmers' vehicles exempted.

Oats GPWA

trades in oats but does not have statutory monopoly.

Private traders

WACBH handles oats on a warehousing system and is a GPWA licensed receiver.

As for wheat.

(e.g. Blackwood Private marketers Option exists to use Grain Co-Op) can store oats them- rail or road (under export oats. On selves or use licence). Farmers' domestic market there is considerable direct grower-to- buyer selling.

WACBH warehousing system. vehicles exempted.

Lupins GPWA,as for WACBH is a licensed Where received by barley. receiver for the

GPWA.

WACBH, as for wheat. Where permit granted by GPWA, as for barley.

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TABLE 2.5 (cont'd)

Grain

Marketing organisations Storage and handling

organisations

Transport organisations

Linseed, Rapeseed GPWA, as for barley, lupins.

WACBH, as for lupins.. As for lupins.

Triticale Private merchants. GPWA not currently involved in private trading.

WACBH handles on a warehousing system. Private marketers as for oats.

Regulated to rail in certain areas, as for wheat.

Field peas

GPWA becoming involved in private trading.

WACBH has applied for approval to handle peas on the warehousing system. At this stage GPWA

and private marketers use the WACBH warehousing

scheme plus private storage.

Free market between road and rail.

Note: Where grain is sold for stockfeed purposes freedom of transport applies and any mode of transport can be used.

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

13

TABLE 2.6 LEGISLATION, AGREEMENTS AND ADMINISTRATIVE ARRANGEMENTS: QUEENSLAND

State Wheat Other marketing Qld grain handling Queensland Board boards authority (BGQ) Railways

Principal legislation/ articles of association

Wheat Pool Act Primary Producers' 1920-1986), Organisation and Wheat Marketing Marketing Act Act 1984 (Qld), 1926-1985 Wheat Marketing

Act 1984 (Cwlth)

Queensland Grain Handling Act 1985-1986

Railways Act 1985 State Transport Act 1981

Principal functions

Engages BGQ to Marketing of handle wheat. various Qld grains Seed wheat sales. Hail insurance scheme. Determines quality premiums. Determine premiums to be

paid by Qld flour millers. Operate permit scheme. Represent wheat

growers in marketing matters. Determine quality standards

for wheat intake. Administer the Wheat Varieties Advisory Comm.

Domestic marketing of wheat.

Receive, store Grain transport and handle grain. by rail. Co-ordinate the transport of grain

to port terminals or domestic customers.

Operate port terminal facilities for the export of grain. Control of grain hygiene and quality.

TABLE 2.6 (cont'd)

State Wheat Other marketing Qld grain handling Board boards authority (BGQ)

Principal Compulsory hail Pooling of revenue. administrative insurance scheme. Permit schemes. arrangements Wheat premiums. affecting growers

Cost pooling within zones (four zones: southern

Qld country, central Qld country, southern

Qld port, central Qld port). Pooling across time via a reserve

fund. Late delivery charge.

Principal agreements Bulk Handling Agreement (with

AWB) . Rail Freight Agreement (with QR) . Agreement with BGQ to handle wheat.

Rail Freight Agreement (with QR) . Most boards have handling agreements with BGQ.

Handling agreements with marketing boards. Handling

agreements with some private marketers. Rail Freight Agreement with

QR.

Queensland Railways

Rail-distance- related rates. No distinction made between grain

types. Rebates for unit trains. Rebate varies depending on size of train,

location and loading procedures. Stopover charge of $2/tonne.

Rail Freight Agreement with AWB, SWB, BGQ, BMB, and CQGSMB.

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

TAB L E 2.7 L E GI S L ATI ON, AG R E E M E N TS AN D AD MI NI STRATI VE ARR AN G E M E N TS: N E W SO U TH WAL E S

Barley Marketing Rice Marketing

Grain Handling Board for New Oats Marketing Oilseeds Marketing Grain Sorghum Board/Ricegrowers

Authority State Rail Authority South Wales Board Board Marketing Board Co-operative

Principal Grain Handling Government

legislation Act 1954 Railways Act

1912. Transport Authorities Act 1980

Principal Country receivals Grain transport

functions and storage of

grains (some compulsory, some voluntarily). Ship-loading or

out-loading to domestic producers. Control of grain hygiene

and quality.

(mainly wheat) to ports and some domestic buyers. There is no

legislative monopoly for rail.

Principal Cost pooling. Distance-based rail

administrative Administration of freight (at present) arrangements AWB receival Closure of

affecting growers standards. Border pricing policy to retain grain in G H A system.

uneconomic branch lines and a move towards cost based charges (Option 3).

Principal Bulk handling Rail Freight Agree-

agreements agreement (with

AWB). Agreements with some other grain marketing boards.

Agreements with private storage agents. Proposed agree-

ment with B G Q to move some N SW wheat through Goondiwindi. Rail

Freight Agreement.

ment with AWB. Informal operating agreement with GH A.

Rail freight agree-ments with the Barley, Oats and Sorghum Marketing Boards.

Marketing of Marketing of Marketing of

Primary Primary Primary

Products Products Products

Act 1983 Act 1983 Act 1983

Receival, storage, To ensure the The Board is to

classification, system of conucta marketing

transport to export distribution and service for oilseeds and domestic disposal of oats which will provide

users, pest control, for domestic an equitable return

marketing and research into barley.

producers, processors, and end users is satisfactory. To develop export markets and sell surplus oats overseas for the available price.

to producers.

Cost pooling. Writer of most contracts affecting

growers. Govt intervention without government support (unlike wheat).

Cost pooling. Operate a pooling

system and offer firm tonnage contracts.

Agreements with Agreement with Agreement with agents to run B M B- G H A for country Tolls Transport for owned storages. and terminal use of Newcastle

Agreements with storage and port facilities.

private storage handling. Agreements with

agents. Storage and handling agree-ment with GH A.

Transport agree-ment with SRA. Contracts and verbal agreements with road hauliers.

Service Agreement Contract with G EB for use of Geelong. Agreements with

private storage agents. Rail freight agree-ment with SRA.

private growers.

Marketing of Primary Products Act 1 983

Marketing of Primary Products Act 1983 and N SW Co-operation Act

Receival, marketing of sorghum and achieving an

equitable price for growers. To develop and maintain cost-effective marketing, transport, handling

and distribution system for both export and domestic markets.

Country receival, drying, storagte, transport, milling, packing, sale,

finance, shipping (incl. charter and loading), hygiene and quality control of paddy and milled

products.

Administration Price/cost pooling, costs recovered via Grower share-a levy. holders own all

facilities.

Agreement with Tolls Transport for use of Newcastle port facilities.

Agreements with G H A and private storage facilities. Rail agreement with SRA.

Storage and shipping agree-ment with G EB for use of Geelong.

Agreements with V/Line and SRA.

ft» IBI » '| > ?fft 1» Ota tS B « LI B e4 i I ft ftB B #4 "TVftftftrifte*

TABLE 2.8 LEGISLATION, AGREEMENTS AND ADMINISTRATIVE ARRANGEMENTS: VICTORIA

Grain Elevators V/Line Victorian Oat Australian

Board Growers Pool Barley Board

Principal legislation/ articles of association

Grain Elevators Act 1958, Transport Act 1988. Transport (Borrowing

Agency) Act 1988. Wheat Marketing Act 1984 (both Cwlth and Vic) Public Authorities

(Dividends) Act 1988. Border Railways (Grain Elevators) Amendment Act 1957 (NSW)

Transport Act 1983 Industrial and Transport Provident Societies (Borrowing Agency) Act, 1958 Act 1983.

Border Railways Act 1922-41

Barley Marketing Act 1958

Principal functions

Country receivals and storage of grains (authorised or licensed receiver for most grains). Terminal receivals

and storage. Ship-loading or out-loading to domestic producers. Control of grain hygiene and quality.

Grain transport by rail, or in some cases by road.

Marketing and some country handling of oats, peas and NSW barley. Provision of advance payments

to growers for oats and peas delivered to voluntary pools. Marketer of minor grains on opportunity basis.

Marketing of Vic and SA barley. Provision of advance payments to

to growers for barley delivered to the pool.

TABLE 2.8 (Cont'd)

Operation of pooling system with State accounting for SA/Vic.

TABLE 2.8 (Cont'd)

Grain Elevators V/Line Victorian Oat Australian

Board Growers Pool Barley Board

Principal agreements Bulk Handling Agreement (with AWB).

Bulk Handling Agreement (with ABB). Barley Marketing Board of NSW - storage & shipping

agreement. NSW Ricegrowers' Co-op Ltd - storage & shipping agreement.

Informal arrangement with SACBH and GHA for partial reimbursement of charges on interstate

grain transfers between bulk handlers. Agreements with private storage agents.

Contracts for storage, handling and shipping with private traders for grain and other products. Contracts with silo out-

loaders & bunker out-loaders where applicable. Service agreement with Barrett Burston (Aust) for barley and malt.

No formal agreements: negotiations are held each year between V/Line and

industry (VFF.GEB and marketers). Government provides bounds of negotiation. Operational

co-ordination with GEB is through a yearly Harvest Plan (a flexible

and informal arrangement); co-operation with AN for interstate grain movement, but no formal agreement.

Bulk Handling Agreement with SACBH. Bulk Handling Agreement with GEB.

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

TABLE 2.9 LEGISLATION, AGREEMENTS AND ADMINISTRATIVE ARRANGEMENTS: SOUTH AUSTRALIA

Co-operative Bulk Australian National Australian Barley Handling Railways Board

Principal Bulk Handling of Australian National legislation/ Grains Act 1955-69 Railways Commission articles of association

and articles of association, Wheat Marketing Act 1984 (Cwlth and SA) Barley Marketing Act

1947

Act 1983

Barley Marketing Act 1947

Grain transport by rail, To organise the acquisition or in some cases by road. and marketing of barley and oats in South Australia.

and storage. Ship-loading or out-loading to domestic producers.

Control of grain hygiene and quality.

TABLE 2.9 (Cont'd)

Co-operative Bulk Australian National Australian Barley Handling Railways Board

Principal Cost pooling, administrative Administration of arrangements AWB receival affecting standards. Imposes growers tolls to raise

capital.

Rating based principally on road distance to port. Discounts for some selected sites;

Surcharge of $2.50 per tonne on grain transferred by SACBH using road between rail-based

f acilities.

SACBH appointed as the only authorised receiver of barley and oats in State.

ABB trains personnel to test barley on receival. ABB employs some personnel but majority are SACBH employees.

ABB acquires all barley other than that for interstate sales, or sales made with the approval of ABB. ABB acquires all oats other

than that for buyers own use or resale in processed form. ABB operates a pooling system but with separate State

accounting for SA and Vic.

Principal agreements Bulk Handling Rail freight agreement Agreement with AWB. between AN, SACBH, AWB,

Bulk Handling ABB and UP & S. Agreement with ABB Rail freight agreement between SACBH, AN, AWB, ABB and UF & S.

Bulk Handling Agreement with SACBH Rail freight agreement between ABB, AN, SACBH, AWB and UF & S.

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

TABLE 2.10 LEGISLATION, AGREEMENTS AND ADMINISTRATIVE ARRANGEMENTS: WESTERN AUSTRALIA

Institutional factors WACBH Westrail Grain Pool

of Western Australia

Principal legislation/ articles of association

A private company incorporated under the Companies Co-operative Act

Government Railways Act 1904 (WA), Transport

Grain Marketing Act 1975 (WA).

1943-82 (WA) Act 1966-82 articles of (WA).

association. Grain handling activities governed by Bulk Handling Act

1967-85 (WA), Wheat Marketing Act 1984 (Cwlth and WA), Grain Marketing Act 1976 (WA).

Principal functions

Country receival and storage of grains. Terminal receivals and

storage. Ship-loading or out-loading to domestic producers. Control of grain hygiene and quality.

Grain transport by rail.

Marketing authority for barley, lupins, linseed and rapeseed by statutory pooling. Provision of marketing services

for oats and other freely traded minor grains.

Principal administrative arrangements

Cost pooling (volume basis). Radial rating pricing

policy.

Cost pooling of administrative and marketing charges for statutory and

non-statutory grains, on a tonnage basis. Private marketers for non-statutory grains.

2 2

SUPPORTING PAPER 2

TABLE 2.10 (cont'd)

Institutional factors WACBH Westrail Grain Pool

of Western Australia

Principal Bulk handling Previously Agreement with agreements agreement with an agreement WACBH as licensed AWB. with growers, receiver under the

Agreement with GPWA, AWB Grain Marketing Act, GPWA to use WACBH and WACBH to detailing rights and as licensed receiver and establishing

set freight rates - not operative in

obligations.

payment procedures by GPWA. Agreement with Westrail to reimburse WACBH expenses incurred in transferring grain from narrow to standard gauge.

1986-87 season. Agreement with WACBH re rail transfer

facilities.

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

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3. PRINCIPAL LEGISLATION AND AGREEMENTS AFFECTING GRAIN MARKETING, STORAGE, HANDLING AND TRANSPORT

The institutional framework for the grains industry is quite complex and involves many interactions. In this chapter the legislation and the agreements made between organisations in the industry are detailed.

The principal relevant legislation can be broadly divided into four categories: bulk handling, marketing, transport, and other. Bulk handling legislation covers Acts

establishing the Grain Handling Authority of New South Wales (GHA), the Grain Elevators Board of Victoria (GEB), Bulk Grains Queensland (BGQ), South Australian Co-operative Bulk Handling (SACBH) and Co-operative Bulk Handling of Western Australia (WACBH); marketing legislation includes legislation enabling the establishment of marketing boards such as the Australian Wheat Board (AWB) and the Australian Barley Board

(ABB); transport legislation defines the role of the different rail systems vis-a-vis road hauliers; and other legislation includes those Acts that impinge upon the operation of entities within the storage, handling and transport systems (for example, the Victorian Public Authorities (Dividends) Act 1983.

The main agreements are storage and handling (wheat and other grains) agreements; transport (rail and sea) agreements; and agreements between statutory agencies and flour millers and other private organisations.

3.1 Bulk handling legislation

There are five major pieces of legislation pertaining to the establishment of bulk handling agencies:

. the Grain Handling Act 1954 (NSW) . the Grain Elevators Act 1958 (Vic) . the Grain Handling Act 1983 (Qld) . the Bulk Handling of Grain Act 1955-69 (SA) . the Bulk Handling Act 1967-85 (WA)

In general, these Acts allow for the formation of a bulk handling agency in each State, define the powers and functions of the agency, specify the composition of the agency's board, and indicate the extent to which the minister responsible may direct the agency (see Table 3.1). In terms of their operations, there are, of course, differences between the agencies, especially in South Australia and Western Australia, where the bulk handling agencies are grower co-operatives.

24

TABLE 3.1 BULK HANDLING AUTHORITY LEGISLATION: A SUMMARY

Victoria Queensland South Australia Western Australia

Act Grain Handling Act Grain Elevators Act 1954 " 1958

Grain Handling Act 1983 Bulk Handling of Grain Act 1955-69

Bulk Handling Act 1967-85

SACBH WACBH

Composition 11 members (all of vote):

board 6 growers, 2 ministerial nominees, 1 managing

director, 1 Public Service Association, 1 Aust. Workers

Union.

6 voting members: 3 growers appointed by­ minister from panels provided by grower

bodies. 1 grower to be either chairman or deputy chairman, 1 Dept. Agriculture rep 1 STA rep., 1 person with business

experience. 1 non-voting advisor appointed by Treasurer who is not recognised for quorum purposes.

13 members (all vote): 5 wheat grower reps, 3 coarse grain

growers 1 each from Barley Board, CQGSMB and QGGA, 1 ministerial

nominee, 1 DPI rep.

8 members (all vote): 3 elected on a State-wide

basis, 5 elected on a regional basis.

10 members (all vote): each elected by members on a

zonal basis.

TABLE 3.1 (Cont'd)

South Australia

Under the supervision of the Minister for Agriculture. Minister can make regulations

to protect some persons, can veto proposed bin

constructions or direct that a bin be built.

Requirement for annual report to members. Charges levied apply to

growers who elect not to contribute tolls, and must be approved by

Auditor-General.

Western Australia

Under the super­ vision of the Minister for Agriculture. Power to veto

construction plans and to direct WACBH to upgrade

facilities in areas deemed unacceptable.

Annual report required to members of co­ operative (although

not in Bulk Handling Act) .

TABLE 3.1 (Cont’d)

Item NSW Victoria Queensland South Australia

Functions and powers Although the Act refers primarily

to the storage and handling of wheat the GHA is also

allowed to handle other grains. The GHA must store wheat as quickly

as possible after it is harvested, at minimum cost, consistent with providing a satisfactory service to wheat growers and satisfying and secure employment

to servants of the GHA.

The Act grants GEB a monopoly over the receival of . ’prescribed grains'. GEB 'shall afford all reasonable proper and equal

facilities for the storage of grain'. Act also grants GEB

power to compulsorily acquire existing elevators (s. 10(1)(a)) if the Minister approves.

BGQ has monopoly on 'declared grain' at ports where it

has facilities. However, it may receive, store, handle and organise

shipment of grain for any marketing authority. The Act allows for

imposition of tolls (s. 47 onwards) but these have not been levied to date.

The Act grants SACBH monopoly rights over the storage and handling of wheat, barley and oats

(millers and maltsters may also do so for their own purposes).

Legislated grains None contained in Grain Handling Act.

Receival rights obtained by agreements or contained in other legislation.

Wheat, barley, oats, rice, sorghum, maize, oilseeds, field peas, lupins, millet,

rapeseed, soyabeans, rye, corn, and triticale.

Has monopoly over declared grains at ports where it owns or operates a

facility. This power 'sunsets' on 28 February 1994.

Wheat, barley, oats.

Western Australia

The Act grants WACBH monopoly over the bulk handling of wheat and

barley until 31 December 2000. However, WACBH is prevented from

trading in grains (with minor exceptions). The Act prevents WACBH

from discriminating between users (s.9 (i)(a)) and from refusing grain

delivered to it provided quality standards are met.

The Act permits the use of tolls.

Wheat, barley.

TABLE 3.1 (Cont’d)

South Australia Western Australia

Other Subject to Victorian

Public Authorities (Dividends) Act 1983·

Subject to Annual Reporting Act 1983·

SACBH established under the company co-operative legislation. Has

articles of assoc permitting tolls.

WACBH established under legislation for co-operative companies. Has

articles of association.

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

SUPPORTING PAPER 2

With the exception of the GEB, the boards of the bulk

handling agencies are controlled by growers (of either wheat or other grains - see Table 3.1). In Queensland, New South Wales and Victoria there is also provision for ministerial nominees to be appointed, allowing for persons with marketing, financial, scientific or commercial skills to be placed on the board. In South Australia and Western

Australia there is no such provision and each board member is elected by members of the co-operative. All board members normally have voting rights, although in Victoria only six of the seven board members have them (the State Treasury representative does not).

Examination of the composition of the boards of the major bulk handling and marketing organisations reveals that one person could be on several boards at the same time (see Table 3.2) . This may aid communication between the organisations and provide other benefits but it is also conceivable that it could generate a conflict of interest.

Although it is often believed that the bulk handling legislation grants the bulk handling agencies a monopoly over the receival of grain, this is not always true. Such rights are often conferred by other legislation or obtained via agreements. For example, in New South Wales the GHA does not obtain a monopoly over the receival of grain from the Grain Handling Act, but it does have a monopoly over the receival of export wheat from the Wheat Marketing Act (see Section 3.2) .

In Victoria, the Grain Elevators Act effectively grants the GEB monopoly storage and handling rights over wheat, barley, oats, sorghum, maize, rice, oilseeds or other grains prescribed under its by-laws because such grains must be handled by an authorised receiver - and the GEB is the only one. At present, though, monopoly rights are only enforced

for wheat and barley. In Queensland, the Grain Handling Act grants BGQ a legislative monopoly over the handling of export grain at ports only, although BGQ gains extensive rights to country storage via agreements with marketing boards. In both South Australia and Western Australia the bulk handling

legislation does grant the co-operative bulk handlers monopoly rights over wheat and barley; in South Australia, SACBH also has a monopoly over oats.

Perhaps some of the most important elements of the bulk handling legislation involve the social obligations placed on authorities. These obligations vary between States and

involve items such as non-discrimination between growers (South Australia, Western Australia), the requirement to follow ministerial directives regardless of commercial consequences (New South Wales, and South Australia and Western Australia in certain circumstances), and the need to

supply satisfactory service levels and to provide secure and satisfying employment (New South Wales). In Victoria, for example, the GEB has to 'afford all reasonable proper and equal facilities for the storage of grain' (Grain Elevators Act 1958, s. 20). Such social obligations are often open to

29

SUPPORTING PAPER 2

differing interpretations. They can also impose upon the organisations costs that would not usually be incurred in a purely commercial environment, and these costs are ultimately borne by growers.

To date, there have been few ministerial directives. But it could be argued that there is little need for a minister to make an explicit directive because sufficient power exists within other sections of bulk handling legislation to achieve most aims.

In regard to legislative provisions concerning the

accountability of the bulk handlers, all of them are required to submit annual reports on their operations to the relevant minister. The Commission engaged Peat, Marwick, Mitchell Services to review the financial and accounting practices of

statutory organisations providing storage, handling and transport services. Part of the review included an

assessment of the adequacy of annual reports produced by these organisations. The consultants found that, in comparison with large private sector firms, the financial and accounting detail reported by the bulk handlers is generally satisfactory (see Supporting Paper 1 for more detail). In some States accountability is further enhanced in the

legislation by making the management accountable to either the bulk handling agency board (Victoria) or the relevant minister (New South Wales). The bulk handlers have argued that grower members on their boards also increase

accountability.

However, the legislation does not require the bulk handlers to provide a public reconciliation of their costs and charges. The Commission believes that given the current monopolistic positions of the bulk handling agencies a public reconciliation of costs incurred and charges should be provided. Similarly, the Commission has reservations concerning the effectiveness of ministerial and grower scrutiny on overall bulk handling agency accountability as they are not in a position to gauge whether the prices and costs of bulk handlers are efficient and must rely on advice received from the bulk handlers rather than an independent authority.

3.2 Marketing legislation

3.2.1 Wheat marketing

Wheat marketing is controlled by the Commonwealth Wheat Marketing Act 1984 and the wheat marketing Acts of the various States. Each piece of legislation is fairly similar and grants the AWB a monopoly over the marketing of wheat, both internationally and domestically (with the exceptions 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).

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SUPPORTING PAPER 2

The board of the AWB currently has 11 members: a wheat grower as chairman (appointed by the Commonwealth Minister for Primary Industries and Energy); a grower representative from each of New South Wales, Victoria, Queensland, South Australia and Western Australia; a representative of the

Commonwealth; and four 'special members' appointed by the Minister for their marketing, financial, industrial, scientific, economic or commercial expertise (one of them must be a wheat grower). Thus, growers control seven of the

11 board positions at the moment.

The AWB' s charter is to ' maximise the return to growers from the marketing of wheat' (s. 5(1)) and in so doing it has the authority, among other things, to

. control interstate marketing of wheat;

. control the export of wheat (but not wheat-based

products);

. to import wheat (this is not an exclusive authority);

. control the overseas marketing of wheat;

. to determine the standards for classification of wheat in conjunction with authorised receivers;

. to do all things that are necessary or convenient to be done for, or in connection with, or that are incidental to, the performance of its functions.

The AWB does not have exclusive authority to import and market wheat. Subject to satisfying certain quarantine requirements, anyone may import wheat.

All wheat must be delivered to the AWB. Delivery is affected by delivering the grain to one of the Board's authorised receivers (s. 19(1)), of which there is only one in each State - the GHA in New South Wales, the GEB in Victoria, the State Wheat Board in Queensland, SACBH in South Australia,

WACBH of Western Australia, and the Tasmanian Grain Elevators Board. The only exceptions to this requirement are sales made under the permit system for stockfeed purposes and direct grower-to-buyer arrangements. Sales made under these

alternative arrangements attract charges authorised under the Wheat Tax (Permit) Act 1984 (Cwlth), an AWB administration charge under s. 22(1) of the Commonwealth Wheat Marketing Act, and levies from the bulk handling agencies authorised by

the State wheat marketing acts ( for example, s. 15(5 ) (c )(ii) in New South Wales).

The charge levied by the bulk handling agencies varies between the States (up to a maximum of $3 per tonne) and is levied despite the fact that the bulk handler never actually stores or handles the grain.

Under the Commonwealth Act the Minister has certain responsibilities, such as setting the guaranteed minimum

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SUPPORTING PAPER 2

price (GMP) (s. 15), determining the net pool return when the gross return from sales is known (s. 16), and the power to ' give directions in writing to the Board concerning the performance of its functions and the exercise of its

functions' (s. 11).

The State wheat marketing acts are complementary to the Commonwealth Act and are necessary in order to invest certain powers in the AWB. For example, the Commonwealth cannot legislate to ensure all wheat is delivered to the AWB because it is outside its constitutional powers. It relies on the States, which have such powers, to legislate that wheat in that particular State be delivered to the AWB or its

authorised receiver.

In general, the State Acts vest the marketing responsibility in the AWB. In Queensland, though, the Wheat Pool Act 1920-1984 retains certain marketing powers for the State Wheat Board.

3.2.2 Marketing of grains other than wheat

The marketing of grains other than wheat varies according to the State. In most cases legislation enables marketing authorities to be established and permits those authorities a monopoly over the marketing of certain grains. This legislation is summarised in Table 3.2.

The legislation usually grants a marketing monopoly over particular grains but it does not always require the marketing authority to use the major bulk handler. In New South Wales there is no requirement for grain marketing

authorities established under the Marketing of Primary Products Act 1983 to use the GHA for storage and handling.

In most cases they use both the GHA and private storage. In Victoria, the Australian Barley Board must use the GEB because barley is a grain prescribed under the Grain Elevators Act. In Queensland, marketing authorities may use any bulk handling organisation although most have elected to use BGQ. In Western Australia, barley must be delivered to WACBH but other grains can be delivered to any bulk handler. However, the Grain Marketing Act requires that the Grain Pool of Western Australia license WACBH as one of its authorised receivers if WACBH so desires (s. 34(2)). In South

Australia, the Australian Barley Board must use SACBH by virtue of the Bulk Handling of Grain Act.

One of the few common features of all authorities established under these marketing Acts is a requirement to report annually on their operations to the relevant government minister.

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SUPPORTING PAPER 2

3.3 Legislation affecting transport

The extent to which transport legislation affects the haulage of grains varies between States. Each State has some form of legislation covering the operation of railways and the scope for other transport modes to compete with rail but only two

States, Victoria and Queensland, use legislation as the means of ensuring that the majority of grain is transported by rail.

In Victoria it is illegal to transport bulk wheat, barley and oats a distance greater than 60 kilometres by road unless the truck is owned by the grain grower (Transport Act 1983, s. 188 and schedule 8). Contractors may haul wheat, barley

and oats distances in excess of 60 kilometres provided a permit to do so is obtained (s. 189). 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 permits, was invalid. In Queensland, wheat, barley and central Queensland sorghum are classed as restricted goods under the State Transport Act

1960-85 (all other grains are exempt from the Act) and are subject to road haulage restrictions. Road haulage of wheat, barley and central Queensland sorghum from farm to receival point is limited to 40 kilometres or the nearest receival point if none exist within 40 kilometres. Road haulage from

'board depots' (either a BGQ facility or, if the movement is a sale under the grower to buyer permit scheme, a farm) is limited to 120 kilometres.

In both South Australia and New South Wales grain may be moved by either road or rail as there are no direct

legislative barriers. In New South Wales, however, the construction of road receival facilities at ports is subject to approval under the Environmental Planning and Assessment Act 1979. At present grain destined for export cannot travel by road in New South Wales because there are no road receival

facilities at ports, although grain being exported through interstate ports is transported predominately by road.

In Western Australia, Westrail has a monopoly over grain haulage in some regions, by virtue of government policy rather than legislation. The State Transport Co-ordination Act 1981 requires road hauliers in inland areas to obtain a

licence from the Department of Transport to carry certain types of goods. The Government's policy is to license road hauliers to haul grain only in areas where there is no rail service, thus granting Westrail a monopoly in other areas.

In regard to the accountability of rail authorities, four points are relevant. First, all rail authorities are required to produce annual reports (see Supporting Paper 1). Second, the relevant minister has considerable discretionary power over railway operations, particularly pricing. Third, rail authorities face varying levels of road competition which would influence the extent to which prices are

33

TABLE 3.2 MAJOR MARKETING LEGISLATION FOR GRAINS OTHER THAN WHEAT

State NSW Victoria Queensland South

Australia

Legislation Marketing of Primary Products Act

Barley Marketing Act, Marketing of Primary Products Act

Primary Producers Barley Marketing Organsiation & Act Marketing Act

Authorities Barley Marketing ABB Board for NSW Oats Marketing Board Sorghum Marketing

Board Oilseeds Marketing Board Rice Marketing

Board

CQGSMB ABB

Queensland Barley Marketing Board Atherton Tableland Maize Marketing

Board Rice Marketing Board

Grains Oats, barley, Barley Covered sorghum, rice oilseeds

Sorghum, barley, Barley, oats maize, rice

Western Australia

Grain Marketing Act

GPWA

Barley,lupins linseed, rapeseed

TABLE 3.2 (Cont'd)

Western Australia

General Act allows Allows for a Comment for the barley monopoly formation of by the ABB. a marketing Same as for

authority for any primary product and provides a

monopoly over marketing if the board so desires.

NSW.

Same as for NSW, Grants ABB Grants GPWA although for some monopoly marketing a monopoly grains the rights over barley over the monopoly is and oats in SA. grains listed

limited to certain or any grain

areas. designated by

the Minister. WACBH must be one of GPWA's receivers.

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

SUPPORTING PAPER 2

reconciled with costs of rail operations. Finally, in all States except Victoria the rail authorities have rail freight agreements with other interested parties (see Section 3.7) which detail the level of charges and usually provide price escalation clauses.

3.4 Other legislation

A plethora of other legislation affects organisations providing grain storage, handling and transport services. Most such legislation applies equally to other enterprises (for example, health and safety legislation).

The Victorian Public Authorities (Dividends) Act 1983, is of particular relevance. This Act enables the Victorian Government to require the GEB to pay the Victorian Treasury a dividend each year in recognition of the public funds invested in the Victorian storage and handling system. The dividend is determined by the Treasurer after consultation with the relevant minister, but it must not exceed 5 per cent of the public equity (where the public equity is calculated on a current cost accounting basis). Growers have claimed that such a dividend is unfair because grower funds and not public funds have been used to build the system (see, for example, the (VFF submission, March 1987) especially when the

service is provided by a monopolist.

Similarly, the Maritime Services Board of New South Wales is required under its enabling legislation to_ provide to the New South Wales Government a dividend equal to 6 per cent of total revenue. The Maritime Services Board claims that this requirement represents 11 cents of the $1.78 wharfage charge

levied in New South Wales. (MSB submission, March 1987, p. 30)

3.5 The grain storage and handling agreement

The AWB has a storage and handling agreement with each of its authorised receivers. Each agreement is similar and covers wheat for the seasons 1985-86 to 1988-89 (end 30 June), services to the end of the 1988-89 service year

(30 September), and shipments to the end of the 1988-89 shipping year (30 November in all States except Queensland, where it is 31 October).

The Agreement, for which the AWB and bulk handling agencies sought confidentiality but which was reproduced in the New South Wales Farmers Association submission, covers the duties and responsibilities of both the AWB and the bulk handling agencies. Briefly, it includes the following.

Services

Receival, handling and storage. The AWB is required to determine the receival and out-turn standards for the

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SUPPORTING PAPER 2

industry after consultation with the bulk handlers. Once these standards are determined (they are almost uniform across all States) the bulk handler is obliged

to receive and out-turn wheat in conformity with the standards and to perform services 'in a good, punctual and workmanlike manner' (clause 3.3(c)).

Transfer of wheat between bulk handling agencies.

Carryover. The AWB is obliged to provide an estimate of likely carryover tonnage to the bulk handlers by 1 July each year (1 June in Queensland) and to update the estimate each month until November (October in

Queensland). The estimates are based on a combination of the target capacity, export availability of grain, shipments presented to the bulk handler to fill, and the nominated shipping capacity projected by each bulk handling agency.

The AWB must compensate the bulk handlers for carryover costs at a rate nominated by the bulk handlers. The nominated rate per tonne cannot exceed the amounts depicted in Figure 3.1, depending on the carryover tonnage. For example, the maximum rate allowed for carryover tonnages not exceeding 500 000 tonnes is $5 per tonne while carryover of more than 3 million tonnes is permitted a rate of $10 per tonne. These rates are

indexed on the basis of the consumer price index.

There is no clause preventing the bulk handlers

nominating the maximum rate irrespective of the actual costs. In practice, however, several of the bulk handlers nominate rates below the maximum. Since the charge is covered by a provisional allowance deducted

from the growers in the State concerned, the growers have the opportunity to reduce the initial charge by seeking to have the bulk handling authority nominate a

low rate.

Inland movements. This covers the transfer of wheat between inland sites. Where such movements are directed by the AWB, the AWB receives the benefits or bears the costs except for costs associated with dead-freight, overload penalties, shunting and stopover charges, which

are borne by the bulk handler. Similarly, charges in excess of or below the AWB's agreed freight tariff for ordinary movements are for the account of the AWB unless the bulk handling agency has moved the wheat at its own cost. Discounts or rebates earned by the use of unit trains are for the account of the bulk handling agency.

Where extraordinary movements are made, with the approval of the AWB, the AWB will only pay a freight cost equivalent to that which it would have incurred in moving the wheat from the silo to the seaboard. The

freight differential is applicable between the AWB and the rail authority and does not involve the bulk

handler. It can best be described by example: for

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operational reasons on the Boggabri to Newcastle route, the SRA often prefers to operate smaller trains from Boggabri to Werris Creek and then change to larger trains from Werris Creek to Newcastle. SRA freight charges per tonne for this type of operation are as

follows:

Boggabri to Werris Creek $11.58 Werris Creek to Newcastle_____ $18.66

Total $30.24

However the rate which the SRA charges the AWB is the through rate for Boggabri to Newcastle, which is $21.89 per tonne. The SRA therefore gives the AWB a rebate of $8.35 ($30.24 less $21.89).

Shipping. The Agreement covers notification of expected tonnage, loading rates, and incentives or penalties for achieving or failing to meet performance criteria.

The AWB is required to notify bulk handlers of expected shipping requirements per month on 1 October each year (1 September in Queensland) and revise that estimate each month. The bulk handler is not obliged to accept a ship for loading if it has surpassed, or means it would surpass, its monthly quota. The maximum tonnage per month can be the greater of (1) or (2):

(1) being the least of

- one-eighth of the target capacity, defined as 'calculated by deducting the average of domestic sales from the average of receivals' in the three highest years of the last five multiplied by 1.2;

- one-eighth of the estimated exportable surplus as advised by the AWB on 1 October of the previous year (1 September in Queensland);

- the greatest monthly wheat tonnage ever exported for that State;

(2) being

- an amount agreed between the AWB and the bulk

handler.

The Agreement sets minimum performance standards for ship loading. When a bulk handler loads in a shorter time than specified it receives a bonus payment from the AWB; a longer loading time requires it to make a penalty payment to the AWB (referred to as compensation

payments). If the shipment tonnage is between 5500 and 9999 tonnes the bulk handler must load at a rate not less than 5000 tonnes per weather working day (defined

as 'a working day of 24 hours or part working day during which it is possible to load cargo without interference

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Carryover tonnage (millions)

FIGURE 3.1 MAXIMUM CARRYOVER RATES ALLOW ED BY AUSTRALIAN W HEAT BOARD

Source: Grain Storage and Handling Agreement.

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due to weather provided always that, where such

interference occurs, the period during which the weather interferes with loading shall not count as time allowed for loading'). For shipments of not less than 10 000 tonnes the loading rate is 1.4 weather working days plus one weather working day per 15 555 tonnes. These rates apply across Australia and do not reflect the actual capability of an individual port. Some ports such as Fisherman Islands would obviously find these rates easy to meet; other, smaller ports would not.

The compensation payments between the AWB and the bulk handlers for ship-loading performance are presented in Table 3.3. The level of payment is the same regardless of whether the payment is from the AWB to the bulk

handler or from the bulk handler to the AWB. It is

interesting to note that the payments between the AWB and bulk handlers are the same regardless of whether a penalty or bonus applies, whereas the Australian Wheat Charter (see Section 3.8) between the AWB and ship operators sets the despatch payment at a rate equal to half the demurrage payment. Whilst the rates applicable to the bulk handling agencies refer to on-berth

performance as distinct from the laytime arrangements applicable to the AWB, it is conceivable that the bulk handling agency's on-berth performance will affect the AWB's liability for demurrage.

The Agreement also allows the AWB to direct the bulk handler to operate overtime in order to load a ship, but if it does so then it must pay the cost of the

overtime. However, any bonus payments resulting from the operation of the overtime are for the account of the AWB (both for the presented vessel and the subsequent vessel included in the overtime period) and not the bulk handler.

The Agreement also directs that costs of two-port loading and other shipping costs incurred in a State be deducted from growers in that State.

Remuneration

Fees. The Agreement requires the bulk handler to notify the AWB of its aggregate fee for the forthcoming year by 1 October. The aggregate fee is broken into a receival fee (two-fifths of the aggregate), a general fee

(two-fifths of the aggregate) and an out-turn fee (one-fifth of the aggregate).

There is no provision for negotiation of each State's aggregate fee and the AWB relies on the bulk handler to have minimised the charge.

Clause 9.6 allows the aggregate fee to differ depending on wheat grade, receival site, time, or any other criterion. Thus, differential charging is possible.

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Permit charges. This section of the Agreement covers the payment of grower-to-buyer fees and permit charges to the bulk handlers. The bulk handler must inform the AWB of its grower-to-buyer fee at the commencement of each season (there is no negotiation between growers, the AWB or the bulk handling agencies).

General

Care of wheat. The bulk handler is required to ' take all proper and reasonable precautions and do all things necessary to preserve and safeguard the wheat . . . against contamination, damage, destruction,

deterioration, infestation, loss, theft and unauthorised admixture' (clause 12.1). Where a problem arises the bulk handler must inform the AWB and 'at their own cost take all reasonable steps to minimise the loss to the Board' (clause 12.2 (d )).

The Agreement also provides for penalties to be imposed on the bulk handler in such cases. In the case of

defective out-turn (excluding insects) the penalty is set at the amount by which the AWB was obliged to

compensate the buyer, up to a maximum of 10 per cent of the value of the shipment (guaranteed minimum price (GMP) multiplied by shipment tonnage). For example, if 4000 tonnes out of a shipment of 20 000 tonnes was

refused by a buyer for admixture reasons and the AWB had to compensate the buyer for the bad parcel (4000 tonnes multiplied by GMP) the bulk handler would only pay the AWB an amount equal to 2000 tonnes multiplied by GMP.

Where defective out-turn is caused by insect infestation the compensation payable by the bulk handler can vary from zero to 80 per cent of the amount payable for other types of defective out- turn. The level of compensation depends on the seriousness of the infestation and varies in accordance with a formula based on rejection rates.

Hence, in this case the penalty imposed on the bulk handler by the AWB will not be equal to the penalty imposed upon the AWB by the buyer.

In the case of excessive shipping out-turn (that is, loading more than it should) the bulk handler is

permitted a 5 per cent error margin. If it loads an amount greater than this margin and the AWB does not receive payment from the buyer for this extra amount then the bulk handler must pay the AWB an amount equal to the GMP value of the excess. For example, if the bulk handler loads 54 000 tonnes instead of the

required 50 000 tonnes the error margin on 50 000 tonnes is 2500 tonnes and so the bulk handler would pay the AWB an amount equal to (4000 - 2500) multiplied by GMP.

In the Agreement, penalties for defective or excessive out-turn relate only to export shipments.

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. Out-turn adjustment. During the storage, handling and transport task it is inevitable that some wheat will be lost or lose weight and so the tonnage received into the distribution system will be greater than the tonnage out-turned. The Agreement recognises this and allows a maximum adjustment factor of 0.5 per cent between receivals and out-turn. For example, if 1 000 000 tonnes is received only 995 000 tonnes need be

out-turned. If the out-turn performance is better than the 0.5 per cent allowance, the AWB gives the bulk handler a bonus for each extra tonne. If the out-turn performance is worse than the allowance then the bulk handler must pay the AWB. In the example the out-turn allowance was 5000 tonnes on 1 000 000 tonnes. If the out-turn were 997 000 tonnes the AWB would pay the bulk handler (2000 x GMP) but if the out-turn were 991 000 tonnes the bulk handler would pay the AWB an amount equal to (4000 x GMP).

A bulk handler may elect to nominate an out-turn allowance less than 0.5 per cent, but few have done so (SACBH nominated a 0.4 per cent allowance for the 1986-87 season). The out-turn rate is reviewed annually

by the bulk handlers.

. Access. The Agreement provides for both parties to gain access to each other's facilities and specified records and documents.

. Disputes. The method of conciliation and arbitration is specified.

. Payments. The Agreement outlines the process of paying accounts and provides for interest, at Australian Savings Bonds rates, to be charged on late payment of accounts.

. Equitable arrangements. The Agreement requires that the AWB endeavour to organise shipments between the States on an equitable basis (based on the 'export availability of wheat' in each State). It also stipulates that the AWB is to provide each bulk handler with information

about other bulk handlers in relation to aggregate and out-turn fees, shipping programs, extraordinary payments, loading performance, and carryover costs.

. Force majeure. The Agreement contains a section

detailing events considered outside both parties' control and how costs incurred because of such factors should be distributed. Such events include strikes by an essential class of workmen and damage or destruction that could not have been reasonably prevented by the parties.

The items noted do not represent an exhaustive description of the Grain Storage and Handling Agreement but they do provide a broad coverage of its contents. Under clause 18.3 the

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parties have agreed to renegotiate the Agreement before 1 October 1988.

TABLE 3.3 COMPENSATION RATES APPLICABLE TO SHIP LOADING

($)

Shipment tonnage Rate per weather

working day

Less than 5500 Nil

5500 - 20000 3500

20001 - 30000 5500

More than 30000 7500

Source : Grain Storage and Handling Agreement.

3.6 Handling agreements for grains other than wheat

There are numerous agreements between marketing authorities and private and public handling organisations for grains other than wheat. Only the most important are discussed here with a view to illustrating the types of agreement in operation.

3.6.1 New South Wales

In general, the GHA does not have formal agreements with State marketing authorities in the way that it does with the AWB. But, it does handle grains such as barley and oats and informal agreements do exist. In such cases the GHA informs

the marketing authority of the charge applicable for that year and the authority may either accept or reject it. If it rejects the GHA rate, the particular authority must make alternative storage and handling arrangements in the private

sector. The GHA also has a few agreements for the leasing of facilities, both from other parties (for example, Warren Shire Council) and to other parties (for example, the Walgett Special One group).

Marketing authorities for sorghum, barley, oats and oilseeds all have agreements with private storage and handling operators. In some cases the agreements are relatively informal; in other cases they are more formal. For example, the Grain Sorghum Marketing Board's agreement to use Tolls Transport facility at Newcastle has no formal documentation and arrangements are made via telex. On the other hand, the Barley Marketing Board has formal agreements with private handlers specifying the operator's responsibility vis-a-vis weighing, sampling, testing, receival, storage, weather proofing, insect and vermin control, and out-turn adjustment

allowances. The agreement also allows the operator to set

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charges and permits direct farm to final destination deliveries.

The Oats Marketing Board's formal agreement with private handlers splits the applicable charge into receival and out-turn components and provides for an out-turn tolerance of

0.5 per cent. If the handler improves upon this level a bonus payment is made; if the performance is worse a penalty is imposed. The Oats Marketing Board agreement differs from most other agreements in that it allows for the private handler to purchase part or all of the oats after payment of

a 20 per cent deposit.

3.6.2 Victoria

The GEB has formal agreements, usually for the storage and shipping of grain, with the Australian Barley Board, the Barley Marketing Board of New South Wales, the Ricegrowers Co-operative, and Barrett Burston. In addition, the GEB enters into contracts with merchants wishing to store and/or ship miscellaneous 'grains' in bulk.

The GEB also has a standard contract with private handlers to receive and store grain as an agent of the GEB. This

contract requires the operator to adhere to the same standards required of the GEB by the marketer and to

instructions given by the GEB. It is supplemented by a standard out-loading contract for private operators, covering responsibilities such as sampling and cleaning, and it also includes the charges agreed upon between the parties.

3.6.3 Queensland

Bulk Grains Queensland requires its non-statutory clients to sign either a storage or warehousing agreement. These agreements cover items such as out-turn adjustment (0.5 per cent), transfer of grain, tonnage limitations involved in warehousing, and BGQ's right to accept grain into a 'common' pool of such grain (that is, not to maintain the identity of a particular user's grain if there are several suppliers of such grain).

3.6.4 South Australia

The Australian Barley Board has a remuneration agreement with SACBH and licence agreements to receive barley and oats.

The remuneration agreement allows for SACBH to set the charge payable for the forthcoming season by 15 October but to revise it by 31 March to take account of seasonal factors

such as higher or lower receivals. The Australian Barley Board is required to pay one-twelfth of the estimated annual remuneration each month, with a final adjustment payment at the end of the year. The agreement specifically refers to wharfage, belt charges levied by BHP or the Department of

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Marine and Harbors, freight and stopover charges,

despatch/demurrage, overtime for ship out-loading, one-port loading allowances, and transfer of barley to other bulk handlers as being for the account of the Australian Barley Board.

The 'licence to receive barley' outlines the duties of the receiver in areas such as weighing, sampling and quality control. The agreement states that SACBH is not responsible for ' any loss or damage to the barley whilst in its

possession or any shortage in out-turn in any period during which the remuneration paid ... is based on recoupment of operating costs and not on a unitary basis' (clause 9(b)).

Presumably, this implies less than full cost recovery for barley receivals by SACBH and that fixed costs and overheads are allocated to other grains.

The 'licence to receive oats' agreement, unlike the barley licence, specifies that remuneration is to be on a basis mutually agreeable to both parties, not on the basis of recouping operating costs. But SACBH is still not liable for

shortage in out-turn: the agreement states that SACBH 'shall apportion such shortage or surplus between the [Australian Barley Board] and the other parties in proportion to the total quantity of oats received on behalf of each party at that particular silo' (clause 8(c)).

3.6.5 Western Australia

In Western Australia, a handling agreement exists between WACBH and the Grain Pool of Western Australia. The agreement formalises WACBH's position as an authorised receiver of Grain Pool of Western Australia grain (which is mandated under the Grain Marketing Act) and outlines the duties and responsibilities of each party.

Under the terms of the agreement WACBH is obliged to ensure, to the best of its ability, that the quality of grain stored in its possession does not deteriorate, although it is not liable for losses, damage or shortage on out-turn unless it

has performed negligently.

The handling charge is set by WACBH at the start of the season and the Grain Pool of Western Australia must pay WACBH on a monthly basis. The amount the Grain Pool of Western Australia must pay each month is limited by a formula based on what it has paid in previous months and the tonnage received. Separate formulae exist for service-related payments and facility-related payments. Despite these

formulae, the agreement also states that the Grain Pool of Western Australia ' shall not be obliged to pay to [WACBH] any amount in excess of the actual costs incurred in providing the services until the end of [WACBH's] financial year and

then only upon the written request of [WACBH] ' (clause 7(A)(a )6).

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In effect, the agreement means that the Grain Pool of Western Australia pays to WACBH operating costs during the year and a profit at the end of the year. For example, assume WACBH sets a handling charge of $20 per tonne at the start of the

season and that during the season it receives 1 000 000 tonnes of grain on behalf of the Grain Pool of Western

Australia. Assume further that WACBH has billed the Grain Pool of Western Australia $15 million for operating costs during the course of the year. At the end of the year WACBH would be entitled to bill the Grain Pool of Western Australia

for $5 million (1 million tonnes at $20 per tonne less the $15 million already recovered), which the Grain Pool of Western Australia would be required to pay before 30 June the following year.

The agreement also requires the Grain Pool of Western Australia to reimburse WACBH for carryover costs (allowable costs are defined in a schedule to the agreement) and to pay WACBH for road and rail haulage. The exception is where WACBH arranges for a transport task to ' suit its own

convenience' (clause 7(B)(ii)). The Grain Pool of Western Australia is also obliged to collect tolls on behalf of WACBH and, if WACBH has been asked to take delivery of grain upon which a toll has not been paid, to pay the full toll.

3.7 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 parties. In each case the agreement seeks to direct grain traffic to rail instead of road. In Victoria there is no such agreement, although V/Line does produce an annual operating plan for grain

transport and has several informal agreements. Each formal agreement is briefly described in the following paragraphs.

3.7.1 New South Wales

In New South Wales the rail freight agreement is between the SRA, the GHA, the AWB and the New South Wales Farmers

Association; it is renegotiated each year. The stated objective of the parties is to improve the efficiency and effectiveness of the grain storage and handling, and transport system and to keep costs to a minimum.

The agreement directs grain towards rail transport, places obligations on the SRA and GHA to meet certain performance criteria, covers the exchange of information between signatories (primarily the GHA and the SRA), and incorporates penalties. For example, if the GHA overloads a rail wagon by between 1 and 3 tonnes it incurs a 20 per cent freight

penalty from the SRA on the additional tonnage; overloading by more than 3 tonnes attracts a 100 per cent penalty on the extra tonnage.

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Freight rates are determined on the basis that grain flows to the 'natural terminal port' irrespective of whether the SRA moves it to that port or another. It also covers SRA pricing of multiple sector haulage; that is, silo to sub-terminal and

then sub-terminal to port terminal.

The SRA is liable for loss, damage, injury, misdelivery or delay to grain shipments but the liability is limited to $100 000 per annum.

3.7.2 Queens1and

The rail freight agreement in Queensland is between Queensland Railways (QR), BGQ, the AWB, the State Wheat Board, the Queensland Barley Marketing Board and the Central Queensland Grain Sorghum Marketing Board. The agreement, which expires on 30 September 1990, provides QR with a monopoly over the transport of wheat, barley, sorghum, maize,

legumes and oilseeds provided the distance exceeds 120 kilometres and the grain is for export.

Under the agreement QR provides rebates to BGQ if it loads unit trains. The rebate ranges from $0.50 to $1.50 per tonne and varies depending on the train configuration (the definition of a unit train configuration varies between

locations and the number of locomotives used), the time taken to load the wagons and the time of day in which loading may take place.

The agreement allows QR to impose a $2.00 per tonne charge on BGQ if grain is ' discharged for interim storage at an intermediate depot on a direct haulage route' (s. 8). It also permits the railway to levy 'hold-over charges' on BGQ

if rail wagons placed with BGQ for unloading at a port are not unloaded within specified periods. The hold-over charge varies depending on the type of rail wagon involved. For example, QGX-type wagons placed for unloading at Mackay

before noon on a week day (public holidays excluded) should be unloaded on the same day. Failure to do so will incur a hold-over charge of $18 per wagon.

The agreement also establishes criteria for the supply of information between the signatories. These include customers providing QR with 48 hours' notice of the need for a

'category 1' unit train ($1.50 rebate), QR supplying BGQ by 3 pm on any given day a schedule of train arrivals and

departures at depots and ports for the next 24 hours, and QR supplying schedule times for 'category 1' unit trains with an accuracy of 30 minutes (up to 4 hours before arrival).

The freight rates applicable are detailed in an appendix to the agreement. Section 1(b) of the agreement provides for an annual review and adjustment of the rates. Freight rate adjustments must be acceptable to all parties as s. 1(c) states that if the parties are unable to agree on freight rates (or other matters applicable to the agreement) then

'the agreement shall absolutely cease'.

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3.7.3 South Australia

The rail freight agreement in South Australia is between the AWB, Australian National (AN), SACBH, the Australian Barley Board and the United Farmers and Stockowners. The agreement, which expires at the end of the 1987-88 season, has the objective of transporting grain in the most direct and efficient manner available. It endeavours to secure grain traffic for AN because the railway does not have a statutory monopoly. AN has achieved agreement primarily by tying

freight rate increases to an 'escalation formula' based on labour, material and fuel costs as well as a productivity index. It also offers a freight rebate to all growers who move more than 80 per cent of their crop by rail (s. 4(a) (ii)). The Commission has been advised, however, that this rebate did not apply in the 1987-88 season.

The agreement does not prevent SACBH using road transport but specifies a surcharge to be paid (currently $2.50 per tonne) to AN where such transport could have been achieved by rail (clause 3(f)). A lower surcharge, of $0.47 per tonne, also

applies to grain moved from a rail-based silo to a

destination 'not reasonably' served by rail. Surcharges paid by SACBH under this arrangement go into A N 's general revenue.

Although AN is contracted to transport the grain it is not obliged to use rail. If it elects to use road instead of rail, any savings it makes must be reinvested in rail infrastructure for the transport of grain (clauses 3(c),3(d), and 3(e)).

The agreement also specifies the actual freight rates for haulage within South Australia, freight rates between certain South Australian centres and Portland, the conditions under which the freight rates are valid (for example, minimum

tonnages), exchange of information between the parties, and the establishment of a Grain Freight Review Committee to assess the performance of the agreement.

3.7.4 Western Australia

The rail agreement in Western Australia is between Westrail, WACBH, the AWB, the Grain Pool of Western Australia, the Primary Industry Association of Western Australia (now the Western Australian Farmers Federation), and the Pastoralists

and Graziers Association of Western Australia. The agreement expires on 31 October 1989 and has the aim of increasing Westrail's share of grain transport.

Whenever possible, WACBH is to use Westrail from the receival points listed in the agreement. In return, Westrail has undertaken to make its freight rates competitive with road transport rates by the 1988-89 season and to also adjust freight rates in accordance with an adjustment formula. The adjustment formula is based on the existing rate, the consumer price index, a special factor (nominated in the

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agreement but the composition of which is not specified) and rail's market share.

The agreement does not impose specific performance criteria but it does establish a committee to review performance and recommend changes. The committee comprises one

representative from each of Westrail, WACBH and the 'industry' (remaining signatories to the agreement).

The agreement was not able to produce an outcome acceptable to all parties for the 1986-87 season and the State Minister for Transport was required to set the rail rate.

3.8 The Australian Wheat Charter

The AWB has a standard contract for the carriage of wheat between Australia and overseas buyers. The contract 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. The major clauses of interest to the Commission relate to specified loading rates, demurrage rates and notice of arrival.

Clause 12 of the agreement stipulates the loading times for different cargo sizes (see Table 3.4). The number of days allowed excludes Saturdays, Sundays, holidays and days on which bad weather prevents loading.

TABLE 3.4 DAYS ALLOWED TO LOAD VESSELS UNDER THE AUSTRALIAN WHEAT CHARTER

Mean cargo (tonnes)

Days allowed

Less than 5 000 not stated

5 001 - 8 000 6

8 001 - 15 000 7

15 001 - 25 000 8

25 001 - 40 000 9

40 001 - 6 000 10

More than 60 000 11

Source : Australian Wheat Charter.

If it takes longer than allowed to load a ship then the AWB must pay the owners demurrage at the rate determined when the contract was signed. Conversely, if loading is completed in

less time than allowed the owners must pay a despatch fee to the AWB. The despatch fee is set at only half the demurrage fee.

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Vessels travelling 'in ballast' to Australia will have been given advance notice by the AWB of whether loading will occur in the eastern States or in Western Australia. The ship's

captain must give the AWB 96 hours' (four days') prior notice of arrival in that area, after which the AWB has 48 hours to nominate the actual port of loading. For vessels carrying a cargo to Australia the agreement stipulates that the AWB be given three days' notice of the expected departure from the

final discharging port (failure to do so means three days are added to the loading time), even when the discharging port is the same as the wheat loading port. AWB directions about the port of loading for such vessels are to be given upon receipt of the three days' notice. The requirement for notice of

arrival is designed to assist the AWB in allocating ship movements between ports and States.

Among other items in the agreement are the following:

. the need for vessels to pass the customary survey of the Commonwealth Government Marine Surveyor;

. the right of the AWB to operate continuous loading if overtime differentials are negotiated;

. if the port authority directs loading during overtime hours the costs of that overtime are shared equally between the AWB and ship owner or operator;

. the AWB has the option of ordering the vessel to change loading berths at the owner's expense on one occasion at each loading port. Where berth movements are ordered by the port authority all costs are for the owner's

account.

3.9 Agreements with private organisations

The statutory monopolies in the grain storage, handling and transport sector have a large number of contracts with private organisations. These contracts cover all sectors, from receival through road transport to export terminals, and exist for all grain types. Tables 3.6 to 3.10 refer to most of these agreements.

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. Consequently, they are of lesser significance to the issues considered in this paper.

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3.10 The Flour Millers Agreement

The AWB has a standard agreement for flour millers. Once signed, it 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.

Under the terms of the agreement the miller must nominate the end use for the wheat at the time of ordering. Allowable uses are for human consumption in Australia, an industrial use in Australia, or export of processed wheat from

Australia. The miller need not 'preserve the identity of wheat purchased for varying end uses' (clause 4(3)) but must ensure that wheat products sold by him are in accordance with

the volumes of wheat purchased for those purposes. For example, a miller who buys 1000 tonnes for industrial use cannot use 500 tonnes for industrial purposes and 500 tonnes for human consumption because no wheat was nominated as being

for human consumption.

The AWB is not bound to deliver from any particular storage, although millers can make their own arrangements for direct deliveries from growers under the grower to buyer scheme.

After the order is placed the AWB is required to deliver within three weeks. If delivery is by road the miller must accept it within the three week period; if delivery is by rail the miller has up to five weeks in which to accept

delivery. If delivery is not effected because of some action on the part of the miller the AWB may extend the delivery period and may also vary the price for the wheat not yet delivered, or it may charge the miller for any losses it

incurs in respect of that wheat. If delivery is not

completed because of the AWB's actions the miller may either cancel the balance of the order or require the AWB to extend the delivery period while keeping the same price.

The miller is responsible for demurrage on rail trucks if the trucks are not unloaded in any one day. However, the miller is not responsible for demurrage on the amount delivered in excess of the daily handling capacity, unless that amount was specifically ordered for delivery. It is interesting to note that the AWB has written demurrage costs into the Flour Millers Agreement but that other rail agreements to which the AWB is a signatory do not mention wagon demurrage.

The agreement also permits the AWB to charge millers interest on overdue accounts, allows the AWB to use wheat of any season to fulfil an order provided it is of the quality

required, allows the AWB to request security from millers before accepting orders, and outlines the method of arbitration for settling disputes.

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4. ECONOMIC IMPACT OF LEGISLATION AND THE VARIOUS AGREEMENTS

Fundamental to an assessment of the economic impact of grains industry legislation is the concept of economic efficiency. The term was used frequently in submissions to the Commission

and is a key feature of the desirable system for grain

distribution that the Commission has been asked by

Commonwealth and State governments to identify.

The Commission has interpreted the requirement to identify the most efficient and cost-effective integrated system for grain storage, handling and transport to involve not only maximum technical efficiency and cost minimisation, but also the longer term objective of ensuring that the maximum benefit is achieved from the employment of society's resources in the provision of grain storage, handling and transport services. This would mean that decisions taken to invest or disinvest in various parts of the system will be efficient when the resources concerned cannot be more beneficially used from the community viewpoint in other activities either within or outside the grain distribution system. It should be recognised that the actual ownership of the resources used is not relevant to the concept of economic efficiency from the point of view of community resource allocation.

4.1 Economic impact of grains industry legislation

Obviously, 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 resulting bulk handling and transport monopolies have not been exposed to the economic pressures that would be faced in a more competitive environment.

This is not to say that the bulk handlers and railway

authorities are necessarily less efficient than they would be in a competitive market, but rather to stress that their task may well be more difficult, since they do not face the same

competitively set incentives for performance. Instead, the statutory agencies rely on other pressures for performance, some of which are self-imposed and others of which are derived from external sources. These include pressures from progressive management, pressures from the customers (growers in this case), and sometimes pressure due to direct political involvement. For example, the Carmichael report stated that

' . . . widespread dissatisfaction with the NSW grain handling system led to calls by a number of interests, including grower organisations and GEB employee representatives, for an Enquiry into the system'. (Carmichael et al. 1981, p. 19)

Such pressures may, however, be inadequate for two reasons. First, they tend to vary in their duration and intensity and often arise only during periods of adverse economic

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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 in attempting to maximise their benefits

from the system without bearing the true cost of generating those benefits. In the grains industry context, examples of benefits for special interest groups include working conditions that may be more generous than those prevailing in other industries employing labour with similar skills and the possible siting or upgrading of country storage facilities on the basis of factors other than efficiency and cost

effectiveness.

In the grains industries there is a tradition of monopoly provision of services. In the case of some bulk handling agencies, particularly co-operatives, growers feel that the organisation is ' theirs' and should be able to be 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 was operating efficiently. For example, in its submission V/Line 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)

Prior to the determination of the rail freight rates for the 1987/88 season, the VFF accepted V/Line's invitation and examined the basis of V/Line's cost estimates. The outcome of the examination was that the VFF and their consultants identified same cost savings which V/Line accepted, and some which were not accepted. In submission to the Commission the VFF provided an indication of some of the difficulties they

encountered:

It has been a noticeable characteristic of this watchdog exercise that information supplied to PWU [Price Waterhouse Urwick, the VFF consultants] and VFF researchers has been confusing and very misleading on

some occasions. What was planned as an eight week exercise has now taken four months and is still not complete. Our criticisms of V/Line costs have always been answered, but when further criticised, different reasons have often been produced. These require further analysis, a process which becomes time consuming, very expensive and possibly endless. (VFF submission, 2 October 1987, p.l)

In general there are two difficulties with the 'watchdog' approach. First, to be sure that there is no ' creative accounting' taking place, a consumer watchdog may well have to monitor a significant amount of the activities of the organisation concerned, which could be a very expensive or

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even impossible task. Second, there is the problem of defining the benchmarks for acceptable performance.

Regardless of the ownership status of bulk handling agencies, the extent to which an organisation operating in a

monopolistic environment can continually be encouraged to behave in an optimally efficient manner is clearly very important. As a general observation, it seems apparent that there is less incentive for such an organisation to

critically examine all of its activities to ensure that it is minimising its costs than would be the case in a more

competitive environment. After all, since most costs can be passed on to customers without a significant impact on market share, there is no need to minimise those costs.

Consequently, the Commission has difficulty with the notion that through consumer watchdogs, or by some other

administrative means, the agencies providing transport and bulk handling services can effectively be encouraged to operate efficiently in an environment largely devoid of competition.

4.1.1 Administered competition

Some of the rail authorities have at least implicitly acknowledged the advantages of competition and, as a result of the constraints of their enabling legislation (which usually precludes direct competition), have developed administrative systems that attempt to approximate a competitive environment. Under this system the operating practices and resource allocation decisions are determined by administrative procedures or by the application of some standard methods.

An example of this type of approach is the radial rating freight policy currently practised by both Westrail and V/Line, which sets rail freights according to the straight­ line distance between the freight source (for example, a country silo) and the closest port terminal. This policy

sets freight rates on the basis of zones determined by intersecting concentric rings, using the grain export ports as the centre of the associated circles. Figure 4.1 is an example of the Victorian radial rating method; it can be seen that freight rates are lowest near the ports (Geelong, Portland and Port Adelaide) and increase with the straight­

line distance from those ports.

The rationale behind the radial rating policy is that these freight rates will be more commercially oriented (V/Line 1986b) and hence will be competitive with road transport rates. The fact that the rate may bear only an indirect relationship to the actual cost of providing the service,

because of circuitous rail routes or because the grain may be transported to a different port, is ignored. Consequently, the link between rail freight charges and costs may be tenuous. In addition, such a pricing policy can result in pricing anomalies from the growers' perspective.

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As an example of these pricing anomalies, the following situation has arisen in the Western Australian context. Some growers geographically closer to the main port but on a narrow gauge branch line are charged less for their rail

freight than growers delivering directly to the main line (standard gauge) that the branch line joins (for example, Narembeen and Merredin). Furthermore, most of the grain from these narrow gauge branch lines is transferred onto standard gauge lines and this involves an additional cost. It is not surprising that growers delivering directly to the standard gauge line have difficulty understanding the rationale that

apparently values the additional services of narrow gauge rail transport and trans-shipment at a negative cost. Nevertheless, the Commission recognises that differential pricing may well be practised in a competitive environment,

and that there is no guarantee that the prices charged by a firm that can, for example, achieve economies of scale will directly reflect the costs of providing the service. Instead, these prices will reflect competitive pressures.

A further example of the administrative decision-making approach to efficiency is the Westrail concept of moving to a rail freight charge that is 'competitive' with expected road freight rates. Westrail has proposed that its freight rates will be competitive with road freight rates by 1988-89. However, since Western Australian government policy prevents

direct competition between road and rail transport throughout most of the State (there is some competition at the border of the road/rail areas and in the movement of permit grain), the approach that has been adopted matches rail rates to expected

road freight rates. These expected values are derived from the actual road rates applying in those areas of the State where all grain is transported by road. This approach is rather inflexible and does not take account of the road

freight variations that might occur for a number of reasons in a competitive environment (for example, back-haul opportunities, different rates at different times of the year, and so on). In a competitive market firms can readily

adjust their prices in response to those of their

competitors. Using its administered efficiency approach Westrail is on a path that tends to match its freight rates with expected road rates, even though the road rates used may

not reflect market realities and opportunities at any particular time.

In Victoria, the V/Line concept of 'efficient cost' is another example of an administrative approach, the purpose of which is to increase efficiency in a regulated environment. V/Line is undertaking significant investment in the grain transportation system ($140 million by the end of 1989-90)

and altering operational procedures in an endeavour to improve the system's efficiency (V/Line submissions). V/Line has estimated the ' efficient cost' of moving the grain harvest when the investment and operational changes are complete and plans to fully recover this efficient cost. Its

freight rates are then set via the radial rating system to recover the efficient costs. However, until the investments

55

400 km

300 km

200 km

100 km

Portland Geelong

FIGURE 4.1 VIC TO R IA N RADIAL RATING MAP

Source: V/Line 1986a

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and operational changes are completed (1989-90) the rail system cannot attain the efficient cost solution and the Victorian Government provides a subsidy for the shortfall. The important and unanswered question associated with this procedure is how can V/Line be sure that its estimate of

'efficient cost', is in fact the least-cost method of transporting grain in Victoria? V/Line informed the Commission that it sees the estimation of efficient costs as evolutionary and that, given current knowledge, the costings are efficient, but not the 'ultimate optimal solution'

(V/Line submission, September 1987, p. 5). In a competitive environment the continuing incentive to search for cost- minimising methods is to obtain an advantage over one's competitors. In a regulated environment this incentive is

absent and there may well be an uncritical acceptance that the existing 'efficient cost' is the optimal solution.

The Commission is concerned that an administrative decision­ making approach to efficiency may not be an efficient and effective way of capturing the benefits of competitive rate­

setting. Instead, it may be more appropriate to remove transport regulations and to allow competition to occur. This would also enable road and rail transport to provide complementary services as well as competitive services. In this situation the railways would be free to set their rates in response to the rates set by road hauliers, and vice versa. As long as each transport mode was made responsible

for all the costs of providing the service, this approach may offer a more efficient economic outcome.

4.1.2 The scope of the legislation

The legislative framework underlying an organisation's activities can also affect economic efficiency by precluding the organisation from undertaking a wider scope of activities than was envisaged by the original legislation. For instance, the GEB administers a deferred delivery scheme for

grain. Under this scheme the GEB reduces its handling charges for grain delivered outside the peak delivery period (normally a six-week period immediately following the peak

harvest period). In 1986-87 the deferred delivery rebate was set at $1.10 per tonne and was only payable if total

receivals exceeded 3.6 million tonnes. Deferred deliveries in the country are made by appointment, usually at central receival points, while at ports they can be made during

normal working hours.

The GEB suggested to the Commission that it could achieve improved operating efficiencies if it was able to offer an on-farm pick-up service in conjunction with a rostering system of opening times. While a rostering system could be

introduced without on-farm pick-up, reduced opening times (after the harvest period in order to receive deferred delivery wheat) may be inconvenient to farmers if they had to make their own arrangements to transfer their deferred delivery grain to a receival point. If the GEB could offer

farmers the option of an on-farm pick-up service this

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inconvenience could be minimised. But the GEB believes that it is unable to offer such a service since the legislation requires it to provide handling and storage services, not transport services. Similarly, the GEB is unable to purchase

(or lease) motor trucks for the cartage of grain from bunkers to silos, or from silo to silo for consolidation.

Another example of legislative constraint occurs with the activities of the AWB. In its submission, the AWB pointed out that one of its principal statutory objectives was to maximise the return to growers (AWB submission, April 1987). Although the legislation does not specify if the returns are net of storage, handling and transport costs, the AWB has indicated in the Grain Storage and Handling Agreement, as well as publicly in its submission, that it sees maximisation of net returns to growers as its prime objective. Grower organisations have also argued,

... we fully support the role of the Australian Wheat Board as stated there [in the Wheat Marketing Act]; in other words to maximise returns to growers. Now we take that to interpret as being the net return to growers. We do not see it as being an exercise where the

Australian Wheat Board should be out there trying to get the best it can on world markets for Australian wheat only to neglect the important issue of marketing costs at home. (NSW Farmers Association, Transcript, p. 10)

The AWB, however, pointed out that the State autonomy of the bulk handling and transport authorities prevents it from meeting the objective of maximising net returns to growers. As a result, it has been limited to consulting with, or making recommendations to, the various grain storage,

handling and transport authorities, and it may have refrained from directing those organisations to undertake actions that may be in the national interest but not in the interest of a particular State.

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

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

handlers to perform certain functions or to undertake particular investments the bulk handlers ability to plan operations and fulfil commitments to other customers would be hindered.

In some cases the legislation also grants the bulk handler the authority to acquire storage facilities from other operators or to close down an operator if it wishes to

commence services in that area. For example, the GEB compulsorily acquired a large proportion of the Victorian Oatgrowers Pool storage in the late 1970s. Similarly, should BGQ wish to commence operations at a particular port it could close down any existing company loading 'declared' grains. When such powers exist for the bulk handlers it is possible

that competitors will be discouraged from entering the market. Should they be successful in taking business away

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from a bulk handler they would run the risk of having their operations acquired or halted by the bulk handlers.

These examples highlight the fact that in some cases the legislation under which an organisation is established or operates can prevent it from operating in the most efficient manner. It appears necessary to examine such legislation with a view to removing those restrictions which hinder the

efficient operations of storage, handling, transport and marketing organisations. In addition, it would be

appropriate to investigate whether the bulk handlers would choose to use their facilities to handle other bulk

commodities (such as mineral sands) if their legislation permitted. It may be that this diversification of operations would not be economically attractive to them. On the other

hand, there may be some activities in which they could engage (but are currently prevented from undertaking by the legislation) which would provide them with further economies of scale or scope in their operations.

4.1.3 Ambiguous areas of legislation

In some cases the legislation under which the various grain transport and handling agencies derive their powers is unclear.

An example of legislation that is unclear, or at least open to various interpretations, is that providing the basis for cost pooling in the South Australian grain handling system. Under s. 10( i ) (a ) of the Bulk Handling of Grain Act 1955-1969

(SA), SACBH is required not to ' give to any persons desiring the services of the company [SACBH] preferential treatment as against other persons desiring such services'. This could be interpreted to mean that all growers should be charged equally, which would require the pooling of costs. On the other hand, cost pooling almost inevitably introduces cross­ subsidisation between growers, and this implies preferential treatment. Hence, this same section could be interpreted to mean that growers should be charged according to a ' user pays' system.

A further instance of ambiguity is found in the legislation underlying New South Wales GHA - the Grain Handling Act 1954 ). Under s. 12(2)(d ), the GHA is required

to exercise its functions at minimum cost consistent with

(i) a satisfactory level of service to wheat growers and to purchasers of wheat; and

(ii) the provision of satisfying and secure employment for the servants of the Authority.

Neither 'a satisfactory level of service' nor 'satisfying and secure employment' is defined and both would seem open to fairly loose interpretation. Both growers and unions could

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use this section of the Act to apply pressure to the GHA to obtain increased benefits, which may not be economically justified and may not be consistent with a minimum-cost

solution.

These two examples illustrate how difficult it is to legislate to ensure efficient outcomes. In the first example, SACBH must choose between two courses of action, one

of which leads to a more efficient economic allocation of resources than the other. In the second example, the GHA is given poorly defined objectives. Unfortunately, the legislation provides little guidance to the organisations in these situations. At present SACBH has adopted a policy of cost pooling, while the GHA has very extensive country storage facilities and a number of restrictive work practices, both of which may be attributable to the influence of vested interest groups and are sanctioned by the

legislation. The GHA legislation has required decision­ makers to choose a balance between conflicting objectives: in striking this balance economic efficiency is inevitably compromised.

4.2 Economic impact of the various agreements

There are three main types of agreements of interest to the Commission. They can be broadly categorised as follows:

. agreements that are primarily concerned with market power - these may, for example, extend (or in some cases grant) monopoly power to different organisations, where such power is not provided directly in the legislation;

. agreements that attempt to introduce market forces into a regulated system, primarily through a series of incentive payments, and/or financial penalties that relate to the organisation concerned exceeding or falling short of designated performance standards;

. 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.

4.2.1 Agreements to extend market powers and their economic effect

Although there is already significant overall monopoly power provided to grain industry organisations through legislation, some organisations have attempted to extend their powers. There are at least two reasons for this:

. perceived benefits from economies of scale arising from increased throughput;

. an attempt to secure a position in the industry by

reducing contestability.

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The first of these reasons is the justification most often advanced for entering into agreements to extend market power. However, even if an organisation can secure benefits from economies of scale the existence of an agreement may create inefficiencies elsewhere in the system. In this regard the Commission is concerned about the impact of such agreements in limiting alternatives available to customers or clients and upon economic efficiency in general.

Two examples of this type of agreement will suffice. First, the Queensland Grain Handling Act 1983 grants BGQ a monopoly over the handling of exports of declared grains at ports at which it owns or operates facilities ('declared grains' encompasses virtually all grains and oilseeds). BGQ has extended this monopoly power by negotiating agreements with the major marketing boards which, in effect, make it the sole licensed receiver of a number of grains in the country areas of Queensland. The only exceptions are rice from the Burdekin River and maize from the Atherton Tableland, and a small number of private handling sites for barley.

The second example concerns AN, which is the rail authority operating in South Australia. Under the terms of the agreement between the South Australian growers organisation (the UF & S) and Australian National, growers receive a

discounted rail freight rate if 80 per cent or more of their crop is consigned by rail (s. 4(a)(ii)). The discounted freight rates were paid in 1985-86 and 1986-87 but were, by agreement, discontinued in 1987-88. As is pointed out by

Spriggs et al. ( 1987), these rail rate concessions do not have the same effect as those that used a discount based on absolute volume. Whereas the latter may encourage efficiency through economies of scale, the concessions based on the proportion of crop size regardless of overall tonnage seem more related to exerting market power and discouraging

competition for the railway.

In both of these examples the organisations concerned may well be attempting to maximise their efficiency in order to pass savings back to growers. But regardless of their overall objectives, agreements that extend market power by

either granting monopoly rights or restricting competition are likely to be less flexible overall and in particular are likely to be highly unresponsive to the market pressures that would normally govern economic decision-making.

4.2.2 Agreements that are proxies for market forces

Some agreements have introduced a structured set of rewards and penalties to promote more efficient operating practices and resource allocation. While these financial incentives do not have the same flexibility as market prices, they may encourage economic efficiency. When organisations take

advantage of the incentives to minimise their own costs the rewarded behaviour is also beneficial for the other parties to the agreement. Consequently, the financial incentives in

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these agreements are to some extent proxies for market forces.

The most important example of this type of agreement is the Grain Storage and Handling Agreement between the AWB and the various State bulk handlers. The main features of the Agreement are discussed in Section 3.5, and the success or

otherwise of the agreement, so far as efficiency gains are concerned, is discussed in Section 4.2.3. At this point it is appropriate to mention some apparent anomalies in the Agreement.

To understand how these anomalies arise, some background information is necessary. As marketer of the Australian wheat crop, the AWB enters into charter party agreements with ship owners or operators. These agreements specify a time period in which the ship is to be loaded. If the ship is

delayed in port for a longer period than is specified in the charter party agreement, the AWB pays demurrage. If the ship is loaded more quickly than is specified the ship owner or operator pays the AWB a despatch (bonus) payment.

Conventionally, the rate of demurrage is twice the rate of despatch.

The AWB passes some of this incentive/penalty payment system back to the bulk handlers, for it is their operations that will have a significant impact on the length of time that the ship will take to load, which in turn has a large bearing on the length of time the ship is in port.

The first anomaly is that the time period over which the despatch/demurrage payments are calculated differs between the AWB/shipper payments and the AWB/bulk handler payments. In the case of the payments between the AWB and ship owners or operators, the time period over which the payments are calculated begins once the ship has passed the Commonwealth's marine survey, even if it is waiting in a queue for berth space. On the other hand, the time period over which the AWB/bulk handler payments are calculated is for the time 'on berth'. If, however, a vessel exceeds its time allowed and a presented vessel is waiting to load at the berth, its time commences at the expiration of the berthed vessel's time allowed.

Whilst it can be argued that the bulk handler is responsible only for the loading of ships once they reach the berth it must be acknowledged that their performance does affect queue lengths. Queues will usually occur because either the AWB

has not managed its shipping program correctly or poor performance by the bulk handler has led to a backlog. In the first case the AWB has caused the queue to develop and should bear the cost. In the second case, the queue has developed after the AWB has organised what is an acceptable shipping program (that is, one that is capable of being fulfilled by the bulk handler) and the bulk handler has not performed satisfactorily. In this situation it would appear reasonable that the bulk handler should bear the cost of the queue.

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As a result of this system the Commission understands that the GHA was able to achieve earnings from on-berth

performance in 1985-86, even though the AWB incurred substantial demurrage payments in New South Wales. This occurred because the AWB was committed, at the time, to the fair-share allocation system and needed to line up ships more or less stem to stern in order to meet that commitment. A more efficient approach may well be to take advantage of any

savings in total demurrage costs that can be achieved through the use of Victorian and Queensland ports. Such an approach is not addressed by the Agreement and it is also at odds with State government tendencies to retain as much grain as possible within State borders. The Commission notes, however, that the AWB has moved away from the application of

the fair-share principle and that the AWB believes it should be abandoned. (AWB submission, November 1987, p. 9)

The second anomaly is that the amount of the demurrage payments between the AWB and shippers usually differs from the penalty payments between the AWB and the bulk handlers. One set of payments is defined in the charter party

agreement, the other in the Grain Storage and Handling Agreement. If a queue has formed because of poor ship scheduling by the AWB this is reasonable. But if a queue has formed because of poor on-berth performance by a bulk handler it does not provide accurate price signals to the bulk handler. For example, the bulk handler pays to the AWB a

loading penalty which is less than the demurrage penalty incurred by the AWB. That is, the poor performance of the bulk handler has caused a queue to develop but the total cost of that queue (demurrage) is paid partly by the bulk handler

(to the ship owner via the loading penalty to the AWB) and partly by the AWB (the difference between the demurrage bill it pays and the loading penalty it receives from the bulk handler). Thus the full cost of the queue generated by the bulk handler is not passed back to it.

The third anomaly is that the Grain Storage and Handling Agreement provides the same level of payments for early and late loading times, while the AWB's despatch payments with

shippers are normally only half the amount of the demurrage payments.

As a result of these anomalies it is hardly surprising that in the 1985-86 shipping year the AWB ended up making a loss on its despatch and demurrage payments; that is, it made to the bulk handlers net payments that were some $400 000 greater than the net payments they received from the shippers.

A performance-based operating agreement is being considered by the GEB and V/Line for the Victorian storage, handling and transport system. At present the two primary parties are still discussing the details of the agreement, but the Commission understands that there is a general acceptance by both organisations that the industry would benefit from the introduction of a performance-based agreement that incorporates bonus and penalty payments and provides each

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party with a monetary incentive to utilise its resources in the most integrated and cost-effective manner.

The GEB already has an agreement with V/Line that where, at V/Line's instigation, the GEB must double-handle grain in the country - for example, to transfer a road movement of grain from a silo onto rail via a country receival point the GEB will be paid a fee for the double handling (in 1986-87 the

fee was $1.33 per tonne). The GEB has cited two other

examples that it and V/Line are investigating in order to introduce compensatory payments between the two

organisations:

1. Failure by V/Line to provide wagons for outloading in accordance with the pre-agreed schedule.

The GEB would be compensated by V/Line for the cost of providing the outloading operators for non productive periods.

2. Failure by GEB to load wagons placed for outloading in accordance with the pre-agreed programme.

V/Line would be compensated by the GEB for the cost of the effects of the loading delay.

(GEB, personal communication, 23 March 1987)

Both of these agreements are designed to make the relevant authorities more responsible for their activities and, in the case of the Grain Storage and Handling Agreement, to pass back to them at least part of any cost savings the marketers can achieve. The Grain Storage and Handling Agreement also requires the AWB to compensate the bulk handling agencies for carryover costs imposed on the authorities as a result of AWB actions.

4.2.3 The economic effectiveness of market proxy agreements

A central issue surrounding such agreements is the extent to which they improve economic efficiency. It is not difficult to envisage circumstances in which an agreement of this type, while apparently encouraging increased efficiency, may set performance standards that are too low (or too high) or may set rewards and penalties that do not adequately provide sufficient incentive or deterrent to modify an organisation's behaviour. For example, if organisations had sufficient bargaining power when the agreement was established they could set minimum performance standards that would be particularly easy to achieve. If this was the case the rewards and penalties embodied in the agreement would be easily attained or avoided, and there would be little incentive to lift levels of productivity.

Even if organisations were not able to set performance levels that could easily be met (for example, if international performance standards were used), they may still influence

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the levels of the incentives and penalties included in the agreement. An incentive (or penalty) that is too low can safely be ignored by organisations, and when the agreements were being negotiated it would seem a sensible strategy for organisations likely to incur penalties to bargain for penalty levels that were not too severe. However, even if the performance levels and incentive and penalty structures were appropriate, organisations may not adopt a profit-

maximising strategy. If organisations adopted the more conservative cost-minimising strategy, they would operate so as to meet the minimum performance standards rather than strive to increase their productivity and earn the incentive payment.

The problem lies at least partly in the fact that the

incentives and penalties are not designed by the ultimate beneficiaries of the system (that is, growers or purchasers) but by the participants who are in a position to pass on any penalties incurred, in the form of higher charges. In the

case of South Australia and Western Australia, however, it should be noted that the bulk handlers are co-operative companies and hence represent the end users. The capacity of the marketing, bulk handling and transport organisations to

pass on 'unavoidable' costs raises the general question of just how useful these agreements are to the growers at the end of the chain. To the grower who is locked into the

system it probably matters very little if one organisation reduces its charges by the same amount as another

organisation raises its charges. Arguably, penalties can only be effective when the organisation incurring the penalty is limited in its capacity to pass that cost on or when the growers have the ability to choose not to use the services of

an organisation; that is, when there is a competitive environment.

In their submissions to the Commission the VOP, ACIL Australia Pty Ltd and the Grains Council of Australia questioned the economic effectiveness of the ship-loading rate specified in the charter party contract between the Australian Barley Board and shippers. The loading rate

specified in the contract is only 1500 tonnes per day and the charter party agreement contains provision for incentive payments to the marketer (despatch) or penalty charges for

the marketer (demurrage) if the vessel is loaded either more quickly or more slowly than the charter party rate. The consequence of the low rate is that the marketer has a longer time during which the vessel can be loaded. Assuming that the bulk handler attempts to maximise throughput and keeps

loading times to a minimum, the low load rate in the charter party agreement will increase the likelihood that the marketer will receive a despatch payment.

The argument of the Victorian Oatgrowers Pool, ACIL Australia Pty Ltd and the Grains Council is that, since the ship owner or operator bears the costs of having the ship in port while it is being loaded, it would seem logical to expect the

freight rate to be set so as to cover the expected costs of the port stopover. To the extent that a low daily loading

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rate leads shippers to expect a longer port stay, it is reasonable to expect a higher freight rate to be charged. The Victorian Oatgrowers Pool and ACIL Australia Pty Ltd contend that even after paying a significant despatch fee, the ship owner or operator's increased freight rate ensures that the costs of the despatch payment are more than covered

(VOP submission, April 1987 p. 21; ACIL submission, May 1987 p. 124). Hence, the marketer (and ultimately the growers) would be the overall losers.

In a personal communication an Australian Barley Board representative responded to this contention by arguing that there is no evidence to suggest that an increase in charter party loading rates will result in an increase in growers'

income from barley sales. The Board's principal arguments are as follows:

. The majority of the Australian Barley Board sales are made through international commodity traders on an f.o.b. basis and when the sale is made the loading port is not determined. Since the sales are arranged many months before the shipping period, the price achieved

for these sales is usually dependent on a supply and demand situation based on world prices. Freight rates are fixed at a later date between the buyer and ship owner.

. Shippers incur considerably more costs through ship delays than they would receive through compensating demurrage payments.

. The existing load rate requirement in the charter party agreement does not influence port performance. The bulk handlers load the ship as quickly as possible in order to maximise the throughput of grain through the terminal

and in order to free up storage facilities at the terminal for other grains.

The Australian Barley Board concludes that any increase in the charter party loading rate would be likely to reduce despatch payments and increase demurrage payments without

leading to lower freight rates. Furthermore, it argues that even if freight rates fall and the f.o.b. price rises, the result will simply be greater profits for commodity traders.

It seems from these arguments that the Barley Board believes either that the f.o.b. price for Australian barley is independent of freight rates or that the procedure of selling barley through international commodity traders is sufficiently uncompetitive that any freight rate reductions which should lead to higher f.o.b. prices would not be passed on. The Barley Board supports this argument by noting that it is prepared to increase its load rate if a higher f.o.b. price is offered. To date no shipper has been prepared to accept this trade-off.

The Barley Board's arguments imply that the approach which would appear to be more economically efficient (that is, a

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higher load rate) does not provide the greatest return to growers. It would seem that the explanation for this is related to the role of the middlemen (the commodity traders).

The point to be emphasised from this example is that the presence of a performance standard and the application of incentives and penalties does not, by itself, necessarily produce an economically efficient outcome. Instead, it is

the ultimate financial outcome of a complex set of marketing and handling considerations that is of interest to growers, not the achievement or otherwise of specified physical out-loading and in-loading rates.

The Grain Storage and Handling Agreement has been in operation only since October 1985. To determine its effectiveness in raising the productivity of the bulk

handlers, comparisons could be made between the amount of State carryovers, the out-loading performance to shipping, and the amount of defective (or excessive) out-turn under current and previous arrangements (for example, the Remuneration Agreement). The Commission asked the AWB to evaluate the effectiveness of the Grain Storage and Handling

Agreement using these criteria, and it also asked the bulk handlers for their comments on the Agreement. The discussion that follows draws upon their responses.

In all States except New South Wales, carryover in recent years has not resulted from logistical constraints but rather from other factors, in particular marketing requirements. Before the Storage and Handling Agreement came into operation

carryover costs (excluding interest costs) were pooled nationally, but after the Agreement was introduced the State bulk handlers could be held responsible for a proportion of

the costs of carryover in the event that such carryover is due to their poor performance. It seems reasonable to argue that the likelihood of being held responsible for a

proportion of carryover costs acted as a potent incentive to the GHA in New South Wales, and it is worth noting that shipping throughput increased for that State in 1986, particularly as a result of the introduction of 'continuous running' of the terminals. Of course, this increase may not be solely attributable to the operation of the Storage and Handling Agreement. Other factors, such as management changes, may have been instrumental in achieving the improved performance.

As far as the measure of out-loading performance is

concerned, at a national level 1986 was a record shipping year, partly due to the new Fisherman Islands facility and partly as a result of the 'continuous running' work practices in New South Wales. The AWB has also indicated that it believes that the higher on-berth loading rates in the

Storage and Handling Agreement (as compared to the

Remuneration Agreement) have led to significant improvements in the loading rates for a number of South Australian ports. SACBH argued, however, that it does not see the improvement

in shipping turnaround times as being attributable to the Agreement.

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The AWB also noted that even though 1986 was a record

shipping year the number of market complaints was smaller than in previous years. These complaints concern grain quality issues such as insect infestation, contamination by other grains, and weed and fungal contamination. While not proposing that this result is solely attributable to the Storage and Handling Agreement, the AWB believes that the perception of increased accountability by the bulk handlers would have contributed to the decline.

In general, the bulk handlers seem to be satisfied with the Agreement. The GEB has gone so far as to say,

While the GS&H Agreement certainly could not be

considered to be perfect from any perspective, its negotiation was a veritable 'quantum leap' in the direction of progressive development of sound, comprehensive and commercially appropriate arrangements between the parties. (GEB, personal communication, 28 April 1987)

The State Wheat Board of Queensland was less enthusiastic:

The State Wheat Board believes that one of the major deficiencies under the current legislative and institutional arrangements is the absence of benefits to the respective States with respect to sea freight rates on larger vessels, adequate bonuses on prompt turnaround of ships and benefits from freight rates attributable to geographical location to markets. (SWB, personal communication, 22 April 1987)

The GEB also noted some weaknesses in the Agreement. The main weakness it perceived was that when the Cost

Reimbursement Scheme (that is, the scheme previous to the Remuneration Agreement) was abandoned and the performance- oriented payment system was introduced, the different States had facilities of differing age and capacity. Because of

these unequal starting points the performance oriented payment system placed greater pressure on some bulk handlers than on others. In the GEB's opinion a bulk handler with an older or less developed system would be able to achieve performance improvement only by undertaking significant

capital expenditure, which would need to be covered by increased revenue either from greater throughput or perhaps increased payments from the shipper or marketer.

More generally, in the case of infrastructire investment, the relationship between a marketer of grain and the storage and handling agent should be on a commercial basis. For example, marketers of grain could specify out-loading requirements at port facilities as well as penalty and incentive clauses in commercial contracts. In this environment investment in infrastructure will respond to the market environment in accordance with the commercial interests of the parties

concerned. It should be noted that the Storage and Handling Agreement does provide some performance incentives but they

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are not sufficient to warrant large additional capital expenditure.

4.2.4 Agreements to improve co-operation and co-ordination

The other type of agreement that is of interest to the Commission seeks to achieve improved levels of economic efficiency by improved co-ordination and planning. The key element of such agreements is the interdependence of the participating organisations. Even though the separate parties may have different objectives, their operational

interaction makes the creation of this type of agreement highly likely. Probably the best examples are the

arrangements between rail authorities and the bulk handlers for moving the grains crops from the country to the seaboard.

In its simplest form it is readily apparent that the

efficiency of the railways in transporting the crop will be affected by the speed with which trains can be loaded and unloaded, by the number of different loading locations that a train must visit, and by the number of different types of grain or segregations that a single train must carry. On the other hand, the efficiency with which a bulk handler can receive the harvest, and the efficiency with which it can

load ships, will be significantly influenced by the availability of rail transport to either move grain away from the congested country receival facilities or supply the requested type of grain in a timely fashion to port

terminals.

When considering examples of these agreements it is immediately apparent that they tend to be less formalised than other types of agreements. Woolfe (1985) has noted that most of the grain agreements have tended to be flexible

arrangements rather than binding legal contracts and this observation seems to be particularly appropriate for this type of agreement. Perhaps this is so because of the absence of direct financial payments that arise from this type of

agreement.

The Western Australian situation provides a useful example of a rail/bulk handler agreement based on the co-operation principle. Prior to the 1986-87 harvest Westrail proposed new operational procedures that involved changed working

arrangements for both itself and WACBH and required some investment to be undertaken by WACBH. The proposal became known as the ' Six Point Plan'. It was not implemented,

primarily because of the additional costs and operational constraints that would have been imposed on WACBH. Instead, a ' Compromise Plan' was accepted, and has been tried on a trial

basis in the Great Southern district of Western Australia for the 1986-87 season.

The essence of this plan is to use unit trains to

systematically shift all the grain from a regional area, and then move on to the next area and repeat the exercise. This approach avoids the piecemeal loading of trains that occurred

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previously. When combined with extended operating hours at loading points and regular shift operations at port terminals, it is expected to result in lower costs for both Westrail and WACBH.

In New South Wales, the SRA and the GHA have operating specifications that are equivalent to a co-operative agreement aimed at improving system efficiency. These specifications involve items such as loading and unloading times, the use of unit trains, 'single-sector' loading, and the use of exchange 'rakes' (groups of wagons) at certain

locations. Although the arrangement is not formal, both parties attempt to comply with it on a 'best endeavour' basis. For operational reasons it is impossible to comply with the guidelines all the time (for example, insufficient grain may be available in one sector to enable single-sector

loading) but the target compliance rate of 80 per cent is being achieved.

4.2.5 The economic effectiveness of co-operation and co-ordination

When considering the effectiveness of agreements that try to increase economic efficiency by improved co-operation and co-ordination a number of questions emerge. For example, it could be argued that without an incentive to improve performance the organisations concerned will optimise their own behaviour, with little regard for the overall costs of the total system.

Because of the interactive nature of the system, individual decisions by some organisations (for example, the railways) would be very likely to impose external costs on other organisations (for example, the bulk handlers). One could argue further that without a financial incentive there is little reason to expect monopolistic organisations to alter such behaviour. Indeed, even with a financial incentive the monopolist's behaviour may not be altered as it is possible to pass the higher costs on to users.

Conversely, one could also argue that the organisations involved (in this case railways and bulk handlers) have very similar objectives - cost minimisation for the bulk handlers and cost recovery for the railways. In this environment, and especially in view of the difficulties currently confronting the grains industry, co-operative agreements provide a most useful opportunity for organisations to work together to minimise total system costs.

To make this discussion more specific to the grains industry, assume that the bulk handlers and rail authorities each have the objective of minimising their charges to growers. It is highly likely that if these authorities pursue their objectives completely independently they will ignore the increases in system-wide efficiency that might be obtained if

one authority incurred a minor cost while the other authority made substantial savings. The question is whether a

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co-operative type of agreement is sufficient to persuade the first authority to accept any additional costs. The preliminary evidence on this matter is mixed. The agreement between QR and BGQ, involving QR paying a rebate for the

efficient rail movement of grain, indicates that co-operative agreements can be an effective way to increase economic efficiency if there are external pressures on the

organisations to minimise their costs.

On the other hand in the Western Australian example referred to previously, the Six Point Plan proposed by Westrail was not acceptable to WACBH because it would have involved additional investment in external lighting towers and would have required expensive shift operations to be worked when out-loading country silos (Westrail, pers. comm., 13 March

1987). In this case the majority of investment costs would have been incurred by the bulk handling agency while most of the benefits accrued to the railway. Clearly, unless some form of financial incentive or compensation is provided to the bulk handling agency it is unlikely to undertake the

investment.

A final example of co-operation between agencies can be seen in Victoria, where the actions of the GEB to upgrade the rail out-loading facilities at central receival points has enabled V/Line to achieve significantly faster train loading times.

It is important to note that this co-operation does not arise as a result of an agreement; rather, it is the result of a co-ordinated policy, made easier because both authorities are both contained within a single ministry.

Despite the success of this co-operative approach, however, there have still been some anomalies in this arrangement. The Victorian Farmers Federation and the GEB provided the Commission with information indicating that a number of central receival points have higher freight rates than nearby fill-and-close silos. In this case growers are being given a financial disincentive to deliver to the high capacity, efficient central receival points and as a result they will deliver as much of their grain as possible to the cheaper but less efficient fill-and-close silos. This is clearly not an

optimally efficient economic outcome. In some cases this situation has arisen because the receival points are near the boundary of a radial rating zone. In other cases the

fill-and-close silos are located in a lower freight rate zone. In general, the problems have arisen as a result of the imposition of the arbitrary radial freight rate system, which does not take into account the higher efficiency of the central receival points. The Commission understands that these anomalies are continually being examined with a view to some rate adjustments being made. Table 4.1 sets out the details of some of these rate anomalies and changes that have been made for the 1987-88 season.

From the foregoing discussion it seems that with the existing institutional environment, the co-operative approach, either through agreements or through policy directives, can work quite well and in some circumstances can encourage economic

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efficiency. This is particularly the case where both parties can reduce their operating costs through variations in operating practices. However, difficulties appear to arise when one authority needs to expend capital and the other

authority benefits. In these situations financial compensation is required. Although some agreements do introduce financial incentives, they are not, in general, as successful at reflecting price signals as a competitive market. Consequently, the usefulness of agreements, relative

to competitive markets, seems to be somewhat limited.

TABLE 4.1 VICTORIAN CENTRAL RECEIVAL ANOMALIES ($)

POINTS FREIGHT RATE

Central receival point

Radial rating freight rate (1986-87 and 1987-88)

Alternative fill- and-close silo freight rate (1986-87)

Adjusted fill- and-close silo freight rate (1987-88)

Dookie 21.20 Pine Lodge 20.20 20.95

Beulah 23.10 Galaquil 22.20 23.00

Murtoa 20.20 Lubeck 18.90 19.60

Boort 21.20 Borung 20.20 20.95

Woomelang 23.85 Watchupga 23.10 23.95

Dunolly 15.50 Moolort 13.50 14.00

Source: VFF and V/Line, personal communication.

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APPENDIX A THE PRESENT FINANCIAL REPORTING AND ACCOUNTING PRACTICES OF BULK HANDLING AGENCIES AND RAIL AUTHORITIES

The Commission engaged the firm of Peat, Marwick, Mitchell Services to investigate and report on the financial and accounting practices of the bulk handling agencies and rail authorities. Specific areas of examination included forward planning, financial monitoring, capital valuation procedures, investment appraisal, and cost accounting. The consultant was also required to make recommendations about improvements in the areas of financial and accounting practices.

The approach adopted by the consultant was to ask each organisation to complete a questionnaire and to follow this up with a site visit. All organisations co-operated, apart from QR, which declined to complete the questionnaire or take part in the follow-up interview. Copies of QR' s corporate plan were obtained, however, and all of the bulk handlers and rail authorities provided copies of recent annual reports.

The report provided by the consultant indicates a generally satisfactory position in regard to the matters under review, given the existing legislative and administrative requirements under which the organisations operate. For example, the consultant noted that investment decisions are generally based on criteria associated with provision of a given level of service, rather than commercial,

profit-orrented criteria, largely because of the legislative requirement that bulk handling agencies accept all grain offered.

The consultant's report was prepared in a number of parts, comprising an overview and separate reports for each of the organisations reviewed. The Commission provided each of the organisations with a copy of the relevant volume of the consultant's report and invited comments. All organisations

except QR and V/line responded, and, with the exception of the SRA, all indicated broad agreement with the consultant's findings. In some cases the organisations said that the weaknesses identified by the report had either been addressed or were in the process of being addressed. A summary of the principal findings and the responses of the organisations concerned follows, for both the bulk handling agencies and the rail authorities.

A. 1 Bulk Handling Agencies

Forward planning Each agency had adopted forward planning techniques, although in the consultant's view there were some weaknesses in some of the current planning procedures including:

. Some agencies had a very short planning horizon; for example, for the GHA, SACBH and WACBH the planning horizon was 12 months.

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. The forward plans of some agencies were not co-ordinated by a central planning unit. The advantage of

centralised co-ordination of forward plans is that it facilitates consistency in management's decision making and review process. Ideally plans from all areas of management should be incorporated in a single document which can then be reviewed by the appropriate levels of management to ensure adherence to corporate goals and objectives. Such a document would be directed to

achieving agreed goals, and would take into account operational improvements, infrastructure commitments and financial plans. It should be endorsed by the board of the organisation, reviewed annually, and should form the basis of future operations.

. Forward planning procedures were not always documented. For example, SACBH did not have its forward planning procedures documented, while the GHA included some of its forward planning procedures in a number of separate documents. To ensure that all elements of the forward planning process are identified and understood, a manual outlining standard procedures should exist in each agency.

In response the bulk handling agencies questioned the appropriateness of some of these criticisms. The GHA pointed out that five-year forward plans would not be of great use in an environment in which there are considerable fluctuations in crop size, with a resultant considerable fluctuation in operating costs and revenue. WACBH made similar comments, pointing out that it was able to handle record harvests in

1984-85, and that generally planning for grain receivals on a year-by-year basis was adequate. The GEB and SACBH indicated that they were considering adopting some of the planning suggestions made in the reports while BGQ argued that a

formal corporate plan was not an essential prerequisite for sound business management.

Some bulk handling agencies also pointed out that the current institutional environment provided little flexibility for alternative operations, and that as a result the role of forward planning was inevitably more constrained than it would be in a competitive environment.

Financial monitoring The consultant reported that each agency had adopted, or was in the process of adopting, systems to ensure that financial information required to control the operations of the business was reported to appropriate levels of management on

a timely basis.

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Capital valuation procedures Each agency adheres to Australian Accounting Standards with respect to fixed asset valuation and depreciation

procedures. Details of fixed assets are also generally disaggregated to appropriate levels.

Investment appraisal The grain industry is characterised by expensive capital infrastructure which is only used for short periods each year and does not have practical, alternative application. Investment in capital works, in the form of recurrent depreciation and finance expenditure, represents a major cost for the industry.

As a general rule, each agency bases its decision to invest in new storage facilities on service level criteria due to legislative requirements to accept all grain which is presented by growers.

At present, investment appraisal procedures used by bulk handling agencies are not strictly commercially oriented. In a free market environment an organisation would only invest in capital expenditure where it met established financial criteria, such as a minimum desired rate of return. Although bulk handling agencies do not presently operate in a free market environment, the consultant recommended that the bulk handlers establish standard financial criteria and attempt to

adhere to such criteria wherever possible. Departures from established policy should be approved by the organisation's board and the reasons supporting the departure documented in the annual report.

In its response the GHA acknowledged that in the current institutional environment investment decisions were not always made on a purely commercial basis. However, the GHA also noted that if they were to operate in a competitive environment investment decisions would be based on fixed

financial criteria.

The consultant also noted that, primarily due to the limited reliance on fixed financial criteria, WACBH, SACBH and BGQ do not have documented capital expenditure control procedures. The significance of capital expenditure requires that procedures be fully recorded and correctly followed. The most effective means of achieving this is to document all procedures in a single manual.

WACBH felt they did have sufficiently documented capital expenditure control procedures and that although initial plans sent to the board may not be completely documented, full documentation is carried out after approval is obtained.

Cost accounting Cost accounting procedures were generally satisfactory. Each authority is able to determine costs on a site-by-site basis,

75

although the GEB and BGQ elect to aggregate costs on a

regional level (comprising 8-15 sites) for management purposes.

Both the GEB and BGQ have amended their cost accounting procedures as recommended by the consultants.

SUPPORTING PAPER 2

Financial disclosure and accountability The consultant found the annual reports of the bulk handling agencies to be reasonably presented and informative. There were, however, a number of areas in which the consultant felt

that annual reports could be improved, both individually, and more importantly, collectively.

The key financial accounting and reporting issue is the development of uniform reporting and accounting formats incorporating common accounting principles that will permit improved management reporting, effective performance comparisons and greater accountability to growers and the public at large.

Specific areas for improvement were identified. First, it is generally considered that the use of performance indicators has the potential to provide valuable information on the performance and efficiency of an organisation. In response to the increased expectations of shareholders and the public alike, many organisations now provide a reasonably

comprehensive list of performance indicators in their annual financial statements. With the exception of SACBH, annual reports contained minimal performance indicators. Where indicators have been developed, they have mostly been used as a measurement of historical achievement rather than as targets by which bulk handling agencies could measure their future performance. The consultant suggested performance

indicators should be developed for the industry as a whole.

The indicators should also be sufficiently disaggregated, so as to allow the efficiency of different operations to be assessed. This last criterion is particularly important. It is difficult to assess the overall efficiency of the grain industry by means of one general performance indicator. Moreover, if the intention is to focus action on areas of poor performance, it is essential that the efficiency of different facets of the industry's operations can be highlighted.

In response, the GHA noted that performance indicators were included in their annual reports. However, the authority was sceptical of the use of performance indicators in comparing different bulk handling agencies. For example, the GHA emphasised the advantage which the grower co-operatives had in terms of raising capital through tolls without incurring debt, in contrast to the statutory authorities.

The consultant also noted that there was little comment in annual reports on the way in which annual handling charges are determined. A reconciliation, outlining the relationship

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between the standard handling charge and the operating costs for the authority for the year, should be included in the annual report. This information would provide an explanation of variations in handling charges as a result of varying grain harvests.

Another area in which financial disclosure was inadequate was in relation to the analysis of salaries, wages and the deployment of staff throughout the organisations. As salaries and wages represent the largest single item of operating expenditure, a breakdown by functional areas would

allow a more useful analysis of an organisation's performance to be made. Staff numbers within functional areas should also be disclosed, along with a commentary on significant movements between periods.

In general, the bulk handling agencies argued that their current level of disclosure was adequate. Most agencies commented that their levels of disclosure were generally greater than private organisations and some public ones, and

in a competitive environment financial disclosure could undermine the position of an agency. At least some of the bulk handlers seemed to anticipate the removal of sole

receival rights when they argued that greater disclosure now would give their future competitors an advantage. The Commission can see the logic in this argument, and in general believes that economic efficiency is more likely to be

achieved through a competitive environment than from increased levels of financial disclosure and accountability in the current institutional environment.

A. 2 Rail Authorities

Forward Planning The consultant reported that forwarding planning procedures were reasonably sound for all of the rail authorities, although the SRA should produce a corporate plan in order to better co-ordinate and document its planning operations. In response the SRA pointed out that there had been significant

changes in management strategy since the consultant collected the information for the report, and that these changes directly addressed the planning process. However, the SRA also stated that:

The corporate planning process is not primarily a financial plan, nor is it the responsibility of the financial function to either formulate it or co-ordinate its implementation. (SRA submission, 21 January, 1988)

In the light of this statement, the consultant's concerns may not be entirely resolved by the SRA's management initiatives.

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Financial Monitoring Each rail authority has an accounting system in place which is able to supply relevant information on a timely basis in order to enable financial performance to be monitored.

Capital valuation procedures The consultant found that, with the exception of the SRA, capital valuation procedures were in accordance with generally accepted accounting principles. The SRA does not adhere to these principles (Institute of Chartered Accountants, Accounting Standard No. 4 'Depreciation of Non-Current Assets') as it does not fully depreciate all fixed asset items. The SRA has pointed out that Section 64(3)(d )(1) of the Transport Authorities Act, 1980, makes provision for the direct adjustment of the SRA's capital, and because of such adjustments, depreciation is not charged. Fixed assets are purchased with capital funds or other funds set aside for this purpose, while the cost of maintaining fixed assets to the end of their effective life is charged against revenue. However, this approach is not the

conventional method of treating capital costs, and is not the most appropriate procedure for matching costs and revenues over time.

Investment Appraisal Generally, the rail authorities, like the bulk handling authorities, do not base their decisions to invest in capital works on fixed financial criteria. The current institutional environment often requires various non-economic factors to be considered when investment decisions are undertaken, and as a result, the rail authorities often do not undertake detailed investment analysis.

The consultant recommended that the rail authorities always attempt to base their capital investment decisions on fixed financial criteria, and that full details of investments outside these guidelines should be given on annual reports. In other words, economic and social investment decisions should be segmented.

In response to this recommendation, the SRA noted that the New South Wales Government's Economic Development Strategy had foreshadowed the release of uniform investment appraisal requirements for use by all Government Authorities and Departments. AN commented that fixed financial criteria were not the only reason to invest, and that outlining the reason and amount for each small investment would be cumbersome and would serve no useful purpose.

Cost Accounting The consultant reported that each of the rail authorities use generally accepted cost accounting techniques. The level of detailed cost information produced, and the application of this information by certain authorities, however, could be

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expanded on. V/Line and the SRA both base grain freight rates on system-wide average costs. V/Line has a cost model which provides a reasonable level of cost disaggregation, but the organisation chooses not to use it when setting rates. To ensure efficient resource allocation, and to provide more cost effective freight rates for grain, authorities should use a cost model which offers a reasonable level of cost disaggregation.

Financial disclosure and accountability The consultant had three major criticisms of the rail authorities in respect of these areas:

. There was an inadequate level of analysis of labour and labour on-costs. Given that these costs represent such a major portion of total expenditure, a cost and

staffing break-up by functional area, or freight section as a minimum, should occur.

. None of the authorities adhered to the disclosure

requirements of the Institute of Chartered Accountants (Accounting Standard No. 16 'Financial Reporting by Segments'). Recognising that rail authorities' activities encompass a number of distinct areas, and given the issue of cross subsidisation, adherence to the

standard would allow a more detailed and meaningful analysis to occur.

. With the exception of AN and Westrail, annual reports contained minimal performance indicators. Industry specific performance indicators should be developed and used by each authority. Annual reports should contain the results of the performance indicators for both

current and previous financial years.

In response, the rail authorities generally accepted the desirability of a more detailed break-down of labour costs, and the usefulness of performance indicators. However, the SRA, AN and Westrail all opposed the recommendation that detailed financial reports should be provided for separate activities, such as grain transport. The reasons for the opposition included:

. advice from the Australian Society of Accountants that it was not necessary to segment the accounts for rail transportation into separate activities;

. the difficulty of adequately treating joint and common costs if financial reports were segmented; and

. the advantage that detailed financial information might provide to rail's competitors.

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REFERENCES

Carmichael A, Ducker J & Renshaw H 1981, Final Report of the Grain Handling Enquiry, New South Wales

Government Printer, Sydney.

Commonwealth of Australia 1986, Statutory Authorities and Government Business Enterprises, AGPS, Canberra.

Department of Management and Budget (Victoria) 1986, 'Public authority policy and rate of return reporting', Information Paper No. 1, Victorian Government Printer, Melbourne.

Spriggs J, Geldard J, Gerardi W & Treadwell R 1987, 'Institutional arrangements in the Australian wheat distribution system', BAE Occasional Paper 99, AGPS, Canberra.

V/Line 1986a, Export Grain Rates 1986-87, V/Line, Melbourne.

____ 1986b, 'Document prepared for grower meetings', V/Line, Melbourne, September 1986.

Woolfe J 1985, An Investigation of the Economic Benefits to Victorian Graingrowers of a Contractual Agreement between V/Line and the Grain Industry, for the Transport of Grain by Rail in Victoria, report for the Victorian Farmers Federation, Melbourne.

8 0

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

STORAGE AND HANDLING

Supporting Paper 3 February 1988

■

'

CONTENTS

Page

1. INTRODUCTION 1

2. OVERVIEW OF THE GRAIN STORAGE AND HANDLING 3

SYSTEM

3. CAPITAL AND COST STRUCTURES FOR STORAGE AND HANDLING SERVICES 8

3.1 Capital funding arrangements 8

3.2 Cost structure of bulk handling agencies 9 3.2.1 Grain handling 9

3.2.2 Corporate administration 10

3.2.3 Infrastructure capital and maintenance 10

3.3 Summary of bulk handling agencies' costs 11 3.4 Capital cost of storage facilities 13

3.4.1 On-farm storage 13

3.4.2 Country storage 13

3.4.3 Port terminal storage 16

3.5 Variation of operating cost with type of storage 17

3.6 Operating cost functions: country sites 19 3.6.1 New South Wales 19

3.6.2 South Australia 25

3.7 Operating cost functions: port terminals 27 3.7.1 Port terminal facilities 29

3.7.2 Cost function results 29

3.7.3 Concluding remarks 38

3.8 Construction and operating costs of grain handling facilities: a synthetic approach 40

3.8.1 Construction costs of grain handling facilities 41

3.8.2 Available construction cost data 42 3.8.3 Synthetic operating cost functions for grain handling facilities 42

4. CAPITAL AND COST STRUCTURES FOR PRIVATE HANDLERS 51

4.1 Private handling costs reported in BAJ3 studies 51

4.2 Commission survey results 52

4.3 Cost estimates for Maynegrain 55

iii

5. SCOPE FOR GENERAL COST REDUCTIONS 57

6. STORAGE AND HANDLING IN A COMPETITIVE ENVIRONMENT 60

6.1 Introduction 60

6.2 Proposed changes in storage and handling 60 6.2.1 Restructuring the statutory authorities under State ownership 62 6.2.2 Restructuring the co-operative

companies 66

6.3 Policies to limit market power 67

APPENDICES

A Estimation of operating cost functions for 71

grain handling facilities in New South Wales and South Australia

B Cost function analysis and results for grain terminals at Australian ports 97

C Synthetic construction and operating cost functions 103

D Technology and cost structures 107

E On-farm technology 131

F Results of the Commission's survey of private 138 grain handlers

REFERENCES 153

TABLES

2.1 Storage and handling charges: wheat, 1984-85 to 1987-88 5

2.2 Difference between least and most costly receival points in each State, 1982-83 to 1985-86 7

3.1 Summary of grain handling costs, 1985-86 12

3.2 South Australian port terminal receivals, 1985-86 13

3.3 Capital costs of on-farm storage, 1986-87 14

3.4 Capital costs of permanent storage 15

iv

15 3.5 Typical capital costs: country permanent storage

3.6 Capital cost of temporary storage 16

3.7 Capital cost of port terminals 17

3.8 Comparison of operating costs by storage type 18

3.9 Operating costs of on-farm storage 19

3.10 Characteristics of port terminals, 1986-87 30

3.11 Comparisons of actual and synthetic operating costs for selected sites: New South Wales, 1982-83 to 1985-86 45

4.1 Average operating costs for private grain handlers, 1982-83 to 1985-86 54

4.2 Grain handling costs: Maynegrain, 1985-86 55

A. 1 Elasticities of average operating costs with respect to regressors 82

B. l Estimated port terminal average operating cost functions 102

C. l Average construction cost functions for storage and handling facilities in Western Australia 105

C. 2 Synthetic average operating cost functions for selected country receival points, sub-terminal and Newcastle port terminal 106

D. l Estimated capital costs of building new storage 108

F.l Business structure of respondents to the Commission's survey of private grain handlers 139

F.2 Number of grain types handled by private handlers, 1982 to 1985 141

F.3 Weighted average operating costs per tonne for respondents to the Commission's survey of private grain handlers 145

F.4 Imputed capital costs for private grain handlers 145

v

FIGURES

3.1 Estimated average operating cost functions: New South Wales sub-terminals 22

3.2 Estimated average operating cost functions, New South Wales country sites: five arbitrary permanent capacities and assuming bunkers not used 24

3.3 Estimated average operating cost functions, South Australia: five arbitrary permanent capacities 28

3.4 Short-run cost functions for Bunbury and Mackay 31

3.5 Short-run cost functions for five South Australian ports 32

3.6 Short-run cost functions for medium-sized ports 33

3.7 Short-run cost functions for Geraldton, Portland and Pinkenba 34

3.8 Short-run cost functions for selected large ports 35

3.9 Short-run cost function for Fisherman Islands, Queensland 36

3.10 Long-run operating cost functions for ports 39

3.11 Synthetic and statistical average operating cost functions: receival point A 46

3.12 Synthetic and statistical average operating cost functions: receival point B 47

3.13 Synthetic and statistical average operating cost functions: receival point C 48

3.14 Synthetic and statistical average operating cost functions: sub-terminal 49

3.15 Synthetic and statistical average operating cost functions: Newcastle Port terminal 50

A.l Change in average operating costs with increasing quantity: New South Wales sub-terminals 83

A.2 Change in average operating costs with increasing capacity: New South Wales sub-terminals 84

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A. 3 Change in average operating costs with increasing quantity: New South Wales country sites 86

A.4 Change in average operating costs with increasing capacity: New South Wales country sites 87

A.5 Average residuals for New South Wales country sites 90

A.6 Change in average operating costs with increasing quantity: South Australia 93

A.7 Change in average operating costs with increasing capacity: South Australia 94

A. 8 Average residuals for South Australian sites 95

D.l Truck raised deck tipping system 110

D.2 Illustration of a 50 000 tonne storage portal scraper reclaimer 113

D .3 Strarch structure 115

D.4 Spantech structure 116

D .5 Concrete dome 117

D .6 Safeway silo 119

D.7 Aerobelt conveyor 121

D .8 Pipe conveyor 123

D .9 Tube conveyor 124

D.10 Sidewall belt conveyor 127

D.ll Sandwich belt conveyor 128

D .12 Improved rail loading facilities: large over rail garner bin 130

vii

1. INTRODUCTION

This paper provides information about the capital and cost structures of the main components of the grain storage and handling system in Australia. This information is

fundamental to the Commission's work on the evaluation of alternative systems and the assessment of the contestability of the grain storage, handling and transport system.

The Commission's evaluation of alternative systems (Supporting Paper 8) compares the costs of storing, handling and transporting grain under current institutional arrangements with those that may arise in alternative institutional settings. The evaluation embraces all stages of the distribution system, from on-farm storage to receival of grain by domestic and export market customers. To

facilitate this analysis, capital and cost information is derived in this paper for both the current costs of the storage and handling activities and the costs of

alternatives. The former costs were established primarily by analysis of information provided to the Commission by the various bulk handling agencies and other organisations.

When estimating the cost of alternatives, particular attention was given to the immediate scope for improved efficiency. In some cases the agencies provided information

on 'efficient' operating costs while in others it was necessary to establish these costs by indirect means.

The information provided in this paper is also used in the Commission's examination of the contestability of the storage, handling and transport system (Supporting Paper 7). Of particular interest in the assessment of contestability

is the cost structure of the activities involved and how costs vary with throughput. Accordingly, special attention is given in this paper to estimating cost functions where costs are specified as a function of throughput volume and other factors.

In Chapter 2 of this paper a brief overview of the storage and handling system is presented. In Chapter 3, the capital and cost structures of the existing bulk handling system are analysed. Capital funding arrangements are described and cost components are identified. Cost functions relating costs to throughput and other factors are estimated for various types of storage and handling facilities. These are

then compared with engineering-based cost functions. In Chapter 4, the cost structures of private handlers are outlined; while in Chapter 5, the scope for cost reductions in bulk handling system is discussed. Finally, in Chapter 6, policy issues of relevance to storage and handling in a

competitive environment are discussed.

Appendices are provided at the end of the document to elaborate on key technical or analytical aspects of the study. These appendices, as well as parts of the text, draw significantly upon material provided to the Commission by its

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SUPPORTING PAPER 3

consultants. Sections 3.1 to 3.5 of the text draw on

material prepared by Travers Morgan Pty Ltd: the on-farm storage costs in Section 3.4 are based, in part, on material prepared by David Bedbrook and Associates; the cost function analysis reported in Sections 3.6 to 3.8 and Appendices A, B

and C draw on a report prepared by a group of consultants led by Professor B.S. Fisher - in particular, Section 3.6 and Appendix A are based on research conducted by

Dr. R.R. Piggott, Mr. T.J. Coelli, Dr. E.M. Fleming and Professor B.S. Fisher, Section 3.7 and Appendix B are based on research conducted by Professor B.S. Fisher,

Dr. J. Quiggin and Dr. C.A. Wall, and Section 3.8 and

Appendix C are based on research conducted by

Professor B.S. Fisher. The material on technology and cost structures in Appendix D draws on material prepared by GHD-Planner West Pty Ltd. Finally, the material on on-farm technology in Appendix E is based on research conducted by the New South Wales Department of Agriculture (NSWDA).

2

2 . OVERVIEW OF THE GRAIN STORAGE AND HANDLING SYSTEM

Storage and handling costs represent a significant proportion of total grain production and marketing costs. For example, in 1986-87 storage and handling costs for wheat represented approximately 19 per cent of ' beyond farm gate' costs.

Storage and handling operations are dominated by five bulk handling agencies: the Grain Handling Authority (GHA) in New South Wales, the Grain Elevators Board (GEB) in Victoria, Bulk Grains Queensland (BGQ), South Australian Co-operative Bulk Handling (SACBH) and Co-operative Bulk Handling of Western Australia (WACBH). The GHA, GEB, and BGQ are publicly owned agencies; SACBH and WACBH are grower

co-operatives. The dominance of these five bulk handling agencies derives from a combination of legislative monopolies and commercial agreements. As a result of these legislative

controls and agreements, there are very few private handlers competing with the bulk handling agencies.

All bulk handling agencies operate in a broadly similar manner and undertake the following tasks:

. receival from growers;

. storage and stock control of grain (including carryover when required);

. co-ordination of transfers (from the receiving silo and sub-terminals to the export terminal);

. out-turn to domestic and export markets.

Receivals from growers are concentrated in the harvest period. For the dominant winter crops, the bulk handlers normally open the majority, if not all, of their silos for receivals during a four-to-six-week period in

November-January. In northern New South Wales and Queensland silos generally receive the summer crops during the period March to May. Outside these periods, receival times are dictated by a combination of the bulk handling agency's operating strategy and local circumstances, but typically as the season proceeds receivals are increasingly concentrated

at the larger and more central sites.

The number of staff employed following opening of a site depends on anticipated throughput but generally at least two or three personnel are present. Additional staff are usually casual workers and staffing levels can therefore be adjusted

if the overall harvest level differs from that originally anticipated. On a daily basis there is often considerable variability in receival levels for reasons such as the weather but the scope to adjust staff accordingly at short notice is limited.

There are four main activities in the receival of grain;

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sampling and classifying;

weighing;

unloading the vehicle and placing into storage;

application of pesticides.

Although there is a wide variety of storages in use by the bulk handling agencies, they can be classified into three main types: vertical storages (silos), horizontal storages (sheds) and bunkers (or pads). The first two types are often grouped together as permanent or conventional storage whilst the third is often termed temporary storage.

Unloading grain to bunkers and its subsequent retrieval is expensive in terms of operating costs and the permanent storage is thus normally utilised in preference to temporary storage. This may mean that bunkers are not used until the permanent storage has been filled or the number of

segregations required dictates the use of additional storage before the permanent storage has been filled; alternatively, both bunkers and permanent storage may be used during the main harvest season, with bunkers then being shut down and only permanent storage being used for the remainder of the receival period.

As mentioned, the bulk handling agencies receive the majority of their intake during the harvest season. Grain transfer, on the other hand, tends to occur over longer periods. The pattern of export shipments varies from grain to grain; sorghum, for example, is shipped relatively quickly but wheat is exported more or less uniformly over the year. Significant quantities of grain are therefore held in storage for several months. In addition, there is often a carryover of stocks

from one year to another either because the marketers have been unable or unwilling to sell it or because of logistical problems.

The out-turn of grain to markets is a relatively

straightforward process. The domestic market is normally served from inland silos or sub-terminals but sometimes from port terminals. Export markets are served from the port terminals, which are maintained by the bulk handling agencies. The bulk handling agencies control out-loading as far as the edge of the wharf (except in South Australia where the Department of Marine and Harbors owns and operates the

loading equipment). All loading activities on board the ship are undertaken by the stevedoring company.

In most cases bulk handling agencies 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 servicing that user, or by other market factors such as the price that the market will bear. Rather, charging practices tend to be based on the concept of

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cost pooling. In Table 2.1 storage and handling charges for wheat over the period 1987-85 to 1987-88 are presented.

TABLE 2.1 STORAGE AND HANDLING CHARGES : WHEAT, 1984-85 TO 1987-88 _________________________ i$l_____________________________

State 1984-85 1985-86 1986-87 1987-88

New South Wales 17.20 16.70 16.70 16.70

Victoria 13.75 13.80 14.63 15.43

Queensland ^ 20.00 19.00 17.00 17.00

South Australia ^ 12.74 11.93 12.44 11.76

Western Australia 13.05 13.05 13.05 13.70

a. charge for southern Queensland. Charge for central Queensland was $16.50 in 1986-87. The same charge applies in 1987-88.

b. not including grower toll which, in 1987-88, is $0.25 for members of SACBH ($1.25 for non-members) and $1.84 for members of WACBH.

Source: Australian Wheat Board (AWB), personal

communication, 12 January 1988

An outline of the pricing policies of the bulk handling agencies follows; a more detailed description is provided in Supporting Paper 6.

In general terms, pooling refers to the combining of items into a common fund. In its narrow sense cost pooling is simply the combining of costs, but more generally it is used to refer to the practice of using these pooled costs to charge growers an average price. The degree to which costs are pooled varies between States. The highest degree of pooling occurs in the States with co-operative bulk handling

agencies (Western Australia and South Australia). In both of these States the only price disagreggation practised involves different charges for different grain types. Growers pay the same handling charge regardless of whether their grain is delivered directly from farm to a port terminal or handled an additional number of times after being delivered to a country receival point. Further, in both States the bulk handlers impose an annual toll on growers delivering grain.

BGQ has the highest degree of disaggregation of prices. Charges are disaggregated into four separate zones - southern Queensland country, southern Queensland ports, central Queensland country and central Queensland ports. However, competition between zones is restricted by transport legislation, which limits the distance grain can be carted by

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SUPPORTING PAPER 3

road. Charges also vary according to grain type, and time of delivery.

In both Victoria and New South Wales costs are generally pooled, although there are minor exceptions. In Victoria rates vary by grain type and price differentiation also occurs with respect to border discounts, overtime surcharges, and deferred delivery discounts and penalties. In the past discounts were also offered for grain (in particular wheat, barley and oats) delivered to central receival points and seaboard terminals but these were suspended in 1984-85. Some price differentiation also occurs in New South Wales for different grain types and border and deferred delivery discounts. A trial scheme was also introduced in 1983, offering discounts to growers delivering to the new bulk receival facilities at West Wyalong but the discount was removed in 1985-86 as part of a general suspension of location-based discounts due to the large carryover situation.

Pooling of costs that occurs across sites within a particular year, as described, is known as 'spatial pooling'. Pooling of costs either within a season, when the demand for storage and handling services varies due to the delivery pattern, or between seasons, in order to smooth any fluctuations in charges that would result from production fluctuations, is known as 1 temporal pooling'. With regard to seasonal

fluctuations in production, most bulk handling agencies have established reserve funds to accommodate such situations. In seasons of greater than average production, charges are set above costs, contributing to reserves, which are then drawn upon in years when throughput is low; this allows charges to be maintained at around average cost. In the case of Queensland, the charge for fixed costs is averaged by dividing total fixed costs for a particular year by a three-year moving average of grain handled or shipped in each zone.

Overall cost pooling by bulk handling agencies will lead to individual growers rarely being charged the true cost of storage and handling the delivered grain.

The practice of pooling of storage and handling charges also creates significant transfers between growers. The Commission estimated these transfers in New South Wales for

1985-86 to range from a $19 per tonne subsidy to a $3.50 per tonne additional payment (see Supporting Paper 6). Although the estimated range of transfer payments is wide, the majority (84 per cent) of receival points fall within the range of plus or minus $2.50 per tonne. It should be noted that these calculations do not include capital costs and that the extent, and even direction, of transfers can change across years due to variations in throughput. However, the variation in costs between sites exists in all States (see Table 2.2) and illustrates that a pooled charge leads to transfers between growers.

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TABLE 2.2 DIFFERENCE BETWEEN LEAST AND MOST COSTLY RECEIVAL 1985-86 POINTS IN

(per

1 EACH STATE

cent)

, 1982-83 TO

State 1982-83 1983-84 1984-85 1985-86

New South Wales -southern 442 584 480 282

-northern 1783 440 431 1213

Victoria3 714 256 243 243

Queensland -southern 428 429 184 158

-central 153 156 119 139

South Australia 2008 461 822 442

Western Australia 701 654 684 787

a. In Victoria, costs were available only on a regional basis and figures are therefore based on least and most costly regions rather than receival point

b. In Queensland, costs were available only on a

supervisor's area basis (6 to 8 depots) and figures are therefore based on least and most costly areas rather than receival points.

Source: Bulk handling agencies, personal communication.

7

3. CAPITAL AND COST STRUCTURES FOR STORAGE AND HANDLING SERVICES

In this chapter, the capital funding arrangements used by the bulk handling agencies are described in general terms, the main factors affecting costs are outlined, the bulk handling

agencies' costs are summarised and capital and operating costs associated with different types of storage are described.

The estimation of cost functions for country receival sites and port terminals is also described, as is the estimation of engineering-based cost functions for the construction and

operation of storage and handling facilities.

3.1 Capital funding arrangements

To varying degrees, all bulk handling agencies raise funds internally from bulk handling charges imposed on users. Other sources of funds for capital financing vary, depending on the type of corporate structure. The statutory

authorities largely finance capital expenditures from external borrowings, whereas the grower co-operatives in Western Australia and South Australia largely rely on a toll system.

External funds are borrowed by the GHA in NSW and the GEB in Victoria through their respective State central borrowing authorities (namely, the New South Wales Treasury Corporation

and the Victorian Public Authority Finance Agency). This arrangement gives the State central borrowing authorities control over the amount of funds made available to the bulk handling agencies. In Queensland, BGQ raises funds on the private market, although Queensland Treasury approval is required for all loans raised. In return for the privilege of providing final approval for borrowings, the Queensland Government issues guarantees for all funds loaned to BGQ.

In contrast, the co-operative bulk handling agencies in South Australia and Western Australia obtain capital funds directly from grain growers through a system of tolls. Under this system, a surcharge on handling fees is compulsorily levied on growers; it is progressively refunded by the bulk handling agencies after some time (ten years in Western Australia and after twelve years in South Australia). This toll is effectively an interest-free loan to the bulk handling agencies. In Western Australia, WACBH has also borrowed from overseas to help finance the Kwinana terminal.

Owing to the imposition of Public Authority Dividends by the Victorian Government in 1983-84, the GEB is faced with financial costs in addition to those faced by the other bulk handling agencies. The rationale behind the Public Authority Dividend, as expressed by the then Victorian Treasurer, is that public authorities' operations involve equity effectively owned by the people of the State. In 1985-86,

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SUPPORTING PAPER 3

the dividend constituted a return on equity of about 3.6 per cent, slightly lower than in 1984-85 because of expected lower grain receivals and higher interest costs. (Lloyd 1986)

In addition to internally generated and borrowed funds, grants have been made from time to time from the Commonwealth Government for specific projects (although not all bulk handling agencies have received such grants). For example,

the GHA received a grant of $18.7 million towards the construction of the Port Kembla terminal and the upgrading of the Newcastle terminal; the Commonwealth Government made the grant through the Steel Cities Assistance Scheme.

3.2 Cost structure of bulk handling agencies

The costs of the bulk handling agencies can be divided into three broad groups:

. grain handling costs (the operating costs of receiving, treating for insects, storing and out-loading grain);

. the cost of corporate administration;

. the capital costs of building and maintaining storage facilities.

3.2.1 Grain handling

Grain handling costs are affected by several major factors: the times during which the facilities are open for receivals, the facilities' receival rate capacity, the number of segregations accepted, the volume of grain received, the rate at which grain is delivered by growers, and the type of storage used. The times during which grain receivals are allowed are determined by bulk handling agency policy. Most sites are open during the harvest period but the extent to which they are open pre-harvest and post-harvest, outside normal hours and at weekends is a matter for management

decision. The number of grades handled affects the number of storages open at any time, each storage requiring operators.

The volume of grain handled affects the number of staff employed at the site, over and above the minimum needed to open the site. Finally, the type of storage also affects receival rates and modes and, hence, receival costs. The primary difference is between receivals into permanent storage, which tend to use direct and often automated receival systems, and receivals into bunkers, which often require high cost on-site trucking.

The main operating costs associated with the storage of grain are periodic inspection, fumigation and the application of pesticides. These costs tend to vary with the number of tonnes handled and the period of storage.

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The transfer of grain between storages involves out-loading the grain at the country site and receiving it at the

sub-terminal or port terminal. The cost of both operations is principally a function of the number of tonnes handled for any given site. However, out-loading costs are also affected by whether grain is being out-loaded from permanent or

temporary storage and the achievable out-loading rate. If grain is being out-loaded from temporary storage to rail, it is generally reclaimed and then transported from the bunker to be out-loaded through the permanent storage out-loading system. Overall, the out-loading of grain in this manner tends to be a relatively high cost operation. In-loading rates vary significantly between sub-terminals and port terminals, from 150 tonnes per hour to 2000 tonnes per hour.

Operating costs associated with the export of grain from port terminals are again largely a function of the number of tonnes handled by any particular terminal. The cost is also influenced by the infrastructure and layout at the terminal

(with facilities ranging from off-port storage, requiring trucking and unloading to conveyors, to modern storages with automated ship loaders), the shipping schedule organised by marketers,and the number of different types or segregations of grain which are handled

3.2.2 Corporate administration

'Corporate administration' covers all costs incurred in corporate management. Some administrative functions such as personnel and payroll are, in the long run, variable with the number of staff employed. Other functions, however, such as accounts and planning are more general and only broadly variable with the size of the organisation. For practical purposes these costs do not respond to small changes in tonnage and can be taken as constant; there is little doubt, however, that in the long term these costs reflect the general 'scale' of operations of the bulk handling agency.

3.2.3 Infrastructure capital and maintenance

Infrastructure capital and maintenance costs cover the cost of building and maintaining receival sites and terminal storages and associated infrastructure. These items are covered in bulk handling agency accounts by interest and depreciation charges associated with the infrastructure and plant used by the bulk handling agencies. In general, these costs are historically based and are not comparable between bulk handling agencies. In this paper, capital costs of permanent and temporary storage have been imputed. These costs are based on an assumed life for the asset with a real rate of return of 5 per cent. In all cases, the cost of the associated plant and machinery has been included with the fixed infrastructure cost. These costs are all variable with the capacity provided.

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Maintenance of storage and handling facilities is carried out partly by local staff and partly by specialist maintenance gangs employed by the bulk handling agencies or by outside contractors. Maintenance costs typically cover maintenance on the terminal buildings, the sheds and silos, and plant and

equipment. Plant and equipment maintenance costs are largely a function of use and, hence, of tonnage handled. However, the other maintenance costs are primarily related to time-based deterioration and are thus a function of the size

and age of the facilities involved.

3.3 Summary of bulk handling agencies' costs

The bulk handling agencies supplied cost information to the Commission for the four years 1982-83 to 1985-86. These years include a variety of seasons so far as annual grain production is concerned. In particular, 1982-83 was a drought year in eastern Australia, while 1983-84 was an above normal year for grain production.

Bulk handling agency costs for 1985-86 are presented in Table 3.1. Costs vary between States for a number of reasons, including the size of the task to be performed, the

dispersion of grain receivals, the transport network serving storage and handling, and the relative balance of port and country storage capacities.

Country grain handling costs in New South Wales, Queensland and Western Australia are relatively high compared to those in South Australia, and (to a lesser extent), Victoria. This

difference reflects, in part, the extensive use of bunker storage in New South Wales, Queensland and Western Australia compared to the limited use of such storage in the other two States. In particular, the South Australian storage system is predominantly permanent vertical storage.

The storage system in South Australia reflects the fact that over 40 per cent of the grain harvest is delivered direct from farm to port (see Table 3.2). Port terminal operating

costs vary considerably between the States and between terminals in each State, reflecting the different

infrastructure and methods of operation. Costs at some South Australian ports are increased by the high proportion of direct deliveries and, in the case of Wallaroo and Port Pirie, by the cost of constructing bunker storage. In New South Wales, the high port terminal costs primarily arise

from the high manning levels maintained at both Sydney and Newcastle. In Victoria, Queensland and Western Australia, port costs reported in Table 3.1, reflect a mixture of high and low cost terminals. In Victoria, Portland is primarily a high throughput facility, with relatively low operating costs, whereas Geelong involves a higher cost storage operation. In Queensland, port terminals are generally high throughput facilities, but average port operating costs are increased by the high cost facility at Mackay. In Western Australia, average port handling costs are reduced by the modern low cost facilities at Kwinana, but are increased by

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the cost of operating the storage depots and annexes associated with the Esperance terminal.

TABLE 3.1 SUMMARY OF GRAIN HANDLING COSTS, 1985-86

NSW Vic Qld SA WA Ave

rag·

Grain handling ($/t) Country -1abour,other 5.13 3.05 5.83 2.40 3.94 4.07 -fuel,light,power 0.22 0.26 0.15 0.10 0.12 0.17

Port -labour 3.58 2.19 0.94 1.70 1.62 2.01

-fuel,light,power 0.28 0.20 0.21 0.29 0.37 0.27 -other 0.10 0.20 1.96a 0.54 0.52 0.66

Insecticides 0.60 0.91 0.82 0.25 0.23 0.56

Repairs & maintenance ($/t capacity) Country 1.02 0.53 1.37 1.08 1.63 1.13

Port terminal 0.22 0.28 0.32 0.41 0.54 0.35

Administration (S/t)13 1.45 2.76 2.39 1.40 2.00 2.00

Depreciation ($/t capacity) Country 1.15 1.82 1.52 0.72 3.73 1.79

Port terminal 7.02 1.82 6.34 1.73 5.43 4.47

Interest ($/t capacity) 2.67 2.76 5.60 0.00 3.25 2.86

a. Includes cost to BGQ of grain shipped through Maynegrain. b . Components of the administration charge vary between States.

Note: Costs defined in the table are on the basis of both throughput and capacity where appropriate. Should excess capacity exist within a system then the cost per tonne handled would be greater than the cost per tonne of capacity.

Source: Bulk handling agencies; Royal Commission into Grain Storage, Handling and Transport

Repairs and maintenance costs are similar between States; however, the book depreciation and interest charges show considerable variation. This variation reflects a number of

factors including the different ages of the infrastructure and the sources of funds.

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TABLE 3.2 SOUTH AUSTRALIAN PORT TERMINAL ('000 tonnes) RECEIVALS, 1985-86

Port Direct delivery Transfer Total

Ardrossan 320 - 320

Port Giles 227 - 227

Wallaroo 345 128 473

Port Pirie 277 325 602

Port Lincoln 289 614 903

Thevenard 62 109 171

Port Adelaide 220 879 1099

Total 1740 2055 3795

Source: SACBH submission, March 1987.

3.4 Capital cost of storage facilities

Information on the capital costs of new storage and handling facilities was provided in a number of submissions by bulk handling agencies and others. Cost information was supplied for on-farm storage as well as country and port terminal

storage. In all cases the cost of associated plant and machinery has been included with the fixed infrastructure cost. The information provided has been supplemented with

data collected by the Commission.

3.4.1 On-farm storage

The costs of typical on-farm storage facilities are shown in Table 3.3. These costs are based on two main sources: material contained in a WACBH submission (April 1987) and costs presented by Benson et al. (1987). Table 3.3 indicates

that the capital cost of on-farm silo storage ranges from $2.72 per tonne to $4.80 per tonne depending upon the capacity of the silo. The main additional capital cost would be that incurred for an auger, which would impose a cost of

$0.72 per tonne of throughput.

3.4.2 Country storage

Permanent storage Typical capital costs for the main types of permanent storage are given in Table 3.4. These have been derived from data contained in submissions and from other material provided to

13

TABLE 3.3 CAPITAL COSTS OF ON-FARM STORAGE, 1986-87 _______________________ ( $ per tonne )________________

Silo type

60 tonne 160 tonne 530 tonne

Costs elevated prefabricated prefabricated

transportable flat bottomed flat bottomed

Silo cost Delivery, site

45.00 28.00 22.08

preparation, erection and sealing costs 29.10 17.84 19.70

Total cost per Cost per annum tonne 74.10 4.80a

45.84 2.98a

41.78 2.72a

Auger Total cost per Cost per annum tonne 9.00*3

0.72c

9.00b 0.72°

9.00d 0.72C

a. Annuitised over 30 years at 5 per cent real interest rate. b. Use of medium capacity auger with a capital cost of $4500, to transfer 500 tonnes of grain per year. c. Annuitised over 20 years at 5 per cent real interest

rate.

d. Use of large capacity sweep auger with a capital cost of $9,000, to transfer 1000 tonnes of grain per year.

Sources: Benson et al. 1987, Royal Commission into Grain Storage, Handing and Transport.

the Commission. Table 3.4 includes the cost of machinery, which typically makes up about 25 per cent of the total capital costs. This has an estimated life of 20 years. The WACBH costs are largely historical, and thus in some cases represent outdated construction technology. The costs quoted by SACBH and BGQ for more modern designs are

significantly lower.

The choice of storage type at a particular site depends on a number of factors such as volume of grain to be stored, annual throughput to storage ratio, segregations required and

land availability. Typical annual capital costs for current storage designs can be represented by the SACBH cost for a 10 000 tonne vertical steel silo, together with the WACBH cost for a large galvanised iron horizontal shed and the BGQ

'Safeway' silo cost. The costs are summarised in Table 3.5.

These annuitised capital costs may appear high compared to the on-farm storage costs included in Table 3.3; however, direct comparison is not appropriate. Permanent storage at country receival sites is likely to have multiple throughputs in some States and incorporate capital-intensive but

14

relatively cost-effective in-loading and out-loading equipment.

TABLE 3.4 CAPITAL COSTS OF PERMANENT STORAGE

SUPPORTING PAPER 3

Storage type

Capacity

kt

Cost/t of capacity $

Life

yrs

Source

Steel vertical 6 150 40 SACBH

10 125 40 SACBH

14 + 115 40 SACBH

Concrete vertical 8 280 40 WACBH

Steel vertical 5 400 30 WACBH

15 200 30 WACBH

Concrete horizontal 27 75 40 WACBH

Gal.Iron horizontal 11 110 30 WACBH

18 80 30 WACBH

27 65 30 WACBH

' Safeway'a 20 55 30 BGQ

a. Estimated construction cost for a two-thirds self-emptying silo.

Note: The designated life spans are indicative. A

comprehensive maintenance program and rebuilding during this period may considerably increase the life expectancy.

Source: Bulk handling agencies.

TABLE 3.5 TYPICAL CAPITAL COSTS: COUNTRY PERMANENT STORAGE

Storage Cost/t of Life Annual cost

type capacity (5 per cent)

_____________________________ $_________ yrs________$/tonne

Steel vertical 125 40 7.30

Gal. iron horizontal 65 30 4.25

'Safeway' silo 55 30 3.60

Source: Bulk handling agencies.

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Temporary storage The capital costs of temporary storage such as bunkers are relatively low in comparison with vertical storage. Essentially, they involve site preparation and

infrastructure, grain-handling equipment, and, in Western Australia a conveyor loading system (CLS) is used. Typical costs for each of these items are set out in Table 3.6, together with equivalent annuitised costs calculated at a real interest rate of 5 per cent per annum. In addition to these costs, the purchase of PVC covers for the bunkers is necessary. The GEB estimates the cost of covers at $2.16 per tonne, calculated assuming a life of two uses over three years. An alternative estimate from BGQ, with covers being used once and then discarded, is $0.65 per tonne. A cost for covers of $1.40 per tonne has been used, averaging the BGQ

and GEB estimates.

TABLE 3.6 CAPITAL COST OF TEMPORARY STORAGE

Bunker Cost per tonne

Type of capacity

$

Life

yrs

Annuitised cost $/t

Non-CLS bunker

Site preparation 5 12 0.56

Equipment Sub-total

4 8 0.62

1.18

CLS bunker

Site and equipment 20 20 1.60

Source: Bulk handling agencies; Commission estimates.

3.4.3 Port terminal storage

The cost of constructing storage at port terminals tends to be greater than for country sites because storage generally needs to be concentrated in a small area (due to land

availability and cost), building costs for items such as foundations are higher, and the handling systems installed need to have a higher capacity. In general, the functions performed at port differ from those performed in the country, with rapid grain assembly and out-loading being the major functions compared with receival and longer term storage functions in the country. Some examples of recent or planned additions to terminal capacity are given in Table 3.7.

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TABLE 3.7 CAPITAL COST OF PORT TERMINALS

Site Storage

type

Capacity

kt

Cost per tonne of capacity (1985-86) $

Port Giles3 Vertical steel 75 260

Gladstone3 Vertical 40 300

Fisherman Islands'3 Vertical 60 700

Port Kemble*3 Vertical steel 260 850

a. Additional facilities. b. New facilities.

Source: Bulk handling agencies.

Table 3.7 shows that the cost of completely new facilities is much greater than the cost of providing additional capacity at existing sites. Typical costs can be derived from Table 3.7 by averaging the unit costs and converting to an

equivalent annual cost based on a 5 per cent real interest rate over a 40-year life. This gives annual costs per tonne of capacity of $16.30 for additional capacity and $45.20 for new capacity. However, when allowance is made for the high throughputs planned for new terminals, the cost per tonne of throughput is only $1 to $3 (assuming a throughput ratio of

15:1).

3.5 Variation of operating cost with type of storage

Different types of storage have different operating costs, depending on the tasks undertaken and the level of capital intensity. Vertical silos generally have the lowest operating costs: grain is received, elevated, treated with pesticide and then out-loaded with gravity assistance. Horizontal storages perform the same tasks but out-loading is

more labour intensive than for vertical storage. Finally, bunkers are more labour intensive in both in-loading and out-loading relative to permanent storage and also require covering, a highly labour intensive task. In many cases transport is required to the out-loading point. Operating costs will also depend on the technology employed at different locations. Although it is not possible to report on the impact of different technologies on operating costs at different locations it is possible to make some general observations; these are presented in Appendix D .

The WACBH submission contains a detailed comparison of the operating costs of horizontal, vertical and bunker storage.

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The costs, which are summarised in Table 3.8, are direct operating costs only and do not include overheads, repairs and maintenance, or other costs such as receival site management. Nevertheless, they indicate the relative operating costs for the different types of storage.

TABLE 3.8 COMPARISON OF OPERATING COSTS BY STORAGE TYPE ($ per tonne)

Storage type

Item Vertical Horizontal Bunker

Receival Weighing 0.11 0.11 0.11

Sampling 0.12 0.12 0.12

In-loading 0.14 0.14 0.21

Sub-total 0.37 0.37 0.44

Cover storage - - 1.14

Power 0.12 0.12 0.12

Sundry 0.11 0.11 0.11

Pest Control 0.23 0.23 0.23

Sub-total 0.46 0.46 1.60

Out-loading Labour 0.09 0.13 0.27

Loader - 0.36 0.36

Transport - 0.39

Sub-total 0.09 0.49 1.02

Total 0.92 1.33 3.06

Source: WACBH submission, April 1987.

These operating costs shown in Table 3.8 can be compared to those quoted by the GEB (submission, March 1987). Its costings, which include cleaning and maintenance, are quoted as $1.50, $2.50 and $5.00 per tonne for vertical, horizontal and bunker storage respectively. Again, these costs exclude overheads and joint site cost, but include the cost of pesticides.

Operating costs of on-farm storage are estimated to be approximately $2.00 to $2.30 per tonne, depending on the size and type of storage used (see Table 3.9). A discussion of available on-farm technology and possible developments in this area is contained in Appendix E.

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TABLE 3.9 OPERATING COSTS OF ON-FARM STORAGE ________________________ ( $ per tonne )________

Item Silo type

60 tonne elevated

transportable

160 tonne flat-bottomed prefabricated

530 tonne flat-bottomed prefabricated

Labour 0.31 0.31 0.24

Maintenance 0.23 0.17 0.13

Auger 0.23 0.23 0.23

Insecticide 0.50 0.48 0.46

Transport from paddock 1.00 1.00 1.00

Total 2.27 2.19 2.06

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

3.6 Operating cost functions: country sites

The cost analyses previously discussed deal with cost components. Of particular interest is the way the total operating cost of storage and handling varies with different levels of throughput and other factors. Such cost

relationships or functions are important in the determination of the most efficient size and structure of the grain handling and storage system. The Commission has undertaken a detailed analysis of cost functions for the storage and

handling systems in New South Wales and South Australia. Although costs vary from State to State, the cost functions estimated for New South Wales and South Australia illustrate the cost relationship inherent throughout the Australian

grain storage and handling system.

A detailed description of the cost function analysis is provided in Appendix A, which covers the following issues: estimation methods, conceptual and data problems, choices in model specification, estimation results, and analysis of results^ A summary of the procedures used and the results obtained is presented in the following paragraphs.

3.6.1 New South Wales

The procedure involved the statistical approach of regressing costs against throughput and other relevant variables. Most of the data used in the analysis were supplied by the GHA. These data were supplemented with data available from the

19

SUPPORTING PAPER 3

GHA' s annual reports and other secondary sources. Data supplied included cost information for all five sub-terminals and for a random sample of 72 country receival points for the seasons 1982-83 to 1985-86.

In addition to throughput, a number of other variables were included in the cost functions as factors likely to affect operating costs:

. Storage capacity and type - storage capacity is an important determinant of throughput capacity of a receival site. In addition different types of storage (vertical, horizontal, bunker) incur different operating costs.

. Age of facilities - the older a facility, the more

likely that its technical efficiency will be lower and expenditure on repairs and maintenance higher.

. Number of grades handled - the greater the number of grades handled at a particular site, the higher the operating costs are likely to be. Additional

segregations complicate storage and handling procedures and reduce the extent to which storage capacity can be fully utilised.

The principal results of the cost function analysis for sub-terminals and country receival sites are set out below:

Sub-terminals The model, with estimated standard errors in parentheses, is

AOC= -4.07 + 0.385A + 2.080C + 0.620/Q + 0.177Q2- 0.494C*Q (1.47) (0.109) (0.594) (0.562) (0.094) (0.197)

(R2 = 0.627)

where

AOC = average operating cost (constant 1985-86 dollars per tonne) A = weighted average age (years) C = total capacity (100 000 tonnes) Q = throughput (100 000 tonnes).

Graphs of the function for each sub-terminal are shown in Figure 3.1.

Several of the variables discussed are not included in the equation because they did not contribute to the explanatory power of the function. The equation is acceptable in terms of its capacity to explain variations in average operating costs and most regression coefficients are statistically different from zero. The coefficient of the reciprocal of throughput may not be significantly different from zero but this variable was retained because it reflects a fixed component of operating costs.

2 0

SUPPORTING PAPER 3

The general shape of the cost functions shown in Figure 3.1 indicates initial economies of scale followed by diseconomies as throughput increases. It should be noted that the majority of cost-throughput observations correspond to the downward-sloping section of the curve, suggesting that

further economies of scale could be achieved by increasing throughput. In practice, the scope for doing this may be limited by the need to store grain during the year or even

from year to year.

The age of sub-terminals seems an important influence on operating costs: it causes costs to increase over the range of throughput. Storage capacity has a two fold effect on

the relationship between average operating costs and throughput: it increases the cost of operating at low throughput but causes costs to decline more rapidly with throughput.

Country receival points The model, with estimated standard errors in parentheses, is

AOC = 5.279 + 0.123/Q - 3.764(Q/C) + 0.894(Q/C)2 + 2.702D (0.766) (0.008) (1.106) (0.319) (0.587)

(R2 = 0.604)

where

AOC = average operating cost (constant 1985-86 dollars per tonne) Q = throughput (100 000 tonnes) C = permanent capacity (100 000 tonnes) D = dummy variable having the value of unit when bunker

storages are in use and zero otherwise.

Graphs of the function for arbitrary capacities are shown in Figure 3.2. The equation was estimated using only 274 of the 288 observations, there being 14 observations on throughput

that were zero as a result of the 1982-83 drought year.

The statistical significance of the coefficients and the explanatory power of the function are regarded as

acceptable. Preliminary regressions, which included variables such as the number of grades handled and age, tended to give less meaningful results.

Attempts to estimate functions for the sub-terminals and country sites that had the throughput-capacity relationship specified in the same manner (for example, the ratio of throughput to capacity and the square of this ratio in both equations) proved unsuccessful. Importantly, however, it should be noted that by assuming particular values for age,

21

Throughput (100 0001) Mean total capacity min. max. mean A 0.419 2.538 1.946 1.848

B 1.297 3.106 2.155 3.041

C 0.967 6.935 3.966 3.481

D 0.724 4.194 3.012 3.975

E 0.622 3.535 2.355 3.650

Throughput (100 0001)

FIGURE 3.1 ESTIMATED AVERAGE OPERATING C O ST FUNCTIO NS: NEW SOUTH WALES SUB-TERM INALS

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

SUPPORTING PAPER 3

capacity and the 'bunker dummy', the functional form of the relationship between average operating cost and throughput is the same for the sub-terminals and country sites. This relationship is

2

AOC = a + b/Q + cQ + dQ

with a, b, c and d being coefficients each of which has a different value as between sub-terminals and country sites. This form implies a total operating cost function that includes what is commonly referred to as the 'flag-fall' costs associated with opening a storage site in any season as well as components of operating costs that do not vary with throughput.

An important difference between the sub-terminal and country site equation concerns the measurement of capacity. In the case of sub-terminals, capacity is measured as total (bunker plus non-bunker) capacity; in the case of the country sites the measure excludes bunker capacity. The alternative measures of capacity were tried in each equation but the explanatory power of the model was not enhanced. These results might reflect the fact that bunkers tend to have

'emergency only' status at country sites.

The inclusion of a variable to reflect the opening of bunkers was examined for the sub-terminal equation but this variable had low explanatory power because bunkers were used at most

sites in most years. However, the influence of bunkers on average operating costs was discernible in the case of country sites, where 76 of the 274 observations involved the use of a bunker.

The Commission is aware that the influence of bunker usage on average operating costs is a matter of interest to various parties. Based on the equation reported above, the

importance of the bunker variable can be interpreted as a strong indication that the use of bunkers causes average operating costs to increase significantly. Due to data limitations it cannot be regarded as an indication of the precise amount by which average operating costs increase.

The storage capacity of a particular site is fixed in the short term and becomes a constraint causing operating costs to eventually increase as throughput increases. In the longer term, however, site capacity can be varied and new facilities built. The broken curve in Figure 3.2 has been derived by using the country sites average operating cost function to derive the minimum cost associated with particular throughput levels given the flexibility of being

able to alter capacity. Bearing in mind the provisos expressed in Appendix A about the conceptual problems of estimating long-run cost functions, the broken curve can be taken as an approximation to such a function. The function should not be interpreted as the ideal 'planning' curve because it is estimated from the cost structures of existing

facilities, which may not be ideal.

23

1 = 5 0001 2 = 10 0001 3 = 20 0001 4 = 40 0001 5 = 80 0001

ESTIMATED AVERAGE OPERATING CO ST FU N C TIO N S , NEW SOUTH WALES

SUPPORTING PAPER 3

Moreover, no capital costs are included in the estimates of cost functions for particular capacities. What the function does show is that, based on existing facilities, and to the extent that the data are accurate, the unit operating costs of handling increased levels of throughput can be lowered by using higher capacity facilities. In other words, there is some evidence of economies of size associated with existing facilities. It should be noted that those likely economies extend well beyond the observed level of mean country site throughput, which is only about 22 000 tonnes per season if it is measured as the simple average of in-loadings and out-loadings.

Notwithstanding the differences mentioned, the relationship between throughput and average operating costs for country receival points is similar to that for the sub-terminals. Two important findings arise from the analysis. First,

average operating costs are U-shaped, consistent with the notion that productivity will eventually decline as throughput increases; however, for most sites the level of throughput handled corresponds to the downward sloping portion of the average operating cost function. This is

likely to remain a feature of much of the storage and

handling system, given the continued use of smaller and more costly sites and the need to store much of the grain for several months prior to shipping.

Second, there is a strong relationship between capacity and average operating costs, with large capacity sites being relatively efficient at handling high throughput but relatively inefficient at handling low throughput. This relationship is consistent with the notion of scale economies.

3.6.2 South Australia

In this section an average operating cost function for country receival points in South Australia is reported and analysed.

Most of the data for this analysis were supplied by SACBH for a sample of 50 sites. For the purpose of data collection, South Australian receival points were stratified on the basis of capacity and type of structure located at each point. A stratified random sample of 50 sites was selected for the cost analysis. Data were collected for the seasons 1982-83 to 1985-86. The data supplied for the 1982-83 season covered only eleven months because of a change in accounting procedures; hence, this year was excluded from the sample.

Further, one site constituted an outlier with abnormally high costs and was excluded from the sample. Thus, the data set for estimation comprised 147 observations (three years of data for 49 sites).

The same general considerations that applied to specifying the New South Wales cost models apply to South Australia.

25

SUPPORTING PAPER 3

There is, however, one important feature of grain handling facilities in South Australia that simplified somewhat the model specification task. Bunkers are located at only six sites and none of these are included in the sample. Thus, the problem of deciding whether to measure capacity in terms of both bunker and non-bunker capacity did not arise.

In contrast to the New South Wales system, the amount of barley and oats handled in the South Australian system is significant. There arose therefore, the problem of how to measure throughput when a mix of grains is handled. Some preliminary regressions were estimated using a variable that

incorporated a conversion of barley throughput to a wheat-tonne equivalent. The conversion was based on Kerin's (1985) estimate that the cost of handling a tonne of barley is equivalent to handling 1.2 tonnes of wheat. However, the

statistical quality of the regressions using this estimate was unsatisfactory, so a decision was taken to define throughput as the simple average of receivals and

out-loadings of grain.

A point that was emphasised to the Commission was that the dates of construction of facilities in South Australia could not be expected to be an accurate measure of embodied technology at the facilities. As in the case of New South

Wales, facilities are upgraded from time to time, with the result that their current technologies may bear little resemblance to the technology available at the time of construction. Nevertheless, it was decided that the

relevance of a weighted average age variable should be examined.

The model accepted as a basis for further analysis, with estimated standard errors in parentheses, was

AOC = 3.094 + 0.271/Q + 1.272(Q/C)2 + 0.229G (1.579) (0.030) (0.600) (0.104)

(R2 = 0.481)

where

AOC = average operating cost (1985-86 dollars per tonne) Q = throughput (100 000 tonnes) C = permanent capacity (100 000 tonnes) G = number of grades handled.

Graphs of this function for a range of five different capacities are shown in Figure 3.3.

There is only one specification difference between this model and the model reported for New South Wales: the variable measuring the number of grades handled in a particular season appears in the South Australian model. This may reflect the importance of grains other than wheat in that system.

26

SUPPORTING PAPER 3

As in the case of New South Wales, the broken curve in

Figure 3.3 represents an estimate of a long run function. The same provisos apply as applied to New South Wales. With these provisos (notably the exclusion of capital costs) in mind, there would seem to be economies of size present which

extend beyond the observed mean throughput of about 21 000 tonnes per season when throughput is measured as the simple average of in-loadings and out-loadings.

It might be tempting to compare the graphs of the estimated average operating cost functions for New South Wales and South Australia. However, such a comparison could be misleading on the grounds that there are likely to be some differences in the manner in which costs are recorded in the two systems, the comprehensiveness of the average cost data in terms of items covered, and the fact that a tonne of throughput in the New South Wales system is different from a tonne of throughput in the South Australian system because of the predominance of wheat in the New South Wales case. Nevertheless, there are certain points worth making in relation to both systems.

The same general conclusions apply including the evidence of a U-shaped average operating cost function, the tendency for most sites to operate on the downward-sloping portion of that function, the strong relationship between capacity and

average operating costs, and the likelihood of scale economies. In the case of the attainment of optimal

throughput rates, the analysis has provided some evidence that South Australian handling facilities are, on average, nearer than New South Wales sites to the optimal rate but many are below it. Again, the storage requirements in the system will limit the scope for increasing throughput.

3.7 Operating cost functions: port terminals

The aim in this section is to estimate average operating costs functions for the 20 port terminals that operated in the mainland States during the period 1982-83 to 1985-86. The ports of interest are Geraldton, Bunbury, Albany, Esperance and Kwinana in Western Australia; Wallaroo, Thevenard, Port Pirie, Port Lincoln, Port Giles, Port Adelaide and Ardrossan in South Australia; Geelong and Portland in Victoria; Sydney and Newcastle in New South Wales; and Gladstone, Mackay, Pinkenba and Fisherman Islands

in Queensland. The analysis aims at providing insight into the nature of the differences between the operating characteristics of the various types of port terminals in Australia.

27

1

1 = 5 0001 2 = 10 0 0 0t 3 = 20 0001 4 = 40 0001 5 = 80 0001

0 0 0.5 1.0 1.5 2.0 2.5 3.0

Throughput (100 0001)

FIGURE 3.3 ESTIMATED AVERAGE OPERATING CO ST FUN C TIO N S, SOUTH AUSTRALIA: FIVE ARBITRARY PERM ANENT CAPACITIES

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

SUPPORTING PAPER 3

3.7.1 Port terminal facilities

The type of port terminal facility varies around Australia. In addition to differences in the embodied technology in each site, there are wide differences in harbour characteristics and catchment areas between ports. Each of these factors has an important bearing on the operating cost

characteristics of the terminal.

The extent of the differences between ports can be gauged by comparing the characteristics of Kwinana in Western Australia with Thevenard in South Australia. Kwinana is a deep-water port with an average annual throughput for the period 1982-83

to 1985-86 of 2.5 million tonnes of grain; Thevenard is a relatively shallow port with an average annual throughput of only 248 000 tonnes over the same period. Between the ports there is significant variation in the throughput-to-capacity

ratios achieved, as can be seen from inspection of Table 3.10.

3.7.2 Cost function results

Major factors thought to be important in the determination of port terminal average operating costs include throughput, storage capacity, age of facility, ship size limitations and out-loading rate. An examination of the influence of these

factors, as well as background to the specification of the cost functions and a summary of results, is provided in Appendix B .

The preferred equation (Equation 4 in Table B.l) was used to derive short-run operating cost functions for each port terminal. These are illustrated in Figures 3.4 to 3.9. A

number of observations can be made about the operation of port terminals and the figures and estimated residuals from the preferred cost function. After allowing for the inherent features of each terminal, such as age and shallow port depth, a number of ports appear to have been more costly or less costly to operate over the sample period when

compared with the average cost function. A range of local factors may lead to differences between the predicted operating costs (based on the estimated cost function) and actual costs at a specific site. Among these factors are the following:

. Road receivals - additional costs tend to be incurred when terminals receive significant amounts of grain direct from farm. Road receival facilities must be provided to classify, test and elevate small truckloads of grain; pesticides must be applied because this is the

initial point of receival of the grain into the system.

29

TABLE 3.10 CHARACTERISTICS OF PORT TERMINALS, 1986-87

Port

Throughput

kt

Storage capacity kt

Depth at berth m

Geraldton 958 533 9.4

Bunbury 0 26 8.5

Albany 979 311 12.2

Esperance 441 327 11.0

Kwinana 3054 1033 16.8

Wallaroo 258 409 9.4

Thevenard 263 208 9.7

Port Pirie 207 303 8.2

Port Lincoln 821 486 15.2

Port Giles 78 239 11.8

Port Adelaide 532 471 10.6

Ardrossan 0 339 9.2

Gladstone 188 83 11.3

Pinkenba^ 344 112 9.7

Mackay ^ 30 11 10.6

Newcastle 1683 167 11.6

Geelong 1963 845 10.5

Portland 1069 165 11.6

Sydney 2088 143 11.4

Fisherman Islands 620 60 12.7

a. Combined throughput and storage capacities for Pinkenba 1 and Pinkenba 2. b. Includes recent building.

Sources: AWB, personal communication, 2 February 1988; SACBH submission, March 1987; WACBH, personal

communication 3 February 1988; GHA submission, March 1987; GEB annual report 1985-86; BGQ

operations information report, 1985-86.

Rail receival technology - this can be variable, contributing to cost variations. Flat-topped wagons and mixed trains are costly to unload relative to hopper wagons and unit trains.

Segregations handled - costs will tend to increase as the number of different grains and grades received, stored and shipped increases.

Shipping patterns - fluctuations in shipping

availability may also be a factor. No shipping activity followed by periods of high activity requires overtime and weekend work to achieve the desired ship

turnaround.

30

• Mackay

O Bunbury

2.7

SHO RT-RUN CO ST FUNC TIO NS FOR BUNBURY AND MACKAY

• Thevenard O Ardrossan ■ Wallaroo

□ Port Pirie * Port Giles

6.4 6.8

SHORT-RUN CO ST FU N C TIO N S FOR FIVE SOUTH AUSTRALIAN PORTS

4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0

Throughput (100 0001)

FIGURE 3.6 SHORT-RUN C O ST FU N C TIO N S FOR M EDIUM -SIZED PORTS

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

• Gladstone O Port Adelaide ■ Port Lincoln □ Albany ★ Esperance

® 3 -

• Geraldton O Portland ■ Pinkenba

10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0

Throughput (100 0001)

FIGURE 3.7 SHORT-RUN C O ST F U N C TIO N S FOR G ERALDTO N, PORTLAND AND PINKENBA

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

4.0

3.5 -

3.0 -

2.5 -

·â–¡----- □

1.0 -

• Newcastle O Sydney ■ Geelong □ Kwlnana

0.5 -

20.0 21.0 22.0 23.0 24.0 25.0 26.0 27.0 28.0

Throughput (100 0001)

FIGURE 3.8 SHORT-RUN CO ST FU N C TIO N S FOR SELECTED LARGE PORTS

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

12.0 13.0

FIGURE 3.9

Π l I I I I I I I ------- 1 —

14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0

Throughput (100 0001)

SHO RT-RUN C O ST FUNCTIO N FOR FISHERMAN ISLANDS, Q UEENSLAND

24.0

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

SUPPORTING PAPER 3

These factors tend to be local in nature and are difficult to model because of lack of detailed site cost data. The local impact of some of these factors should be kept in mind when

the cost function results are used to address the relative costs of different port terminals. The port terminals with high operating costs compared with the predicted values from the cost function were Kwinana and Esperance in Western Australia; Wallaroo, Port Lincoln, Port Adelaide and Ardrossan in South Australia; Sydney and Newcastle in New

South Wales; and Gladstone in Queensland. In addition, the observed average operating costs during the sample period at Bunbury in Western Australia were very high because of the characteristics of the terminal. The Commission understands that it has since been decided to close down the Bunbury terminal.

Kwinana is a large terminal compared with most in Australia, but observed operating costs suggest that the potential gains associated with a large throughput have not been fully captured. It should be noted, however, that the Kwinana terminal has been the one with the lowest average operating costs in Western Australia. The terminal at Esperance serves

an isolated region in the south-eastern part of the Western Australian wheat belt. Throughput at the port is variable and this may be a contributing factor to observed operating costs being higher than predicted for a terminal with the

characteristics of Esperance.

The Wallaroo, Port Lincoln, Port Adelaide and Ardrossan terminals all have fairly low throughput levels. They also accept a significant proportion of receivals by road. Although Ardrossan does not have the lowest throughput in

South Australia, it does have a low throughput-to-storage ratio and is a shallow port. Port Adelaide is similar to Geraldton in Western Australia in terms of throughput level; however, on average, the terminal at Port Adelaide appears to be more costly to operate than the one at Geraldton. This difference would at least partly be explained by the fact that Port Adelaide deals with nearly all of South Australia's

local usage by millers and maltsters.

Both the Sydney and Newcastle terminals have a high

throughput compared with the majority of terminals around Australia, but even so there is evidence of cost

inefficiencies at both terminals. An inspection of the operating cost components for the New South Wales terminals compared with those of other terminals indicates that labour costs are the major contributor to high operating costs, a

fact well recognised by the GHA. The major factor

contributing to higher than expected operating costs at Gladstone appears to be low throughput at the terminal compared with the predicted level of throughput that would result in minimum operating costs. Gladstone has been upgraded but recent seasons have not provided sufficient throughput to fully utilise the new facilities.

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SUPPORTING PAPER 3

Given their throughput levels and other characteristics, eight terminals (Geraldton and Albany in Western Australia; Thevenard, Port Pirie and Port Giles in South Australia; Geelong and Portland in Victoria; and Pinkenba, Mackay and Fisherman Islands in Queensland) appeared to be relatively cost-efficient compared with other facilities.

As can be expected, substantial reductions in throughput for a given terminal cause average operating costs to rise rapidly. For example, during the drought year of 1982-83, throughput in eastern seaboard terminals was reduced to as little as 10 per cent of the average (the GEB noted that in 1982-83 grain had to be shipped back from ports to the country for stockfeed purposes, increasing terminal costs). As a consequence, average operating costs for that season were up to 400 per cent of what might be expected in a normal season. High levels of throughput might also be expected to result in rising average costs as diseconomies of utilisation

(given fixed capacity in the short run) set in. Such

diseconomies could include site congestion, equipment breakdowns, and management and labour difficulties.

It appears that throughput at most port terminals in Australia is not large enough to push them onto the

increasing part of the short-run average cost function. It is possible that there is a degree of over-investment in port terminal facilities. This is consistent with the

observation that, in the past, statutory bulk handling authorities appear to have constructed a handling system designed to cope with the maximum conceivable harvest.

The estimated long-run average operating cost function, derived using the preferred equation, is shown in Figure 3.10. No evidence of diseconomies of size in the operation of port terminals could be detected. This finding is consistent with that of Dagher and Robbins (1987), who derived long-run average cost curves for grain export elevators in the United States.

3.7.3 Concluding remarks

There is considerable variation in the characteristics of port terminal facilities in Australia. Some facilities, such as Fisherman Islands, have been designed as high

throughput-to-storage-capacity facilities; others, such as Kwinana, have a large amount of storage capacity at the port. Apart from differences in storage capacity among ports, there are differences in the ages and types of

facilities, the capacity to handle large ships, the ability to receive and out-load at the same time, the existence of dedicated paths for major grains, the number of grain types and grades being handled, and the pattern and type of shipping presented. In addition, there appear to be differences in the mean level of average operating costs between States after correcting for differences in port characteristics. Such differences could result from

38

Oqbar = 13.0 ☆ qbar = 2.0 Dqbar = 7.0 Δ qbar = 3.0 ■ qbar= 10.0 • LRAC

★ qbar = 5.0

9 .0 0 -8.00 -

5.00 -ο 4.00-

2.0 0 -

® -- < 1 .0 0 -8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0

Throughput (100 0001)

FIGURE 3.10 LONG-RUN OPERATING COST FUNCTIONS FOR PORTS

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

SUPPORTING PAPER 3

differences in accounting practices across States, differences in incentive structures associated with different forms of organisation of bulk handling agencies or

differences in the level of operational efficiency.

Two major points of interest emerge when one considers the results presented in this section. The first is the level of actual throughput in most years compared with the level that would result in achieving the projected minimum average operating cost, given the current port facilities and incentive structure. The second is the level of actual average operating costs compared with what might be achieved in a technically and economically efficient plant. After correcting for some ports' inherent deficiencies associated with age and port depth, a number of ports appear to have higher than expected average operating costs as a result of

insufficient throughput. Although there may be differences in accounting practices across States, ports in some States, such as New South Wales, have high average operating costs when compared with similar port terminals elsewhere.

Overall, there is evidence of differences in performance among States and among ports within a given State after correcting for specific port characteristics.

The estimated average operating cost functions presented in this analysis do not of themselves provide an absolute test of economic or technical efficiency. In other words, it is not possible to use the results in isolation as a measure of port terminal performance. Nor can the results presented above be used in isolation to determine the optimum number, size or placement of ports. The number, size and placement of ports should be determined in the light of transport networks, potential port catchment areas, likely future ship sizes, decisions about whether to hold grain in country or port storages, and the characteristics of both port operating and construction cost functions.

3.8 Construction and operating costs of grain handling facilities: a synthetic approach

The cost functions described are estimated using observations of the actual operating costs incurred in the storage and handling system for the years 1982-83 to 1985-86. The cost levels indicated by the functions are therefore determined by the system characteristics during that period. They are thus useful for describing the current operating cost structures but not necessarily for describing the capital and cost structures of a supplier of storage and handling services operating at maximum efficiency.

Establishment of full (capital and operating) cost functions for an efficient operator requires that the construction of storage and handling facilities be costed and the cost of technically efficient operations be determined. This is the aim of the analysis in this section.

40

SUPPORTING PAPER 3

First, construction cost functions are estimated and presented for grain handling facilities at both country receival points and port terminals. Although Western Australia data have been used to estimate the functions, the results of the analysis should be relevant throughout Australia.

Second, synthetic operating cost functions for selected grain handling facilities in New South Wales are presented. These functions are derived using an engineering approach and are designed to represent the operating costs that would face an

efficient operator using the existing facilities; that is, assuming no improvement in storage and handling technology. Estimates are also made for the situation in which some investment in improved facilities occurs.

The results presented in this section serve two purposes. First, the construction cost functions are employed in other Commission research, where the question of the contestability

of the grain handling industry is examined (see Supporting Paper 7). Second, the operating cost functions derived using a synthetic aproach are compared with those for a number of New South Wales sites that have been examined previously in this paper. This provides a benchmark for reductions to unit costs that might be achieved in the grain handling system.

3.8.1 Construction costs of grain handling facilities

There is a wide range of types of facilities employed in the storage and handling of grain. The type of facility used at country receival points varies from bunker storage to various types of horizontal sheds and vertical silos. Typically, a

number of different types of storage will be placed at a single site. This pattern is repeated at sub-terminals and, to some extent, at port terminals. At ports, there is a need for the construction of facilities (such as shipping gantries) not required elsewhere. In addition, the conveyor system at port terminals may be required to operate at much higher capacities than elsewhere. It follows that, on average, port terminal facilities will be more costly to construct per tonne of capacity than will storage and handling facilities at country receival points. The higher in-loading and out-loading rates required at sub-terminals in comparison with country receival points will place them in an intermediate position with respect to construction cost per tonne.

For a given type of facility, construction cost is expected to be a function of capacity. It is expected that

construction cost per tonne of capacity is a declining function of capacity, at least over some range, because there are fixed start-up costs for any construction activity associated with establishing site offices and amenities, assembling the necessary equipment, and employing construction workers. Such costs, together with others that are fixed regardless of the capacity of the facility

41

SUPPORTING PAPER 3

constructed (for example, weighbridges, sampling facilities), will be spread over the whole construction task. The surface area of some structures, such as cylinders, increases more slowly than their capacity as their diameter is increased. Such effects may be another source of economies, although it must be recognised that the requirement for increasing wall thicknesses associated with larger capacity vertical structures may offset any gains after some point.

The location of grain handling facilities may have some bearing on construction costs. For example, receival points located long distances from areas of supply of construction materials are likely to be more costly to construct than those located close to capital cities. It is necessary, therefore, to adjust for any cost disadvantages associated with particular locations when considering construction cost

data for specific grain handling facilities.

3.8.2 Available construction cost data

The data used in the estimation of the construction cost functions were provided by the engineering consultants Macdonald Wagner Pty Limited. These data consist of

estimates, expressed in 1986 values, of the cost of

constructing the existing grain handling facilities at a large number of sites in Western Australia. The estimates were made by taking the original design of each facility at each site and costing each component required in construction given the specific characteristics of each location.

Data were obtained for eight types of country storage and handling facilities (specified in Appendix C ) in addition to facilities at port terminals.

The general shape of the functions reported in Appendix C (Table C.l) involves a curve sloping downward to the right. This indicates that on a ' per tonne of capacity' basis, construction costs decline as capacity increases. There is no evidence that the construction cost function begins to increase after some level of capacity. This finding is in accord with the estimates of the replacement costs per tonne stored for a number of selected grain handling facilities in

New South Wales. The shape of the average construction cost function has an important bearing on the nature of the long-run average cost (construction plus operating) function for grain handling facilities. It tends to reinforce the operating economies of scale which, from the operating cost analyses discussed previously are apparent over a significant range of throughput.

3.8.3 Synthetic operating cost functions for grain handling facilities

In order to obtain independent estimates of the efficient cost of operating various types of grain handling facilities in New South Wales, the engineering company Macdonald Wagner

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was contracted by the Commission to examine the cost of operating three country receival points, one sub-terminal and the Newcastle port terminal. The technique was to develop synthetic cost functions based on the efficient use of the facilities at each site and compare these with the empirical cost functions estimated for those sites. The methodology involved is summarised below; it is explained in more detail in Appendix C.

To undertake the analysis, the current technical

specifications of the facilities at each site were determined and actual grain movements for the years 1982-83 to 1985-86 were taken as the basis for making cost estimates. The aim was to facilitate a comparison by simulating the conditions

actually experienced by the New South Wales GHA during the period for which the statistical cost functions reported in Section 3.6 were estimated.

Operating costs for each site were defined as being the cost of repairs and maintenance, fuel and power, insecticides and fumigants, labour costs including on-costs and road haulage of grain to and from bunkers.

Based on the known operating capacities of the equipment and facilities at each site, and allowing for the constraints associated with normal operating conditions (fluctuating receivals, equipment breakdowns and maintenance, unavoidable

labour and management limitations, site congestion, and so on), the minimum level of resources required for each operation was estimated and costed in a spreadsheet model. Data used in the model comprised a combination of technical specifications and subjective judgments about the effect of certain factors on operating efficiency.

The total operating costs over a range of throughputs, including those experienced during the period 1982-83 to 1985-86, were calculated. To maintain consistency with the cost functions estimated elsewhere in this report, throughput was defined as the average of in-loadings and out-loadings at

a particular site.

The cost and throughput data for each facility derived from the spreadsheet models were used to estimate efficient average operating cost functions. The function specification and the results of estimation are presented in Appendix C

(Table C.2). It is of interest to note that the operating cost functions derived from the engineering models exhibited the same typical U-shape as the actual cost functions estimated previously. Graphs of the actual and efficient average operating cost functions are shown in Figures 3.11 to 3.15.

As a summary measure, the means of the average actual operating costs over the period 1982-83 to 1985-86 were compared with the means of the average synthetic operating costs for each site. These data, together with observed throughputs for the period, are shown in Table 3.11. In all cases except one, the synthetic costs were below the observed

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costs for the observed range of throughput. In the case of the single exception, the synthetic and the observed costs were very similar.

Although the sites studied represent a very small sample, there appears to be scope for improved efficiency and a tendency for the divergence between observed and synthetic average operating costs to increase as the size of the facility increases. The largest divergence occurs at Newcastle, which is not surprising considering the operating difficulties the terminal experienced during the period of analysis.

In trying to draw general conclusions from these results about potential efficiency improvements in the storage and handling system, it is important to consider the nature of the potential cost savings implied by this analysis. They arise through using the existing facilities and equipment as efficiently as is practicable, without being constrained by inefficient labour and management practices. The Commission recognises that in some cases the types of productivity

improvements implied by the analysis are being implemented. In New South Wales productivity has improved and is

continuing to improve since the period (1982-83 to 1985-86) used to estimate the actual cost functions.

The GHA submitted to the Commission that some improved facilities were in operation during the period of the study but were not accounted for in the determination of the synthetic cost curves. In a limited number of cases this

was true: the improved facilities were not included because of the limited data available to the Commission and its consultants at the time of the analysis. However, the effect of the inclusion of such improved facilities in the analysis would have been to lower the estimated synthetic cost curve and thus increase the difference between the observed cost function and the synthetic 'efficient1 cost function. In other words, any bias in the Commission's analysis is likely to result in conservative estimates of the potential cost savings to be gained.

It should also be noted that the analysis deals with the sites in isolation and does not account for any long-run dynamic improvements in efficiency that may result from improved investment decision-making across the system and improved co-ordination and scheduling of grain flows.

The results of this analysis, together with information from other sources, are used in the Chapter 5 to derive indicative potential cost savings that may emerge in the short term in a competitive storage and handling environment.

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TABLE 3.11 COMPARISONS OF ACTUAL AND SYNTHETIC OPERATING COSTS FOR SELECTED SITES: NEW SOUTH WALES, 1982-83 TO 1985-86

Site Throughput

(100 OOOt)

Min. Max. Mean

Average actual operating cost:mean

for period $/t

Synthetic average operating cost:mean

for period S/t

Mean difference between observed and

synthetic costs per cent

R.p. A 0.68 1.33 0.98 3.01 2.61 -13

R.p. B 0.17 0.43 0.34 3.20 3.28 + 2

R.p. C 0.62 0.80 0.73 4.00 3.13 -22

S-t. 1.30 3.00 2.15 2.89 1.71 -41

Newcastle 7.97 22.84 17.27 3.85 2.09 -46

Note: R.p. = Receival point S-t. = Sub-terminal

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

45

• Synthetic O Statistical

SYN TH ETIC AND STATISTICAL AVERAGE OPERATING C O S T FUNC TIO NS:

0 Synthetic O Statistical

0.58

FIGURE 3.1 2 SYN TH ETIC AND STATISTICAL AVERAGE OPERATING CO ST FUNCTIO NS: RECEIVAL PO IN T B

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

< 6 -

• Synthetic - i Statistical

55 0.70 0.1

Throughput (100 OOOt)

FIGURE 3 .1 3 SYN TH ETIC AND STATISTICAL AVERAGE OPERATING C O ST FUNCTIO NS: RECEIVAL PO INT C

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

Throughput (100 OOOt)

• Synthetic O Statistical

0.5

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

FIGURE 3 .1 4 SYNTHETIC AND STATISTICAL AVERAGE OPERATING C O ST FUNCTIO NS: SUB-TERM INAL

• Synthetic O Statistical

Throughput (100 0001)

FIGURE 3.1 5 SYN TH ETIC AND STATISTICAL AVERAGE OPERATING C O ST FUNCTIO NS: NEW CASTLE PORT TERM INAL

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

4. CAPITAL AND COST STRUCTURES FOR PRIVATE HANDLERS

In this chapter, the cost structures for private grain handlers in Australia are described. The data presented have been obtained from several sources, including the Commission's own survey of private handlers, Maynegrain, past

studies conducted by the Bureau of Agricultural Economics (BAE) and, to a limited extent, the bulk handling agencies. The discussion focusses primarily on operating costs.

4.1 Private handling costs reported in BAE studies

Before the Royal Commission was established very little information on private storage and handling costs was available. However, some information on private storage and handling charges was compiled by the BAE (1983) in its evaluation of wheat marketing in Australia. It investigated the payments made to private handlers by the New South Wales Barley Marketing Board (BMB) and the Victorian GEB for

storage on behalf of growers and end users. The BAE found that, compared with a GHA charge of $10.60 per tonne of grain received in 1982-83, the following charges applied:

. In New South Wales licensed receivers of barley with aerated storages were paid $9 per tonne in 1982-83 for in-loading, application of insect protectant supplied by the Board, storage up to 31 March, out-loadings and the

associated documentation. A further payment of 50 cents per tonne per month was made for grain held beyond the end of March. For grain held in non-aerated storage, the Board payments were $8 per tonne up to 31 March and

$0.45 per tonne per month thereafter.

. The GEB paid licensed receivers in the New South Wales 'buffer zone' $4.95 per tonne for storage and handling of wheat in 1981-82. Although there was usually no fixed time limit on the storage period, payment of 15 cents per tonne per week may have been made by the GEB when grain was not moved by some mutually agreed date.

(Usually the Board moves all grain from private storages within six months of receival).

Direct costs of operation of some Victorian private storages were likely to have been below $5 per tonne. From personal communications with the GEB, the BAE found that some merchants offered to store for a lower payment in the 1982-83 drought in order to achieve a higher throughput in their facilities. In the absence of a drought and assuming a rise in Board payments broadly in

line with movements in the consumer price index, the 1982-83 general rate could have been around $5.50 per tonne.

. Both the BMB and the GEB pay the cost of chemicals used by private handlers to control grain insects. This

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amounted to approximately $0.68 per tonne for the BMB in 1982-83.

Given the differences between the GHA charges and the BMB and GEB payments to merchants for the provision of a similar service, it would appear that the merchants' costs were somewhat less than for the GHA system. The magnitude of any cost difference was not entirely clear because of the density differences between wheat and barley and possible cross­

subsidisation between business activities.

More recently (1986-87), the GEB has paid private handlers in the Swan Hill area $6.80 per tonne for storage of up to one year. This compares with the GEB's average country storage operating costs of $4.50 per tonne and the Commission's imputed capital cost, for horizontal storage, of $3.80 per tonne; a total of $8.30 per tonne.

In 1986, the BAE followed up its 1982-83 analysis with a survey of all private wheat merchants in New South Wales with more than 500 tonne of storage capacity for hire (Spriggs et al. 1987). As with the earlier study, the objective was to

compare the 1985-86 charges of private handlers with those of the GHA for a similar service. Each merchant was asked the current charges, per tonne, for handling and six months' storage of each grain type, including oilseeds, and the service provided for these charges. The BAE found that for every grain type included in the analysis, the GHA's charge was higher than the average charge of the private handlers,

the difference ranging from $0.80 per tonne for barley to $5.59 per tonne for oilseeds. However, except for oilseeds, the GHA charges were not substantially higher than the average private charge. For example, the effective private charge for storage and handling of wheat (under permit) was very close to the GHA's charge when the $2.00 per tonne compulsory fee on all permit wheat sales was added to the private charge.

The BAE suggests that this similarity could be due to the dominance of the authority in the wheat storage and handling market, and the relative 'thinness' of the private market for handling permit wheat. That is, the private handlers set charges below the GHA charge.

For oats, oilseeds and sunflower seeds the derived wheat equivalent charges were more than $3 per tonne below the GHA's wheat charge and about $2 per tonne below the average private handlers charge for wheat. The BAE notes that these differences suggest that the private handlers charge for wheat would probably be lower in a deregulated market.

4.2 Commission survey results

The market dominance of the bulk handling agencies and the resulting lack of price competition means that charges are not likely to be a good measure of the private handlers' true cost structure. To further investigate this cost structure

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more effectively the Commission conducted a survey of private storage and handling agents located mainly in Queensland, New South Wales and Victoria.

The approach taken in this survey and the results obtained are summarised below; they are described in more detail in Appendix F. The survey sample comprised 37 private handlers identified from information received by the Commission from various sources. The total sample yielded 34 respondents, of which 23 were in New South Wales, six in Victoria, four in

Queensland, and one in Western Australia. The questionnaire is reproduced in Appendix F; it contained questions about the physical and financial nature of the businesses for the years 1982-83 to 1985-86.

Although grain storage and handling was a significant component of their business activities, a feature of the responses and of the industry, was the multi-enterprise nature of the firms involved. The sample included grain traders and merchants, stock and station agents, seed cleaners and graders, transport operators and grain millers.

In general, the nature of the storage and handling service provided by these firms was similar to that provided by the bulk handling agencies. For example, for 94 per cent of respondents, receivals were concentrated into the six to eight-week harvest period. In addition, storage periods of three to six months were the most common although periods of up to twelve months were encountered. Storage capacities ranged from 180 tonnes to over 175 000 tonnes, with average storage capacity being 25 000 tonnes and most respondents handling a number of grain types and segregations.

Due to the mixed and integrated nature of many of the

businesses surveyed, a number of respondents were unable to provide cost breakdowns in the form of interest to the Commission. To derive the best comparison of costs with those of the bulk handling agencies, a sub-sample of 11

respondents was used whose cost information was accurate and compatible with that provided by the bulk handling agencies. From this sample the weighted average operating cost per tonne was calculated for each of the survey years and for the period as a whole. The results are shown in Table 4.1.

The increased operating costs in 1982-83 were the result of reduced throughput in that drought year. The significantly lower costs in 1983-84 reflect the higher receivals resulting from that season's large crop.

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TABLE 4.1 AVERAGE OPERATING COSTS FOR PRIVATE GRAIN HANDLERS, 1982-83 TO 1985-86

Year Operating costs Average receivals

(weighted average) per respondent

___________________ $ per tonne____________________ tonnes

1982-83 4.97 5 875

1983-84 2.28 15 046

1984-85 3.24 11 369

1985-86 3.77 11 722

1982-83 to 1985-86 3.28 11 003

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

Operating cost function In order to summarise the cost relationships revealed by the private handlers' survey, a cost function similar to those estimated for the GHA and SACBH was estimated using

regression analysis. The function, with estimated standard errors in parentheses, is

AOC = 4.98 + 2.24/Q - 10.96(Q/C) + 3.65(Q/C)2 + 0.84G (1.29) (0.63) (2.45) (2.11) (2.20)

(R2 = 0.49)

where

AOC = average operating cost Q = throughput (100 000) tonnes C = storage capacity (100 000 tonnes) G = number of segregations handled

This function displays the same basic U-shape as those estimated for the bulk handling agencies and confirms that economies of scale and throughput are present. However, diseconomies eventually set in when throughput becomes excessive relative to the capacity of the site.

Capital costs Capital costs were estimated using the commercial replacement costs for the different types of storage annuitised at a real interest rate of 5 per cent per annum. This gave estimates of $4.20 per tonne capacity for silos, $4.00 per tonne for sheds, and $2.42 per tonne for bunkers. Taken over the volume of grain actually handled in the four years of

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interest, the capital cost per tonne was estimated at $5.33 per tonne. This is likely to be an overestimate of the true long-run capital cost because of the significant influence of the low volume handled in the 1982-83 drought year. In

addition, a number of respondents built storage with their own labour or with labour that would otherwise have been idle, considered only the material cost as their capital

investment.

4.3 Cost estimates for Maynegrain

Some cost information is available for the largest private grain handler in Australia, Maynegrain, which manages the Maynegrain terminal in Brisbane on behalf of BGQ, and handles

about 1 million tonnes per annum. Cost data for Maynegrain are shown in Table 4.2.

TABLE 4.2 GRAIN HANDLING COSTS: MAYNEGRAIN, 1985-86

Item Cost

$'000

Unit $ per Cost tonne

Labour 898 0.89

Insecticides, fumigants 135 0.13

Fuel, light and power 138 0.14

Repairs and maintenance 316 0.31

Rented storage 362 0.36

Other 404 0.40

Depreciation 168a 0.17

Total 2422 2.39

a. Depreciation value is significantly understated; under the management arrangement BGQ bears a major proportion of depreciation cost.

Note: Throughput is 767 000 tonnes ex BGQ and 247 000 tonnes ex growers/merchants.

Source: BGQ, personal communication, 1987.

The cost of rented storage applies to only a small part of the throughput handled (about 60 000 tonnes). The remaining operating costs (excluding depreciation) total $1.86 per tonne. This is the lowest average operating cost of any of

the port terminals and the labour cost is lower than at any

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terminal except the more automated Fisherman Islands. In

part this can be attributed to the different grains handled, particularly the high tonnage of sorghum, which does not

require segregation. In addition, in 1985-86, Maynegrain throughput was high prior to the opening of Fisherman Islands and unit costs were relatively low. Against this, barley, which is some 20 per cent less dense than wheat, represents

50 per cent of Maynegrain throughput. Allowing for these

factors, Maynegrain appears to have relatively low unit

costs.

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5. SCOPE FOR GENERAL COST REDUCTIONS

For the purpose of evaluating alternative systems (Supporting Paper 8) it was necessary to estimate the potential cost savings that are possible for storage and handling facilities in each State in a competitive environment. For this purpose, the estimated potential savings based on the synthetic cost function analysis can be used, together with information from submissions and cost differences observed

from the survey of private handlers.

The potential cost savings derived from these sources are achievable in the short term and are likely to be

conservative because they involve existing facilities taken in isolation. In the longer term, additional savings will be possible through rationalising the number of receival sites, exploiting economies of size with sub-terminals, upgrading

some facilities, and improving system-wide co-ordination and scheduling of grain flows. The Commission has opted for the conservative short-term estimates of cost savings largely because of the difficulty of estimating the longer run dynamic benefits.

The survey of private handlers provided an initial estimate of potential cost savings in country storage and handling in New South Wales. As described in Chapter 4, the survey gave

rise to a core sub-sample of 11 respondents running storage and handling operations comparable to country operations of the GHA and whose physical and financial data were

comprehensive and accurate. To compare these private handlers' costs with those of the GHA, the characteristics of each respondent (receivals and storage capacity for each year) were used as the independent variables in the operating

cost function estimated empirically for the GHA (see Appendix F).

This procedure was repeated for each site in each year of the survey and estimated the level of costs that would be incurred by the GHA if it operated sites with the same characteristics as those surveyed. A weighted average of the resulting cost estimates was derived by weighting each site cost by the quantity of grain received. This cost estimate was then compared with a similarly weighted average of the costs derived from the survey respondents.

The GHA-based average operating cost was found to be $3.83 per tonne, compared with $3.28 for the private handlers, a difference of approximately 15 per cent. This accords well with the conclusion drawn from the synthetic cost function

analysis, which also suggested that there was scope for a 15 per cent cost saving at country receival sites in New South Wales.

Several bulk handling agencies indicated in public hearings that there is scope for additional savings to be achieved at grain receival sites. It is likely, however, that the extent of possible savings will vary from State to State, depending

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on the nature of their current storage and handling systems. In the Commission's judgment, the estimated 15 per cent cost saving (approximately $0.55 per tonne) is indicative of the potential cost saving in New South Wales, where there is a range of storage types at many sites including bunkers.

On the other hand, South Australia has a high proportion of standardised vertical storage at its country sites. South Australia also operates a contract system for appointing silo agents and staff, which improves the process of matching

labour to work requirements. These observations are supported by the empirical cost function analysis, which showed that over much of the range of receival site storage capacities, South Australia had a lower cost structure than New South Wales. Accordingly, the Commission concluded that the scope for further cost reductions in South Australia is limited in the short term to about 5 per cent (approximately $0.20 per tonne).

For Victoria, Queensland and Western Australia, an

intermediate situation prevails, and potential savings of around 10 per cent (approximately $0.50 to $0.75 per tonne, depending on the State and location within the State) are likely to be possible at country sites.

For sub-terminals in the cost-budgeting model, the alternative systems costing framework (described in Supporting Paper 8) assumes that existing sub-terminals continue to be used to capacity and additional use of sub-terminals will require new storage to be built. This new storage is of a standard type across all States, so that sub-terminal costs are also common across States. Under these conditions, the specific results of the synthetic cost

function analysis as they relate to the New South Wales sub-terminals are not directly relevant. Therefore, in the absence of any reason to differentiate between States, an across-the-board indicative potential saving of 10 per cent

(or approximately $0.20 to $0.40 per tonne) was assumed at these sites.

The situation for port terminals is similar to that for sub-terminals, except that the Commission's industrial relations research (reported in Supporting Paper 10) indicated that the scope for cost savings through improved work practices was significantly greater at the Newcastle terminal in New South Wales than for any other port. Other

areas of Commission research and inquiry, including the synthetic cost function analysis, confirm this general conclusion and consequently a higher level of potential savings (20 per cent, or approximately $0.75 per tonne) was specified for Newcastle compared to 10 per cent ($0.15 to $0.40 per tonne, depending on the terminal) for the other port terminals.

The levels of cost savings estimated by the Commission were the subject of considerable debate during the second series of public hearings. Several bulk handling agencies objected to the efficiency reductions applied by the Commission,

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stating that they were too high. (Although the majority of bulk handlers agreed that efficiency savings were possible, they refused to put a figure on the level of savings they considered achievable.) It is clear, though, that the magnitude of cost savings available in the short term estimated by the Commission is relatively small, ranging from

$0.20 per tonne for country sites in South Australia to $0.75 per tonne at the Newcastle terminal.

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6. STORAGE AND HANDLING IN A COMPETITIVE ENVIRONMENT

6.1 Introduction

The Commission's preferred policy approach to grain storage and handling is outlined in section 9.4 of Chapter 9 in Volume 1. In this section further detail on the policies canvassed in Chapter 9 of Volume 1 are provided.

One implication of the Commission's preferred policy of removing sole receival rights is that the bulk handling agencies would 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 field' 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.

The Commission's views on commercialisation of the bulk handling agencies are set out below. Both the

government-owned statutory authorities and the co-operatives are considered. The chapter concludes with a consideration of the contingency policies that may be necessary in the event of a restructured bulk handling agency exploiting any market power it may have.

6.2 Proposed changes in storage and handling

The Commission received a wide range of suggestions for increasing the competitive nature of the bulk handling agencies, including changing their ownership and/or corporate structure, franchising parts of the system, and breaking up the agencies' operations into separate cost and profit centres.

While there is some merit in all these strategies, the Commission believes that the desired ' commercialisation' of the 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.

Achieving this is relatively straightforward if one of the standard corporate forms such as a grower co-operative or public company is chosen as the preferred corporate

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structure. Providing these are set up under the standard legislation covering companies or co-operatives the Commission believes that no inherent advantage or

disadvantage would be conferred upon them; while

co-operatives may be able to secure taxation advantages over a public company, this will be largely offset by restrictions on financing and on the nature and extent of business activities that can be pursued. In any case, these are corporate structures that are freely available to any competitor. As discussed in Section 6.2.2, the Commission

sees these alternatives, either co-operative or company, as being immediately available to the co-operative bulk handling companies in South Australia and Western Australia.

For the governments of New South Wales, Victoria and Queensland these options are also available for their grain handling statutory authorities. As mentioned previously, the ownership of the grain handling organisations is seen by the

Commission as being of relatively minor importance compared with the commercial and incentive structures involved. Nevertheless, the Commission considers that the governments

of New South Wales, Victoria and Queensland should address the question of ownership at the outset.

There is no legal doubt that the statutory corporations are owned by the State governments and could be sold off if required, but a case may be made on equity grounds that growers should share in the ownership of the corporations. This case is based partly on the fact that the capital invested in the grain storage and handling system was paid for by growers through storage and handling charges. This would not normally constitute a case for ownership (users of privately provided goods and services also contribute to a company's capital investment), except that in this situation growers have had no choice about using the service and paying the additional cost to 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, as Lloyd (1985) points out with respect to the GEB, the risk actually borne by the government has been minimal because of the monopoly position of the bulk handling agencies. The net contribution from government to the bulk handlers and even its potential contribution through guarantees, is likely to have been minimal.

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

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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 1 level playing field' need special consideration. As noted in Supporting Paper 2, 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 below.

6.2.1 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 give them 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.

In Australia there are a number of state-owned enterprises that operate to varying degrees as commercial entities, among them Qantas, Australian Airlines and Australian National Railways. In considering a model for corporatisation of storage and handling authorities the Commission observed the operation of these companies. It also benefited from a visit to New Zealand, where a program of corporatisation is currently being applied to a wide range of commercial activities that were previously the province of statutory authorities or government departments. Because of its application to a wide variety of enterprises, the New Zealand approach tends to have general relevance; on the other hand, the Australian corporations have usually been established under legislation and conditions that are peculiar to the particular enterprise.

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Background 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 of Volume 1, Supporting Paper 2 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 their 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.

Corporate structure 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 grains

' 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 discussed in the following paragraphs. In this

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discussion the term 'grains corporation' is used to

distinguish the restructured corporate entity from the existing statutory authorities.

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 nominally 'purchase' the existing statutory authority businesses at their full commercial value, by means of a sale and purchase agreement with the

Crown. The enterprises would pay for the assets they receive principally by issuing fully paid up shares to the Crown. Part payment could also be made in the form of cash or

promissory notes, depending on the enterprise's circumstances and comparisons with similar private sector firms. As part of this process the authority's current debt/equity ratio

would be considered and debt restructured if necessary. Any debt restructuring should take into account the emergence of new financial instruments for funding long term projects. The grains corporations should be allowed to borrow in their own right; the government should not need to act as banker beyond the short-term.

Nominated government ministers would hold the shares in the grains corporations on behalf of the various State

governments and 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.

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. Governments should work with the enterprises to identify comparable private sector norms against which the performance of the grains corporations can be assessed.

The reporting of financial information should be bound by the provisions of the Companies Act and it would be expected that the grains corporations would follow conventional and acceptable accounting policies.

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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 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, the government should act as any other customer would; that is, enter into a negotiated commercial agreement which establishes an appropriate price for the service to be provided. Private participants in the storage and handling market should be given the opportunity to tender for such government contracts. This approach would enable the government to ensure that any necessary non-commercial activities can be undertaken without restricting the grains corporations' commercial autonomy.

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 reflect views about returns on new investments, profit forecasts, borrowing capacity, and private sector dividend policies.

Diversification and expansion proposals would also need to be considered by the owners to guard against a new venture jeopardising the existing business. Further, in order to ensure that subsidiaries are covered by the accountability procedures, the grains corporations should be required to

formulate an acceptable policy on acquiring or establishing subsidiaries. As a general rule, however, no restriction should be placed on commercially justifiable activities. This includes activities extending beyond State boundaries.

In setting up monitoring and reporting arrangements care is needed to ensure that the procedures fulfil the demands of public accountability without imposing an excessive and costly reporting burden on the grain corporation or requiring it to disclose commercial information that would normally be kept in confidence.

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 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.

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Implementation issues Under a corporatisation approach, the Commission notes the following issues that would need to be addressed if such a policy were implemented. First, it is important that the share-holding ministers see their role as overseeing purely the financial interests of the government. Any situation in which a minister has an incentive to impose non-commercial requirements or constraints on a grains corporation should be avoided. In this respect it may be appropriate for a

minister of finance to be the share-holding minister rather than, say, a minister of agriculture or transport. In New Zealand, the approach taken is to have all shares in

state-owned enterprises held jointly by the Minister of Finance and a special Minister for State Owned Enterprises.

A second issue relates to the monitoring and accountability provisions. As mentioned, there is a danger that

accountability procedures could impose an excessive and costly reporting burden on the grains corporation or require it to disclose commercial information. To facilitate an

acceptable reporting system, the corporation's public reports could be augmented by additional information supplied in confidence to the share-holding ministers.

Third, if the grains corporation and other private storage and handling companies are to be able to act in a

cost-effective and integrated way they should be able to negotiate commercial contracts with other businesses in the grain distribution system and those providing ancillary goods and services.

6.2.2 Restructuring 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 its 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

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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.

6.3 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 of Volume 1 and

Supporting Paper 7, potential monopoly power will be limited by the prospect of potential entrants into storage and handling, particularly in the country system. Furthermore, monopoly power in the country will be constrained by the

transport costs that would be incurred as any individual operator attempted to capture more grain. At the seaboard, port terminals can be expected to possess significant monopoly power, although, again, there are likely to be some

influences that will diminish the extent of such power, as discussed in Supporting Paper 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 agencies

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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 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. This should result in improved competitiveness in the grain storage and

handling sector and should benefit growers and marketers. 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 corporations encounter the same disciplines as private

organisations in respect of monopoly or anti-competitive behaviour.

Grains corporations, whether private or government owned, 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 introduce elements of competition into an otherwise non-competitive 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;

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. 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 New South Wales Grain Handling

Authority: it sought a structure that would '...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)

While indicating that the concept needs to be developed further and needs to be considered by the New South Wales Minister for Agriculture and the grain industry, the GHA suggested that

. . . one possibility would be for a Grains Corporation which would oversee two subsidiary operations bodies - one for management of terminal operations and the other for management of the country storages ... Asset

ownership would be retained by the Grains Corporation which would be required by legislation to make

commercial decisions for the operation of its

facilities. This would allow non-GHA operators to tender against GHA operators for the operation of any facility under a contract or a franchise system. (GHA

submission, October 1987, p. 4)

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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APPENDIX A ESTIMATION OF OPERATING COST FUNCTIONS FOR GRAIN HANDLING FACILITIES IN NEW SOUTH WALES AND SOUTH AUSTRALIA

The material in this appendix is based on research conducted for the Commission by Dr R.R. Piggott, Mr T.J. Coelli, Dr E.M. Fleming and Professor B.S. Fisher.

A.1 Methods of cost analysis

The principal methods of empirical cost analysis have been described and evaluated in various publications. One of the most comprehensive of these is the survey paper by French (1977). Two papers have proved particularly helpful in the

context of the present problem: an early paper by

Stollsteimer, Bressler and Boles (1961), highlighting some of the problems of 'statistical' cost analysis, and a more recent contribution from Pasour (1981), highlighting certain conceptual problems in the interpretation of cost data.

The cost functions reported in this paper were derived using the statistical approach of regressing costs against throughput and other relevant variables.

A.2 Conceptual and data problems

Most of the data used in the analysis were supplied by the New South Wales GHA in response to direct requests from the Commission. These data were supplemented with data available from the Authority's annual reports and other

secondary sources.

One set of data supplied by the Authority related to the costs incurred in handling grain through the New South Wales sub-terminals. These data were collected by means of a questionnaire the Commission circulated to grain handling

authorities. They include observations for all five sub-terminals for the four seasons from 1982-83 to 1985-86, giving twenty observations in total. The period included a year (1983-84) of record wheat production and one of well below average production (1982-83) as a result of widespread drought in eastern Australia.

Another set of data supplied provided operating costs for a sample of 72 country receival points for the 1982-83 to 1985-86 seasons (288 observations in total). Sixty-seven of the sites were selected at random from the 266 sites listed in the 1985-86 annual report of the authority; another five sites were included because their grain handling functions constitute an integral component of the farm-to-ship grain handling model. The Authority also provided various other data to supplement the two main data sets described.

The literature on statistical cost analysis highlights many problems associated with the use of time-series and

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cross-sectional data for the estimation of cost

relationships. In the remainder of this section some of the problems thought to be particularly relevant in the context of the present study are discussed.

A. 2.1 Theoretical versus empirical cost functions

The long-run cost function of economic theory is very much a 'planning concept'. Conceptually, it is the locus of cost levels associated with different throughput levels when each throughput level is handled in the least cost-fashion given existing technology and current price levels. Implicit in the concept is the notion that at any time decision-makers can plan to construct cost-minimising facilities for each potential level of throughput. In this sense the long-run cost concept could be described as constituting a 'normative' view of costs: it shows what costs should be under

cost-minimising operating procedures given ideal facilities.

In contrast, the cost functions derived from the statistical analysis of costs associated with existing facilities can be viewed as a ' positive concept'. Such functions are derived from data generated by the operation of actual, rather than ideal (least-cost), facilities. Moreover, the managers of these facilities may not necessarily make decisions consistent with cost minimisation. The latter can result from informational gaps and/or institutional constraints which prevent management from adhering to cost-minimisation rules. In this regard it is worth noting that statutory grain handling authorities have a number of non-commercial objectives as a result of the nature of their enabling

legislation (see, for example, Spriggs, Geldard, Gerardi & Treadwell 1987, pp 9-10). One would expect, therefore, that attempts to derive long-run cost functions through the statistical analysis of costs associated with existing facilities would result in an overestimate of long-run costs as conceptualised in economic theory, even when the costs associated with existing facilities are measured accurately.

Measurement errors result in further problems of reconciling statistically-estimated costs with the long-run cost functions of economic theory. For one thing, measured costs

are usually based on accounting records rather than the economist's concept of opportunity cost. In the case of inputs such as pesticide or electricity, which have to be purchased in the market at the time production takes place, the market price can be viewed as coinciding with opportunity cost - a dollar spent on pesticide has the opportunity cost of a dollar that could have been spent on some other input. However, inputs (including capital items) already owned by the decision maker before production takes place tend to result in cost-measurement problems because costs associated with these inputs need to be imputed. Further discussion of the conceptual problems associated with cost measurement can be found in Lipsey, Langley and Mahoney (1981) and Pasour

(1981).

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A less subtle problem associated with cost measurement is the fact that accounting cost data may not be comprehensive. Such is the case in the present study, where little useful information was available on the capital costs of either the sub-terminals or the country receival points. The data available were based largely on estimates of historical costs. Hence, it was not possible to derive reliable estimates of the implicit rental price of capital services at each site. As a result, the present analysis is confined to a study of operating costs only.

A.2.2 Alternative means of measuring throughput

The measurement of throughput in this study is complicated by the fact that there is no single obvious definition of throughput, as there is, say, for a fruit cannery that takes in raw fruit and processes it into the canned product. The task performed at the sub-terminals and country receival points is essentially one of receiving grain and storing it until it is despatched elsewhere. The process entails the need for segregation, protection against losses from insects, vermin and weather, and the implementation of such other

safeguards as may be necessary to minimise post-harvest losses and to maintain grain quality.

Definitional problems arise for three main reasons: receivals of grain into a facility in any year need not equal outflows and the costs incurred in receiving a tonne of grain into storage do not equal the costs incurred in out-loading a tonne of grain from storage; different lots of grain might be handled differently during the storage period; and the costs associated with handling a tonne of wheat will differ

from the costs of handling a tonne of oats or some other grain, even when basically similar functions are performed for each type of grain.

Clearly, then, it is difficult to make a one-to-one

association between, say, the receivals of grain in a particular facility and cost. For any one tonne of grain received, the associated cost can vary for the reasons given. It seems that this problem is common in studies of grain handling and storage costs. A review of overseas studies suggests that other authors have had to resort to rather ad hoc measures of throughput such as 'bushels of grain handled' (however defined).

The cost questionnaire circulated by the Commission used the simple average of receivals and out-loadings as a measure of throughput, a measure consistent with that used by Kerin (1985). Since that questionnaire was the principal data source for sub-terminal costs, the same definition was used

for sub-terminal throughput in this study. Computation of the same measure of throughput for the 72 country receival points was not possible from the data supplied by the New

South Wales GHA given the time available. Rather, a measure derived from data on receivals, out-loadings and on-site transfers was developed for country receival points.

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A.2.3 Alternative means of varying throughput

Notwithstanding problems in defining throughput, problems also arise in trying to accommodate different means of varying throughput in studies of the present type. In principle, throughput can be varied in the following ways by: varying the rate of throughput per day, holding the number of days of operation per season constant (the ' rate dimension'); varying the number of days of operation per season, holding the rate of throughput per day constant (the

' time dimension' ); and by a combination of these two ways. Furthermore, the rate of daily throughput can be varied either by increasing the number of hours worked while holding the hourly rate constant, or by varying the hourly rate while holding the number of hours worked constant.

Past studies have shown that the nature of the variation in costs as throughput is varied in any accounting period is dependent upon the mix of the rate dimension and the time dimension in the throughput variation. There will be a mix which minimises the cost of handling any one particular level of throughput during the accounting period (French 1977, p. 104). While the choice of mix is likely to be constrained to some extent by institutional factors and constraints related to the pattern of grain flows from farms to storage facilities at harvest, and from one storage facility to another, there would probably remain some scope for management to alter the mix.

French (1977) argued that throughput variation in the rate dimension results in costs increasing in non-linear fashion, whereas throughput variation in the time dimension results in costs increasing in linear fashion. Another way of stating

this is that the total costs of handling a throughput of, say, N tonnes per day is invariant to the number of days that this throughput rate is maintained. This seems a

questionable assumption in an operating environment characterised by institutional constraints on input usage (for example, penalty rates for labour), machinery and labour fatigue, and day-to-day variation in the quality of grain

(perhaps due to weather) coming into the storage facility.

Overall, it is difficult to speculate about how different mixes of variation in the rate and time dimensions will affect the costs of handling a particular throughput level in any one season. A comprehensive assessment of the

cost-throughput relationship would require sufficient data to separate out the effects of the two dimensions of throughput variation. In the absence of such data, 'unusual'

observations on cost-throughput combinations might partly be explained by 'unusually efficient' or 'unusually inefficient' combinations.

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A.2.4 Fixed versus variable costs

There is a tendency to regard the total operating costs of any production activity as varying from zero at a zero output level through ever-increasing levels as output increases.

That is, operating costs tend to be regarded as synonymous with the 'textbook' concept of variable costs. However, some elements of operating costs are viewed more appropriately as being fixed, provided some output is produced. This is

likely to be the case in the context of the present study. Once the decision to open a particular storage facility is made, there will be some costs incurred which remain invariant to the rate of throughput. Some labour costs will be of this nature, as will components of electricity, fuel

and various other items (see Kerin 1985, pp 22-24). The implication for cost estimation is that the total operating cost function will have an intercept term corresponding to the level of these 1 fixed' operating costs. Conceptually, there is a discontinuity in the total operating cost function which shifts total operating costs from a zero level when the decision is made not to open a particular site to some positive level once the decision to operate has been made.

It is worthwhile to note that, just as operating costs are sometimes labelled incorrectly as variable costs, capital costs are sometimes labelled incorrectly as fixed costs. Some capital costs are fixed in the sense that they do not vary with throughput but they are not fixed in the sense that

they are unavoidable. Some of these costs can be avoided by selling off capital items and repaying loans, or by leasing out the rights to use a capital item (for example, land). (For further discussion of cost categorisation problems, see

Friedman 1966, pp 97-101, or Alchian & Allen 1969, pp 287-90. )

This discussion of conceptual and data problems has been included primarily as a reminder that empirical cost estimation is by no means a straightforward matter and it is demanding in terms of both quantity and quality of data. One should not expect that the costs recorded by a commercial entity as part of its normal accounting procedures will be all that is necessary to support a cost analysis along the

lines in standard economics texts. Nevertheless, the Commission considers that the data available for the present study are sufficient to test for some important relationships suggested by economic theory, particularly the relationship between capacity and costs.

A.3 Choices in model specification

As in all applied econometric work, it was necessary to make a number of important choices at the outset. These are discussed in turn.

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A.3.1 Commonality of sub-terminal and country receival point models

An important choice had to be made as to whether to use basically similar models for the sub-terminals and country receival points. An obvious basis for making this choice is the extent of differences in functions performed at each site. These differences would seem to be slight, since both

types of facilities serve the basic functions of receiving, storing and out-loading grain. They differ, however, in the scale of these activities. Hence, the decision was taken to specify similar functions for each type of facility but to estimate them using separate data sets. (That is, it was expected that regression coefficients would differ between the two types of facilities and that statistical results might indicate that a particular variable was important in explaining the costs of one type of facility but not of the other). This approach was similar to that adopted by Kerin

(1985).

A.3.2 Correcting for inflation

The implicit price deflator of gross non-farm domestic product was used to set all cost data in constant prices. Quarterly estimates of this deflator are published by the Australian Bureau of Statistics using a 1979-80 base; this base was changed to 1985-86 in the present study.

A.3.3 Pooling of time series and cross-sectional observations

In the case of the sub-terminals there was little choice other than to combine time series and cross-section observations due to the brevity of each series. On the other hand, the inclusion of 72 country receival points in the data set for this type of facility did allow for the possibility of not combining time series and cross-sectional

observations. However, in the absence of strong a priori reasons for believing that regression coefficients would be different across the four years included in the data set, the

decision was taken to combine the time series and

cross-sectional observations to maximise estimation efficiency.

A.3.4 Measurement of capacity

One factor likely to influence cost levels is the capacity of the grain handling facility. The GHA provides capacity measurements for each facility in its annual reports. The data are such that total capacity can be disaggregated into components of 'permanent' and 'bunker' capacities. In turn, permanent capacity can be disaggregated further into capacities of vertical and horizontal storages. This called for a decision about how capacity should be measured.

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One view is that bunkers are intended for use only in

emergency situations and reflect a decision on the part of the Authority to trade off higher capital/lower operating costs associated with permanent storages against lower capital/higher operating costs associated with bunkers. This view might lead one to define capacity as including only

permanent storage capacity in the capacity measure. Further justification for this view would be data that confirmed the 'emergency-only' status of bunkers.

While all the sub-terminals have had some bunker capacity since the start of the 1982 storage season, only 30 of the 72 country sites had bunker storage available for at least one of the seasons in the sample period. Unfortunately, there were insufficient data to determine the volume of bunker

storage capacity utilised in each season at each site. However, it was possible to determine that the frequency of opening of bunker storages for sub-terminals was 90 per cent (18 cases out of a possible 20) while for country sites it was 75 per cent (75 cases out of a possible 101). On the basis of these statistics, the 'emergency-only' status of bunkers seems more applicable to country sites than to

sub-terminals. To the extent that this is valid, the inclusion of bunker capacity in the capacity measure would seem more appropriate for sub-terminals than for country sites.

A possibility not to be overlooked, however, is that the availability of bunker storages allows more efficient use of permanent storages. This view of the role of bunkers would lead to their inclusion in the definition of total capacity, although their inclusion would also suggest the need to take into account the relative mix of permanent and bunker capacity in trying to account for cost variations. Because of this uncertainty about the treatment of bunker capacity, a decision was made to experiment with two measures of total capacity: one that included bunker capacity and one that did not.

A.3.5 Choice of dependent variable

Cost functions are usually estimated with either average or total costs as the dependent variable. If average (total) cost is chosen as the dependent variable, total (average) cost can be derived by multiplication (division) by the quantity variable. An average or total cost curve so derived will not coincide with the direct ordinary least-squares estimate of that function. The choice of dependent variable might be more or less determined by the nature of the problem. For example, if the primary aim is to predict total

cost, one would probably choose total cost as the dependent variable because the ordinary least-squares estimator will minimise the sum of squared residuals between predicted and actual total cost.

Another basis for the choice of dependent variable is 'intuitive appeal1: if the analyst is accustomed to

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analysing and interpreting average cost behaviour, then average cost is the logical choice for the dependent

variable. Such was the case in the present study.

A.3.6 Functional form

Choice of functional form is crucial in any applied

econometrics because the choice implies restrictions on the relationship between the dependent variable and individual regressors, as well as on the coefficients that are computed from the regression relationship. For example, a regression of average operating cost on the inverse of throughput alone would imply monotonically decreasing average operating costs

as throughput increases (provided the estimated regression coefficient is positive), contrary to the widely accepted notion of eventually diminishing average and marginal productivity.

In the present situation, the choice of functional form was a result of three a priori lines of reasoning. First, it was thought that average operating costs should increase eventually for any fixed capacity level. This is consistent with the hypothesis of eventually diminishing average returns

and resulted in the inclusion of a quadratic throughput term in the average cost function. Second, it was thought that average operating costs at relatively low levels of

throughput would increase as the capacity of the grain handling facility increased. For example, large capacity facilities will undoubtedly use more electricity and more man-hours of labour per unit of throughput than small capacity facilities at relatively low throughput levels, although the reverse would be expected at relatively high levels of throughput. Third, it was thought that the

functional form should be sufficiently flexible such that facilities of different capacities could have different minimum average operating cost levels and different levels of throughput at which average operating costs are minimised.

Some common functional forms are inconsistent with one or more of these relationships. These include, for example, the linear, logarithmic and semi-logarithmic forms. It might be argued that one should not rule out these possibilities and, in essence, let the 'data decide'. The authors' preference was to opt for the simplest functional forms that were consistent with economic theory, thereby ruling out any

functional form that did not allow for average operating costs to eventually increase with throughput. The preference for simplicity in functional form was to ease interpretation and to maintain an appropriate balance between data quality and the level of sophistication of the analysis.

A.3.7 Other choices

The choices outlined are what might be termed the 'major' choices in relation to model specification. Other choices had to be made in the form of selection of regressor

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variables other than throughput and capacity. Five such variables were thought to be potentially important explanators of average operating costs: turnover, the ratio of bunker to non-bunker capacity, rainfall, the age of

facilities, and the number of grades handled.

Turnover Some previous studies of the costs of grain handling have included what might be termed a 'turnover' variable as an explanatory variable, turnover being measured as the ratio of

throughput to capacity. Presumably, the expectation is that unit costs decrease with turnover over some turnover levels but eventually increase as turnover reaches a sufficiently high level. Hence, a model specification to capture this

effect would include not only turnover but also its square. In essence, the inclusion of turnover in the cost equations would be an alternative way of capturing the interaction between capacity and throughput in determining average operating costs.

Ratio of bunker to non-bunker capacity The reasoning behind the inclusion of the ratio of bunker to non-bunker capacity as a variable is the view that operating costs associated with the use of bunker capacity tend to be

higher than those associated with the use of non-bunker storages, although the view was expressed earlier that the presence of some bunker capacity at a given site could work in the direction of decreasing operating costs relative to

what they would otherwise be. Apart from difficulties in the specification of the sign of the coefficient associated with such a variable, there is a complication in that the existence of bunker capacity does not necessarily mean that

it is used in a particular season. Ideally, one would use a measure of the extent to which bunker capacity was used in each season in order to capture its effect upon average operating costs.

Rainfall A common view is that untimely rainfall increases operating costs because it can disrupt the flow of grain to storages as well as cause new segregation requirements at a particular

location and can therefore result in increased handling and treatment costs. This would provide a rationale for the inclusion of some rainfall measure with an expected positive

sign associated with its estimated regression coefficient. One particular problem that arises in defining an appropriate rainfall variable is deciding how to measure 'untimely

rain'. An approximate measure would be obtained by defining the untimely rainfall variable as a weighted average of rainfall in two consecutive months (for example, 0.6 November rainfall plus 0.4 December rainfall). Unfortunately, such a measure does not fully capture the effect of wet weather on particular days, when critical operations might have taken place or the length of time for which delivery may be

disrupted (the time for which it actually rains plus the time

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it takes for the grain to dry out sufficiently before harvesting can recommence). To perfect such a measure, it would be necessary to study daily records of operations at each site.

Age of facilities The inclusion of an 'age' variable can be rationalised on the basis of the hypothesis that the older the facility the lower its technical efficiency and the greater the expenditure on repairs and maintenance. Where a site contains more than one structure, a weighted average age variable can be computed, with the age of each structure weighted by the proportion of

total capacity it represents. Such an age variable would be an imperfect measure of embodied technology because the facilities at a particular site can be upgraded in various ways, such as increasing belt capacities and automating recording procedures.

Another problem in relation to the age of facilities is that the measure will be different if bunkers are included in the calculation. For example, for the 1985-86 season, the weighted average age of the sub-terminal 'system' (that is,

the weighted average age of each sub-terminal weighted by the proportion of sub-terminal system capacity it represents) was 8.3 years with bunkers included and 13.6 years with bunkers excluded. For the sample of country sites the figures were

13.7 years with bunkers included and 22.1 years with bunkers excluded.

Notwithstanding these problems, it was thought desirable to test the validity of weighted average age as an explanatory variable of average operating costs. The expectation was that its associated coefficient would have a positive sign.

Number of grades handled The greater the number of grades of a specific grain handled at a particular location in any season, the greater average operating costs are likely to be. This arises because of expenses associated with segregation of grain.

A.4 Analysis of results

The analysis undertaken in relation to the statistically estimated average operating cost functions is in two parts: an analysis of the responsiveness of predicted average operating costs to changes in the regressors; and an analysis of residuals.

A.4.1 Responsiveness of average operating cost

The method adopted to measure responsiveness is the elasticity of predicted average operating costs with respect to regressor variables. The elasticities can be interpreted

as showing the percentage change in average operating costs

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following a 1 per cent change in a regressor variable, assuming the values of other regressors remain constant. They are obtained by taking the partial derivative of the cost function with respect to the variable of interest (age, capacity and throughput in the case of the sub-terminals, and capacity and throughput in the case of the country sites) and multiplying this derivative by the ratio of the value of the variable of interest to average operating cost.

The elasticities are likely to differ depending on the levels at which the variables determining average operating costs are set. It is conventional to measure them at the 'point of means' for two reasons: the estimated regression function gives a perfect prediction of the mean value of the dependent variable when regressors are set at their mean values; and

the regressor means are, in a sense, typical regressor observations.

Elasticities computed in this fashion are shown in Table A.1. and discussed below.

Sub-terminals Average operating costs for sub-terminals are more responsive to age than capacity, but more responsive to capacity than

throughput. Whether the magnitudes of the elasticities are regarded as large or small is ultimately a matter for individual interpretation. The most important point about the reported elasticities is the finding that the elasticity with respect to throughput is negative (a 1 per cent increase

in throughput causes average operating cost to decline, other things being constant) and the elasticity with respect to capacity is positive (a 1 per cent increase in capacity causes average operating costs to increase, other things being constant). The intuitive explanation for the negative

elasticity associated with throughput is that, for any combination of age and capacity, the average operating cost functions have a downward-sloping portion and the majority of observed throughput levels fall on this portion of the

curve. The intuitive explanation for the positive elasticity associated with capacity is that, at some throughput levels, the higher the capacity of the facility the higher the average operating cost. This is evident from Figure A. 1, which shows that at relatively low throughput levels the general tendency is for operating costs to be higher for

larger capacity plants.

The signs of the elasticities are determined by the signs of the partial derivatives. The partial derivatives of the average operating cost function for the sub-terminals with respect to capacity and throughput are, respectively,

AOC C = 2.080 - 0.494 Q

and

AOC „

Q = 0.620/Q + 0.354Q - 0.494C

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SUPPORTING PAPER 3

These derivatives are graphed in Figures A.1 and A.2.

TABLE A.1 ELASTICITIES OF AVERAGE OPERATING COSTS WITH RESPECT TO REGRESSORS

Regressor

Elasticity at means:

Sub-terminals Country sites

Age 0.98 a

Throughput - 0.64 -0.42

Capacity 0.90 0.29

a. Elasticity not reported because regressor did not appear in country-site equation.

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

The sign of the derivative for capacity decreases linearly with throughput (Q) and becomes negative when throughput reaches approximately 421 000 tonnes. That is, for

throughput levels above this figure, average operating costs would decline with increases in capacity. It should be noted that the observed mean throughput was about 64 per cent of the throughput level at which the elasticity becomes positive.

The analysis of the sign of the derivative for throughput is complicated by the form of the derivative equation. However, the manner in which this derivative changes with changes in capacity and throughput is evident from Figure A.2. For the range of capacities examined, the derivative increases with throughput and reaches zero at different levels of throughput depending on the assumed capacity level. In general, the greater the assumed capacity level the greater the value of throughput at which the derivative is zero. That is, average operating costs tend to begin to increase at lower levels of throughput for smaller capacity sites. This relationship is consistent with the notion of eventually diminishing average and marginal productivity.

Country sites Unlike the sub-terminals, country sites' average operating costs are more responsive to changes in throughput than to changes in capacity, but, like the sub-terminals, the response to throughput increases is negative while the response to capacity is positive. The logic of these relationships is the same as for sub-terminals.

82

So-

2

l I I [ I I I Γ

1 1.5 2 2.5 3 3.5 4 4.5 5

Q

FIGURE A .2 CH ANG E IN AVERAGE OPERATING CO STS W ITH INCREASING CAPACITY:

NEW SOUTH WALES SUB-TERM INALS

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

5.5 6

SUPPORTING PAPER 3

The partial derivatives of the country sites function for capacity and throughput are, respectively,

AOC ry *y q

~~qT = 3.764Q/C - 1.788Q /C

and

AOC 7 7

Q = -0.123/Q - 3.764/C + 1.788Q/C

These derivatives are graphed in Figures A.3 and A.4.

It can be shown that the derivative for capacity is zero when the ratio of throughput to capacity (that is, turnover) is approximately 2.1. At this level of turnover, the second partial derivative of average operating costs with respect to

capacity is positive, implying that the minimum average operating costs are reached (for a given level of throughput) when the capacity of the storage facility is such as to imply a turnover rate of 2.1. The observed mean turnover rate for

the sample of sites included in the regression was 1.01, or about half that corresponding to the minimum average operating cost turnover rate. Twenty five per cent of the sites had turnover rates less than 0.51; 75 per cent of sites had turnover rates less than 1.31. The implication is that most sites are handling throughput levels that are too small given their permanent capacities. This is consistent with the findings in relation to the sub-terminals.

These findings for throughput to capacity ratios may need qualification in one respect. In order to operate at the optimal ratio, there would need to be flexibility in timing of deliveries and out-loadings so that these could be matched optimally with the technical capacities of the storage

facility. Moreover, it would imply an optimal mix of throughput variation in the time and rate dimensions. Inflexibilities in the timing of receivals and out-loadings, together with institutional constraints preventing the attainment of the optimal use of rate and time dimensions in throughput variation, could be important factors mitigating

against the attainment of the optimal throughput to capacity ratio.

It should be emphasised that, in the presence of size economies, finding the optimal throughput to capacity ratio for a given volume of throughput does not imply finding the

size of facility whose average operating costs are a minimum at that throughput level. Rather, the optimal-sized facility is the facility that can handle the given throughput in the cheapest fashion. If size economies are present, that facility will be operating at less than its minimum-cost throughput level.

From Figures A. 3 and A. 4 it is clear that the derivative of average operating costs with respect to throughput reaches zero at different values of throughput for each assumed value of capacity. The higher the level of assumed capacity, the

85

100 -I

20 -

Q = .218 C = .221 • C = 0.10

-20 -

O C = 0.15 ■ C = 0.20 L1C = 0.25 ☆ C = 0.30

FIGURE A.3 C H ANG E IN AVERAGE OPERATING CO STS W ITH INCR EASING Q UAN TITY: NEW SO UTH W ALES C O UN TR Y SITES

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

• Ο ----- O'

-10 -

30 -

Q = .218 C = .221

- 4 0 - • C = 0.14

OC = 0.18 ■ C = 0.22 □ C = 0.26

FIGURE A.4 CH ANG E IN AVERAGE OPERATING CO STS W ITH INCREASING CAPACITY: NEW SOUTH W ALES CO UNTRY SITES

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

SUPPORTING PAPER 3

greater the value of throughput at which average operating costs are at a minimum. At the mean level of capacity the derivative is negative (that is, average operating costs would decrease with increases in throughput). Again it is

important to remember that in the presence of economies of size, the derivative would be negative if any particular throughput level is handled in the least-cost fashion and capacity can be adjusted freely.

A. 4.2 Analysis of residuals

The aim in this section is to identify sites for which the estimated residuals (actual minus predicted average operating costs) are 'unusual' in the sense that they are consistently positive or negative for each season and/or their average value over the seasons included in the data set is unusually high or low. The rationale for the analysis is that the residual may contain a component due to immeasurable or unknown influences on costs, a component due to an influence

that is too slight to feasibly include in the regression, and a component due to measurement error (Johnston 1972, pp 10-11). Further, positive residuals imply a cost greater than that predicted by the regression (that is, inefficiency relative to the prediction) while negative residuals imply the opposite. This analysis of residuals, therefore, can be viewed as a first attempt at identifying relatively efficient

and relatively inefficient sites in terms of performance vis a vis operating costs.

In principle, two sets of residuals can be calculated. One set can be derived as the differences between actual operating costs and those predicted from the ordinary

least-squares regression with each regressor set at its overall (that is, across all sites) mean. An alternative set can be derived as the differences between actual operating costs and those predicted from the ordinary least-squares regression with each regressor set at a site-specific value. The latter residuals are used here since they correspond to the residuals whose sum of squares is minimised in the ordinary least-squares regression procedure. The use of the

former residuals would be inappropriate in the sense that part of the computed residual would be attributable, in essence, to the fact that a particular site has a specific regressor value that differs from the overall mean for the sample. On the other hand, the residual of interest here is that which remains after account is taken of site-specific regressor values, because it is these residuals that will contain the influence of factors not accounted for in the model specification (that is, those influences that are

expected to be captured in the error term of the underlying model).

Sub-terminals No sub-terminal had residuals that were consistently positive or negative over the four seasons. That is, there was no sub-terminal for which it could be said that omitted

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SUPPORTING PAPER 3

influences on average operating costs made the sub-terminal relatively efficient or inefficient compared to the prediction in all seasons.

The average residual over the four seasons for the

sub-terminals varied from -65 to 6 cents per tonne. Some unusual results were obtained at specific sites in selected years. Examination of these points revealed that relatively high costs at one site in 1984-85 were attributable to unusually high maintenance costs while low costs at several

sites during the drought in 1982-83 were due to the exclusion of costs associated with road transport.

Country sites There are seven country sites in the sample of 72 that have consistently positive residuals and 14 that have consistently negative residuals.

Inspection of the data on the facilities at each site reveals one general distinction between these two groups of sites. Those in the consistently positive residual group have a mix of types of storage structures (for example, a silo, horizontal storage and a bunker). On the other hand, 10 of the 14 sites in the consistently negative residual group had

a single storage structure (for example, a silo). Assuming this is not a purely chance relationship, the implication is that having a single type of structure gives rise to

economies in handling grain. This seems like a relationship worthy of further investigation.

A plot of the average residual for each site is given in Figure A.5. There are four sites that are 'outliers' in the sense of having relatively large positive residuals (using $2 per tonne as a benchmark). Of these four, three have

consistently positive residuals. The site with the largest average residual can be partially explained by the

coincidence of a low throughput and high expenditure on repairs and maintenance in 1982-83 (a not unlikely

coincidence).

There are eight sites that can be regarded as outliers in the sense of having large negative average residuals. All but one of these sites also had consistently negative residuals. The average (negative) residuals for three of the sites stand out from the others in terms of magnitude but inspection of the data did not reveal any obvious reasons for the

difference. Factors that may help explain the large negative residuals in several cases are fill-and-close operations (one location) and out-loading by road only (two sites).

One of the factors that would lead to negative residuals is the occurrence of facility upgrading at particular sites (for example, installation of faster in-loading equipment). One

of the limitations of the data set is the fact that no good measure of embodied technology was available to reflect upgrading of facilities. Another factor that could cause

relative efficiency or inefficiency is managerial ability,

89

10

- 5 -

Site number

FIGURE A .5 (Cont.) AVERAGE RESIDUALS FOR NEW SOUTH WALES CO UNTRY SITES 41 -7 2

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

SUPPORTING PAPER 3

but again it was not feasible to test for this in the

regression. Other factors whose effects could be embodied in the residuals include untimely rainfall and the number of grades handled. Such variables, perhaps imperfectly

measured, were tested in initial regressions but were found to be unimportant systematic influences on costs.

A.4.3 Responsiveness of average operating cost: South Australia

The elasticities of average operating cost for regressors (computed at the means) were 0.34 for the number of grades handled, -0.69 for throughput, and 0.39 for capacity. (The elasticities for throughput and capacity for New South Wales were, respectively, -0.42 and 0.29. ) The logic of the signs of these elasticities is the same as for New South Wales.

The partial derivatives of average operating costs for respect to capacity and throughput are, respectively,

4.156Q/C2 - 2.520Q2/C3

-0.272/Q2 - 4.156/C + 2.520Q/C2 .

These derivatives are graphed in Figures A.6 and A.7.

For any level of throughput, the optimal turnover rate (that is, the value of the ratio of throughput to capacity at which average operating costs are a minimum for any throughput level) is 1.65. (The corresponding figure for New South Wales is 2.1.) The observed mean turnover rate was 1.07 (65 per cent of the optimal rate). Twenty five per cent of sites had turnover rates less than 0.7 while 75 per cent had turnover rates less than 1.3. As in the case of New South Wales, the implication is that many sites appear to be handling throughput levels that are too small relative to their capacities.

The derivative of average operating costs with respect to throughput reaches zero (that is, average operating costs are at a minimum) at increasingly higher levels of throughput as site capacity increases (Figures 3.1 and A.7). The comments made on this point in relation to New South Wales also apply

to South Australia.

A. 4.4 Analysis of residuals: South Australia

Nine of the 49 sites in the sample had consistently positive residuals in each of the three years of the data set:

thirteen sites had consistently negative residuals. Recall that positive residuals imply observed costs higher than the predicted value of average operating costs and negative residuals imply lower observed costs relative to the prediction.

AOC C

and AOC Q

92

- 5 -

- 1 0 -

Q = .213 C = .230

- 1 5 - • C = 0.15

O C = 0.18 ■ C = 0.20 □ C = 0.24

FIGURE A.6 CH ANG E IN AVERAGE OPERATING CO STS W ITH INCREASING QUANTITY: SO UTH AUSTRALIA

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

>AOC

100 -I

— 200 -

-3 0 0 -

-4 0 0 -

-5 0 0

Q^= .213 C = .230 • C = 0.14

O C = 0.22 ■ C = 0.30 □ C = 0.38

FIGURE A.7 CH ANG E IN AVERAGE OPERATING CO STS W ITH INCR EASING CAPACITY: SOUTH AUSTRALIA

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

FIGURE A.8 AVERAGE RESIDUALS FOR SOUTH AUSTRALIAN SITES

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

SUPPORTING PAPER 3

Inspection of the data on the facilities at each site did not reveal any obvious common features of the sites in a

particular category. For example, the mixed versus single facility distinction apparent in the New South Wales case did not seem to apply. Nor does it seem that the two groups can be distinguished on the basis of their grain intake and output rates.

A plot of the average residual for each of the 49 sites is given in Figure A.8. There were only two sites with average positive residuals exceeding $2 per tonne and two sites with average negative residuals exceeding $2 per tonne in absolute value.

In the two cases where average positive residuals exceed $2 per tonne the reason appears to be heavy expenditure on repairs and maintenance allied to low throughputs. In the first case, receivals in 1985-86 were 1658 tonnes, compared with an average of 4057 tonnes and repairs and maintenance

expenditure was $20 per tonne. In the second case, receivals in 1984-85 were 9340 tonnes (average 15 852 tonnes) and repairs and maintenance expenditure $31 per tonne. These costs can therefore be regarded as atypical of the normal operating costs at these sites.

In the two cases where average negative residuals exceed $2 per tonne there does not appear to be any suitable

explanation.

96

APPENDIX B COST FUNCTION ANALYSIS AND RESULTS FOR GRAIN TERMINALS AT AUSTRALIAN PORTS

The material in this appendix is based on research conducted for the Commission by Professor B.S. Fisher, Dr J. Quiggin and Dr C.A. Wall.

B .1 Determinants of terminal operating costs

Factors thought to be important in the determination of port terminal average operating costs are throughput, capacity, the age of the facility, port depth and out-loading rate.

B.1.1 Throughput .

It was expected that average operating costs would vary significantly with changes in the level of throughput. Two throughput measures were defined: the first was simply the

average of in-loadings and out-loadings of all grain; the second was a weighted average, the weights being the densities of each grain type relative to that of wheat. The

second variable was defined in an attempt to account for the effects that 'bulky' grains, such as oats, have on flow rates within the handling system. The two measures of throughput were highly correlated because of the dominance of wheat in Australian grain trade.

B.1.2 Capacity

As mentioned, there are substantial differences between the characteristics of port terminals in terms of 'size'. Storage capacity is not a good measure of size given the large differences in turnover rate between a terminal such as Kwinana and one such as Fisherman Islands. In the present study, size of port terminals was measured using the mean throughput over the sample period as a proxy. In the case of eastern seaboard terminals, the drought year (1982-83) was excluded in calculating mean throughput. Mean throughput over a longer time period (including observations from the

1970s, for example) was not used as a measure of capacity because a large proportion of the port terminals have been upgraded in recent years.

B.1.3 Age of the facility

An age variable was specified as a proxy for the technology embodied in each port terminal. The variable was computed by taking the age of each structure at each site and weighting it by the proportion of total capacity it represented at that site. Major additions to facilities, such as those completed at Albany in 1983-84, led to a substantial drop in the weighted average age of the facility. The age variable is an

imperfect measure of technology, particularly in the case of

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a facility such as Albany, where major improvements were made to the handling equipment installed in the existing silos at the same time as new storages were added.

B . 1.4 Port depth

It was hypothesised that ports with the capacity to load large ships would have lower average operating costs than those restricted to loading smaller vessels, other things being equal. It could be expected that, as the proportion of tonnage carried in large ships rises, losses in ship turnaround time, for example, would fall. In an attempt to capture this effect, a variable representing the depth of the port terminal berth was specified. This is only an

approximate measure of potential ship size because the final weight of cargo shipped will depend not only on the water depth but also on the prevailing tides and the nature of the ship in question.

B.1.5 Out-loading rate

One measure of the physical efficiency of a facility is its out-loading rate. It was hypothesised that average operating costs would be inversely related to effective out-loading rates. The effective out-loading rate was obtained from each terminal operator and represented a measure of the actual rate at which grain could be delivered to a ship. In some instances, the estimate of effective out-loading rates was far less than the capacity of the conveyor system. The estimated effective out-loading rate of each site was highly correlated with the weighted average age of the facility. This correlation probably arose because of the tendency to install new loading facilities at the same time as new storages were constructed.

B.2 Description of available data

The data consisted of operating costs and other variables for 20 port terminals for the period 1982-83 to 1985-86. Average operating cost and throughput estimates were derived from the results of a questionnaire sent to all terminal operators by the Commission. A set of four time series observations was available for 18 terminals. In the case of the Sydney

terminal, only three observations were available because the terminal was closed in 1982-83 due to the extensive drought in eastern Australia in that year. The terminal at Fisherman

Islands did not commence operation until March 1986. As a result, costs were observed for only part of the last season in the sample. After adjusting the data set for zero

observations in the case of Sydney and Fisherman Islands, the data consisted of 76 points.

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B.3 Model specification

B.3.1 Definition of the dependent variable

Operating costs were defined as the sum of costs associated with repairs and maintenance; labour (including labour on-costs); insecticides, fumigants, fuel, light and power; handling costs of grain carried forward; and other operating

costs. The costs of wharfage and demurrage (and any

compensation earned from 'dispatch1) were excluded. Wharfage became the responsibility of the Australian Wheat Board during the sample period. Although both demurrage and

dispatch are linked directly to the operation of the terminal, both are affected by the current Charter Party Arrangement in which specified out-loading rates bear little relationship with what is feasible at most port terminals. Average operating costs were deflated using the implicit price deflator for gross non-farm domestic product with

1985-86 as the base.

B.3.2 Functional form

Two forms of the average operating cost function were specified, as follows:

where:

AOCft = average operating cost;

Q_^ = throughput (100 000 tonnes);

A G E ^ = weighted average age of the facility;

DEPTH^_j_ = depth of the grain terminal berth;

OUT^^. = effective outloading rate (tonnes per hour);

(B.l)

DEPTH.,, OUT..) it' it'

A0Cit = i' Qi' (Qit"®i)/°i'

(Qit"°i)2/°i2' AGEit'

(B . 2 )

DEPTH.,, OUT..] it' it

Qi = proxy for capacity defined as average port terminal throughput (100 000 tonnes); i = 1,...,20 port terminals; and

t = 1,...,4 time periods.

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Equation B.2 was specified in an attempt to distinguish between the short- and long-run average operating cost function. In equation B.2 the long-run average operating cost function is defined in terms of the proxy capacity variables, while the short-run function is defined in terms of the normalised deviations and normalised squared deviations of throughput from capacity, with capacity fixed. Equation B.2 is preferred in the sense that it allows for the possibility that when capacity is fixed the short run average operating cost functions for ports with different capacity levels have different minimum points.

In addition to the variables defined in equations B.l and B.2 a series of dummy variable were specified, as follows:

D„a = unity for ports in South Australia and zero elsewhere,

Dv = unity for ports in Victoria and zero elsewhere,

D , = unity for ports in Western Australia and zero WA , ,

elsewhere,

D.,-,, = unity for ports in New South Wales and zero elsewhere,

D = unity for Fisherman Islands and zero elsewhere,

0^ = unity for Gladstone in 1985-86 and zero elsewhere (represents an increase in efficiency in handling),

DpA = unity for Port Adelaide in 1984-85 and 1985-86 and zero elsewhere (represents an increase in efficiency in handling),

Da = unity for Albany in 1984-85 and 1985-86 and zero elsewhere (represents an increase in efficiency in handling),

DE = unity for Esperance in 1985-86 and zero elsewhere (represents an increase in efficiency in handling),

DNEW2 = unj-*Y for Newcastle in 1983-84 and zero elsewhere (represents the operation of two shifts), and

°NEW3 = unity for Newcastle in 1984-85 and 1985-86 and zero elsewhere (represents the operation of three shifts).

B.3.3 Error structure

The data consist of combined cross-sectional and time series observations. To account for the possibility that the disturbances of the model were cross-sectionally correlated

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and autoregressive, the cross-sectionally heteroscedastic and time-wise autoregressive model described by Kmenta (1971, pp 508-512) was estimated together with an ordinary

least-squares regression with the usual assumptions about the error structure.

B.4 The estimated operating cost functions

The ordinary least-squares estimates of the parameters in the specified cost functions for the full data set consisting of 76 observations are given in Table B.l. The estimates of the cross-sectionally heteroscedastic and time-wise first-order autoregressive model with the autoregressive parameter constrained to be equal for each cross-sectional unit are also presented in Table B.l. The estimates presented in columns 3 and 4 of Table B.l are based on the data set

excluding observations for Sydney and Fisherman Islands. All estimates are for throughput unadjusted for grain density. Use of the adjusted throughput variable had little effect on the estimates.

In both specifications the estimated coefficients have the expected sign and in most cases the coefficients are large relative to their estimated standard errors. All equations perform well in terms of fit, although the cross-sectionally heteroscedastic time-wise autoregressive model is preferred,

given evidence of both differences in error variances across ports and auto-correlation among the ordinary 1east-squares residuals.

101

TABLE B.l ESTIMATED PORT TERMINAL AVERAGE OPERATING COST FUNCTIONS

Variable

Ordinary least squares

Heteroscedastic AR model

(1) (2) (3) (4)

1/CL 1.52 1.66

(8.04) (8.68)

Qit

-0.29 -0.25

(-2.98) (-4.01)

°2±t

0.006 0.006

(1.96) (2.98)

1/Q. 3.92 3.86

(5.42) (5.46)

Qi -0.01 -0.03

(-0.21) (-1.34)

(Qit~Qi )/Qi

-2.46 -1.99

— 9 , —2 (-2.42) (-4.52)

(Qit_Qi ) /Q . 4.55 3.71

1 (3.14) (4.40)

Age ± 0.16 0.07 0.10 0.05

(4.91) (1.83) (3.57) (1.62)

Depthi -0.16 -0.27 -0.11 -0.18

(-1.17) (-1.77) (-1.71) (-1.76)

°SA

1.10 1.34 1.18 1.18

(1.83) (1.98) (2.94) (3.15)

DV

-1.59 -1.24 -1.65 -0.93

(-1.92) (-1.34) (-3.05) (-1.11)

Dv rA 1.96 1.94 1.41 1.41 WA (3.21) (2.10) (3.58) (4.10) D 2.74 1.94 2.16 1.49 NSW (3.25) (2.10) (5.07) (2.15)d F I 0.99 0.43 (0.57) (0.24)Intercept 4.10 3.76 4.22 3.69 (2.38) (2.16) (4.36) (3.22)— 2 R a o 0.77 0.76 Buse R 0.83 0.84 Sample size 76 76 72 722 a. For definition of Buse R , see Judge, Griffiths,Hill, Lutkepohl and Lee (1985, p 32, Equation 2.3.16).Note: Numbers in parentheses are t-ratios.Source: Royal Commission into Grain Storage, Handling andTransport.102

APPENDIX C SYNTHETIC CONSTRUCTION AND OPERATING COST FUNCTIONS

The material in this appendix is based on research conducted for the Commission by Professor B.S. Fisher.

C.1 Construction cost estimation

The construction cost function for a particular type of facility was hypothesised to be of the following form:

ACC = fx(1/CAP,CAP,CAP2 )

where:

ACC = average construction costs ($ per tonne), and CAP = capacity of facility (100 000 tonnes).

The quadratic term was included in the construction cost equation in order to test for the possibility that average construction costs rise after some given size of facility is reached. If this is the case, the estimated coefficient on the capacity variable is expected to have a negative sign while that on the squared capacity variable is expected to be positive.

In addition to the port terminal facilities, the country handling facilities considered were of the following types:

A-type storage - horizontal building with reinforced concrete grain retaining walls, reinforced concrete floor and a steel-framed roof structure with corrugated steel sheet roof and wall cladding;

B-type storage - horizontal building with reinforced concrete floor, structural steel frame and corrugated sheet steel grain retaining walls, roof and curtain wall cladding;

C-type storage - an A-type- storage building with reinforced concrete walled vertical storage cells;

D-type storage - horizontal building similar to the B-type but with a 600 millimetre high retaining wall below the corrugated steel sheet grain retaining walls;

E-type storage - horizontal buildings with structural steelwork portal frames with corrugated steel sheeting curtain walls and roof cladding; timber frame bulkheads with

horizontal spans of corrugated steel sheeting are used as grain retaining structures and the floor consists of compacted gravel sealed with bitumen;

G-type storage - similar in structure to the E-type storage but having a larger capacity;

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L-type storage - vertical storage cells constructed using steel plate for the walls and roof with a fat concrete bottom and a reinforced concrete retrieval tunnel;

SI-type storage - silos of varying sizes.

The data set consisted of different numbers of observations on each class of storage. In some cases too few observations were available to estimate reliable construction cost functions. Although facilities constructed before 1960 were not included in the data set used for estimation, it should be recognised that some of the designs for which construction

costs were obtained are no longer in use.

C.2 Estimated average construction cost functions

The ordinary 1east-squares estimates of the construction cost functions for various classes of storage and handling facilities are presented in Table C.l. In addition to those estimates, an attempt was made to estimate a construction cost function using pooled data for all facilities. This was unsuccessful because it was not possible to account for the differences in the cost functions across facilities in the

pooled regression. As a result, it was not possible to estimate functions for all classes of facility given small sample sizes in the case of some storage types.

In some cases there was little observed variability in the capacity variable. As a result the estimated equation reported in Table C.l for a number of storage types was unreliable. Overall, however, the estimated equations exhibited the expected properties. In all cases the estimated coefficients of the capacity and squared capacity variables were statistically insignificant. In other words,

there was no evidence that the construction cost function turned up after some point.

Although the explanatory power of the fitted equations varies over a wide range it should be noted that the unreliability of the estimates in some equations arises because a number of the facilities tend to be constructed in only a limited number of capacities. When this occurs it is not possible to obtain a reliable estimate of a function over a range of capacities.

C.3 Estimation of synthetic operating cost functions

It was hypothesised that the synthetic average operating cost functions at a given site would have the form:

= f (Q,Q2 ,D )

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where:

AOC = synthetic average operating cost ($/tonne), Q = throughput defined as the average of in-loadings and out-loadings (100 000 tonnes), and D = unity when bunkers are in use and zero elsewhere.

TABLE C.l AVERAGE CONSTRUCTION COST FUNCTIONS FOR STORAGE AND HANDLING FACILITIES IN WESTERN AUSTRALIA

Storage type

Explanatory Intercept variables 1/CAP

R2 Number of

observations

' A ' 38.21 6.56 0.78 86

(19.68) (17.30)

'B' 70.27 0.97 0.00 33

(7.33) (1.03)

' D ' 42.16 4.09 0.18 50

(5.36) (3.48)

' E ' 31.81 1.74 0.07 20

(3.91) (1.59)

' L ' and 'SI' 83.32 8.79 0.88 13

(8.27) (9.27)

Port 171.41 14.37 0.14 14

Terminals (5.44) (1.77)

Note: Numbers in parentheses are t-ratios.

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

Variables representing capacity were not included in the regression equation because capacity was fixed at each site. The ordinary least-squares estimates of the synthetic functions are presented in Table C.2. In all cases the estimated coefficients have the expected signs and, except for the coefficients on the dummy variable representing bunker use, all are statistically different from zero at the one per cent level of significance.

In order to compare the synthetic average operating cost functions with the relevant statistical cost functions reported in earlier sections, statistical cost functions were derived for each site by setting the intercept shifters equal to their observed 1985-86 values. So, for example, in the case of the Newcastle port terminal, the age, depth and proxy capacity variables were set equal to their 1985-86 values, multiplied by their respective coefficents, and added to the intercept, resulting in an equation for average operating

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cost as a function of throughput and throughput squared. The intercept was further adjusted to ensure that, for the sample period 1982-83 to 1985-86, the mean of the residuals was zero for each facility.

TABLE C.2 SYNTHETIC AVERAGE OPERATING COST FUNCTIONS FOR SELECTED COUNTRY RECEIVAL POINTS, SUB-TERMINAL AND NEWCASTLE PORT TERMINAL

Site Explanatory variables R2 Number of

Intercept Q cr D observations

R.p. A 5.12

(8.34)

-4.16 (-3.26)

1.35 (3.06)

0.37 (1.16) 0.81 8

R.p. B 8.66

(5.98) -13.29 (-3.43)

7.47 (3.70)

0.46 (0.92) 0.68 8

R.p. C 9.56

(8.87) -34.90 (-4.69)

43.08 (3.81)

0.84 8

S.t. 4.09

(6.09)

-2.11 (-4.07)

0.40 (4.67)

0.79 9

Newcastle 6.22 (13.65) -0.40 (-8.47)

0.008 (7.98)

0.89 10

Notes: Numbers in parenthesis R. p. = receival point S. t. = sub-terminal

are t--ratios

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

106

APPENDIX D TECHNOLOGY AND COST STRUCTURES

In this appendix, information on different technologies that may be used in grain storage and handling is discussed. The discussion initially focuses on the impact of certain technologies on system cost structures and then provides a

description of alternate technologies. The content of this appendix is based on work conducted for the Commission by GHD-Planner West Pty. Ltd.

D.1 Country storage and handling technology

In recent years structures alternative to the traditional horizontal sheds and vertical silos have become available. Structures such as domes, Strarch arches and 'Safeway' silos can all be adapted to the grain storage task (see Section D.3

for a description of these structures). In general, 'Safeway' silos are substitutable for traditional vertical silos while the other structures could replace the

traditional horizontal sheds.

The Commission has attempted to estimate the capital costs of these alternative structures and compare them with existing structures (see Table D.l). Preliminary analysis indicates that alternative permanent structures have a lower capital cost than current designs but none come close to matching the

low capital cost of bunker storage. The figures in Table D.l include associated in-loading and out-loading machinery and are indicative only. It should be noted that the costs of traditional storage have been inflated to 1987 dollars and do not reflect the actual costs charged to growers; rather, they represent the situation that would be faced if new storage was to be built. Operating costs for these alternative

structures could be expected to be similar to their

traditional equivalents. Some circular storages, such as domes, could be fitted with additional out-loading equipment at a cost of approximately $5.00 per tonne (annuitised over 15 years at a real interest rate of 5 per cent gives $0.48), which would result in reduced out-loading operating costs on

about half of the stored grain.

These alternative structures are beginning to be used by the bulk handling agencies (for example, at Jerdacuttup in Western Australia). However, since sufficient permanent storage currently exists to cope with average harvest levels

there has not been any demand to build additional storage using these alternative structures.

In regard to grain handling, a wide range of alternative conveyors and elevators such as aerobelts, pipe and tube conveyors, sandwich belt elevators, the Scholtz sidewall belt, and pneumatic conveying (see Section D.4 for

descriptions) were considered but were found not to offer savings in most cases. In isolated cases, where special conditions apply, these alternative methods may prove

107

TABLE D.l ESTIMATED STORAGE CAPITAL COSTS OF BUILDING NEW

Storage Cost/tonne Life Annual cost

type capacity

($) (yrs) ($/tonne)

Traditional Vertical 125 40 7.28

Horizontal shed 65 30 4.23

Bunker(a) 18 20 1.44

Alternative Safeway silo 55 30 3.58

Horizontal(b ) 45 30 2.93

a. Based on WACBH costs which includes an inloading conveyor system.

b . Combination of Strarch, Blazely, Lucas and dome structures.

Note: Estimates include real interest rate of 5 per cent.

Source: Royal Commission into Grain Storage, Handling and Transport; WACBH submission, 21 April 1987

cost-effective. For example, in confined areas pipe conveyors are useful because they allow relatively tight corners to be negotiated, which may enable several

conventional conveyors to be replaced by a single pipe conveyor. However, such applications are limited and significant savings are unlikely to be made from adoption of

alternative conveying and elevating technology.

In Western Australia, WACBH has developed a conveyer loading system for bunker storage. At present the system is used only for in-loading but WACBH is continuing investigations to see whether it is feasible to also use it for out-loading. The cost of construction varies according to the size of the bunker but, as an indication, a system for a 25 000 tonne bunker costs approximately $175 000 ($220 000 with an E-type receival pit). Annuitised over 15 years at 5 per cent, this converts to $0.67 per tonne ($0.85 with the receival pit).

WACBH has also estimated the operating cost of a conveyor loading system-equipped bunker (in-loading, out-loading and independent costs) at approximately $3.05 per tonne. By comparison, the GEB has estimated the operating cost of bunker storage in Victoria at $5.00 per tonne.

As noted, a conveyor loading system costs approximately $220 000 to install. This cost is additional to the capital costs incurred in the construction of bunkers in other

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States. Thus, in comparing the costs of a conveyor loading system-equipped bunker with the costs of a non-conveyor loading system-equipped bunker it is necessary to adjust for the capital cost differential. When this is done, a cost differential of approximately $1.10 per tonne is obtained. However, this differential cannot be solely attributed to the efficiency of the conveyor loading system because operating practices differ between the States (for example, type of covers and in-loading procedures).

The Commission has attempted to estimate the difference in operating costs between a bunker fitted with a conveyor loading system and a bunker in-loaded by a Lobstar in Western Australia. The available information is limited but it would

appear that a conveyor loading system-equipped bunker may have an operating cost advantage of up to $1.00 per tonne. However, when allowance is made for the higher capital cost of the conveyor loading system and associated works the differential is substantially reduced. The Commission has estimated that a maximum saving of $0.45 per tonne may be possible from use of a conveyor loading system.

The greater mobility of a Lobstar would enable it to achieve higher utilisation levels than a conveyor loading system and hence lower its capital cost per tonne. This, in turn, would

reduce the apparent cost advantage displayed by the conveyor loading system. However, if WACBH is successful in

developing the conveyor loading system for out-loading as well as in-loading the cost advantage is likely to be increased.

The Commission also considered the cost-effectiveness of installing relatively large over-rail garner bins to improve rail out-loading rates. Garner bins are effectively a buffer storage between silo and rail wagon and can be filled at a slow rate by the existing elevating system and then

discharged using gravity (see Section D.5 for a

description). By filling the bins before rail wagons arrive, faster loading is possible and, hence, train turnaround times are improved. The costs involved vary according to the size

of the garner bin provided and the necessary support equipment but were estimated to exceed the rail savings possible at sites with an annual out-turn of less than 50 000 tonnes. That is, a less than ideal rail operation is the most cost-effective solution because the additional costs

incurred by the bulk handlers in improving out-loading rates outweigh the savings the railways could make.

Should more road receivals be permitted at ports or

sub-terminals, the use of hydraulically raised road decks may be cost-effective. The advantages of this type of

arrangement (see Figure D.l) are that it enables conventional semi-trailers to be used for the transport of grain as the truck does not need to be installed with its own tipping mechanism and all trucks can be unloaded at a rate equal to or in excess of the capacity of the terminal's fixed handling system. It also permits the installation of a weighbridge with the deck so that the truck's gross and tare weights can

109

Safety operated wheel chocks and backstops

Shed over pit with doors

Hydraulic cylinders

Hopper

Optional load cell scales Feeder conveyor-;

FIGURE D.1 TRUCK RAISED DECK TIPPING SYSTEM

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

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be measured at the same place (before and after tipping). The Commission has estimated the cost of installing an hydraulically raised road deck at approximately $250 000 to $300 000, which converts to $0.40 to $0.48 per tonne for a

50 000 tonne per annum facility over 20 years at a real interest rate of 5 per cent per annum. Clearly, the use of an hydraulically raised road deck would only be

cost-effective for large receival tonnages.

D . 2 Port terminals

Three technological possibilities at port were assessed for cost-effectiveness; 'just in time' port design, increased automation of existing facilities, and a mechanical

out-loader for horizontal storage.

The 'just in time' port design involves the use of handling equipment capable of high in-loading and out-loading rates. With high handling rates, storage is kept to a minimum and the terminal works as a cargo assembly facility (that is,

assembles one cargo). Fisherman Islands works on this principle and requires only 60 000 tonnes of storage, compared to much larger storage requirements at other ports. The throughput-to-storage ratio for a cargo assembly terminal

is in the region of 25:1 and, when compared to a more

traditional port terminal with a designed 10:1 throughput-to storage-ratio, allows substantial capital cost savings. In this example the 'just in time' terminal requires four tonnes

of storage per 100 tonnes of throughput compared with 10 tonnes of storage required at a more traditional terminal. If the incremental cost of adding storage at port is taken at approximately $300 per tonne (see Chapter 3) the traditional terminal requires $1800 (six tonnes at $300) more capital per

100 tonnes of throughput than the 'just in time' concept. Annuitised over 25 years at a real interest rate of 5 per cent, this equates to $1.28 per tonne. If a maintenance cost of the additional capital is added (assumed at 5 per cent of

capital per annum) then the cost of the additional storage is $2.00 per tonne.

The 'just in time' concept places a greater burden on the transport system to deliver grain quickly and at irregular intervals. The irregularity of shipping arrivals prevents the railway from organising a regular timetable for grain trains and so the railway system's efficiency will decline as more rolling stock will be required. If it is assumed that wagon cycle time increases from 84 to 108 hours (that is,

utilisation is decreased by 30 per cent) and a

50-tonne-payload wagon costs $50 000, then railway costs will be increased by approximately $0.25 per tonne. These calculations suggest that building a 'just in time' port

terminal instead of a more traditional style terminal would save growers approximately $1.75 per tonne.

These calculations assume that sufficient storage exists in the country to handle the entire crop. If this is not the case and the port storage is required for long-term storage

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(as at Geelong) then the construction of a ' just in time' terminal would also require additional storage to be built in the hinterland.

It is difficult to generalise about terminal automation because the costs and benefits involved will vary between locations, depending on variables such as the number of cells and conveyors and whether the terminal operates as an assembly facility (as Fishermans Island does) or as a

long-term storage facility (as is the case in some South Australian ports). Preliminary work undertaken by the Commission suggests that automation of existing terminals cannot be justified on labour savings alone. Other factors

such as improved quality control, 'real time' reporting capability, and reduced industrial relations problems through having a smaller workforce in a better work environment (although there may be initial opposition) may be of importance but they are difficult to quantify. New

terminals, however, can be designed in such a manner as to minimise the hardware requirements of automation and make them a viable proposition.

At several port terminals, large horizontal sheds are used to store grain. These sheds are, in general, out-loaded manually. The mechanisation of this process is possible by using a portal-reelaiming device similar to that in use by the coal industry (see Figure D . 2). The cost of installing such a system in an existing 50 000 tonne shed would be in the vicinity of $6 million, or $120 per tonne of capacity.

If an annual throughput-to-storage ratio of 10:1 is assumed, this reduces to $12 per tonne of capacity. Annuitised over 20 years at a four per cent real interest rate, this converts to a capital cost of $0.96 per tonne. WACBH has estimated the cost of out-loading a horizontal shed under current practices at approximately $0.50 per tonne and so it would

appear that such a system is not cost-effective at relatively low throughput-to-storage ratios. A throughput-to-storage ratio in the vicinity of 20:1 may be needed before such techonology becomes cost-effective.

D.3 Alternative storage structures

The major storage structure alternatives to those currently in use are Strarch, Spantech, concrete domes, Safeway silos and fabric structures.

D.3.1 Strarch

The innovative Strarch design concept utilises very structurally efficient arches built using high tensile capacity steel cables. This minimises the amount of supporting steel and permits very large, clear spans up to 140 metres.

1 1 2

SUBJ

Section

USU m Storage shed

Elevation

iWE; "1 I Ί Π !i^ ...— .........th -5500 tonne: storage bay ; - l U UPlanFIGURE D.2 ILLUSTRATION OF A 5 0 0 0 0 TO N N E STORAGE PORTAL SCRAPER RECLAIMERSource: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 3

The arch section technique, which is shown in Figure D.3, is also very unusual in that the roof is sheeted on the ground prior to the arch being tensioned. This obviates the need for scaffolding and heavy cranage.

D.3.2 Spantech

Spantech is a company manufacturing self-supporting arch-type structures using a structural system totally different from the Strarch one. While building claddings are invariably commercially manufactured in standard profiles, the Spantech system involves the on-site rolling of deep high-strength structural sections. This enables the rolled sheet steel raw materials to be taken to site in ex-mill rolls, folded into

shape and erected immediately. The sections are locked together using a crimping device operated from the ground. Hence, the system does not involve bolting of the various sections together, which is labour intensive, expensive and introduces weaknesses and possibly points of water ingress.

It also avoids costly transport of bulky steel sections. Figure D .4 illustrates the structure.

The system is limited at present to spans of up to 50 metres but larger spans with new profiles are under development. At present the system effectively complements the Strarch system

at the smaller span end of the range.

D.3.3 Concrete domes

Thin shell concrete domes (agridomes) have been used as large free-span structures for some time. The most common design found in Australia has been constructed using the Binni technique, which involves inflating a rubber internal membrane over which reinforced concrete is placed.

A different design and construction method for concrete domes has been developed in the United States and used for grain storage. The system, illustrated in Figure D.5, requires a vinyl membrane to be inflated to the final shape of the building and then a urethane foam applied over the interior of the membrane. Reinforcing steel is placed under the foam

layer and concrete sprayed onto the foam/steel formation to give a thin concrete shell. The vinyl membrane may be removed or left in place before an outer polyurethane coating is applied.

The foam provides a high insulation level to protect the structure and the contents of the dome. With the exception of access points, the structure is inherently sealed. The advantage of the technique is that it can be constructed quickly and the shell shape requires minimal concrete and reinforcing steel.

114

Stressed skin roof

Cable truss

Up to 140 m span

Erected structure

FIGURE D.3 STRARCH STRUCTURE

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

" ° ο. Sect, through sheeting

Cable truss

Up to 50 m span

FIGURE D.4 SPANTECH STRUCTURE

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

External moisture and ultraviolet barrier coating Polyurethane foam insulation

Reinforced concrete Internal moisture

barrier

Up to 60m diameter

F IG U R E D .5 CO NC RETE DOME

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

SUPPORTING PAPER 3

D.3.4 Safeway silos

Steel bolted silos are available as proprietary items from a number of Australian manufacturers. Some designs originate from North America, where there are a large number of

companies marketing similar products. Almost all such storages are of less than 2000 tonnes capacity per unit and use corrugated steel sheets with the corrugations running around the circumference. A typical design is shown in Figure D.6.

The Safeway silo concept uses ribbed steel sections placed vertically and fastened with high performance rivets to external pressed steel channels. A reasonable number of

these silos have been built and are in use in the industry. All are configured as flat-bottomed tanks.

It is claimed that the cost of Safeway silos is about half that of comparable prefabricated units, size for size above 2000 tonnes capacity. The upper size limit of competing products is around 3000 tonnes while Safeway silos of 7000 tonnes capacity have been built and designs for 10 000 tonnes capacity are available.

The system has two significant advantages over horizontal storages: it can be constructed at a similar cost in smaller units and, hence, allows low cost segregation; and a low cost out-loading system can be built and much of the contents removed by gravity.

D.3.5 Fabric structures

High tensile fabrics are making an increasing impact on the construction industry in Australia and elsewhere. At present, all such fabrics are imported, are relatively expensive, and have an unknown working life.

WACBH has recently built a loose fabric structure called an Aero Store. This involves a centre pole and tent-type storage where the tent fabric is supported directly on the surface of the grain; the fabric is raised up the centre pole until the storage is completely filled. Some aspects of the Aero Store storage are considered undesirable: the loose

fabric can billow and may flap in windy conditions, and, rain water may accumulate on the fabric of an empty or partially filled (or emptied) storage.

Permanently tensioned structures for grain storage would appear to be a far more attractive approach in the long term. Such structures could be constructed in a relatively short period with minimal site works. Cable anchor

foundations would be one of the main pre-erection

construction activities.

118

— External columns

F IG U R E D .6 SAFEWAY SILO

Source: Royal Commission into Grain Storage, Handling and Transport

SUPPORTING PAPER 3

D.4 Alternative conveyor technologies

A number of specialised alternative conveying systems have become available over recent years and some have potential applications in the grain industry.

D.4.1 AerobeIt

The aerobelt, or jet belt, is a conventional belt conveyor supported on the carry or product side on an air film rather than rotating idlers.

A typical cross-section and details are shown in Figure D.7. The return stand of the conveyor belt is normally supported on conventional return idler rollers but can also be

supported on air when handling materials such as grain. Power requirements for the fan to supply the air are

typically less than 5 kilowatts.

In all configurations, this system allows steeper conveying angles than conventional conveyors since the grain on the conveyors is not disturbed each time it passes over an idler. It can also be equipped with a simple, low cost, weatherproof conveyor cover which minimises the area for clean-up.

If both the carry and return strands are air supported, there are no moving parts between the head and tail loading

sections, and it becomes feasible to eliminate access walkways. This significantly reduces loads on the structural support system and makes very significant cost savings possible. The higher angles of inclination possible with

this type of conveyor may make it possible to reduce gantry lengths.

D.4.2 Pipe conveyor

The idea of the pipe conveyor is to fully enclose the product being conveyed in a rubber belt tube which then travels along a system of idlers. Both ends of the conveyor are the same

as a conventional belt conveyor. The typical cross-section is shown in Figure D.8. There are a number of advantages of this system:

. It allows relatively small radius horizontal curves which may enable one conveyor to be used in lieu of many in an existing plant.

. It does not necessarily require weather protection.

. Its capacity is relatively high compared to conventional belts for the width of the support structures and the support frames can be built as the support truss.

. It can be used at higher angles of inclination.

120

Weatherproof cover

Air bleed holes

Film of air

Air plenum

, Grain *

Air supply

Maintenance walkway Return roller

Gantry support

F IG U R E D .? AEROBELT CO NVEYO R

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

SUPPORTING PAPER 3

However, the mechanical component is significantly more expensive and is likely to prove a viable and useful system only in specific applications.

D.4.3 Tube conveyor

The tube conveyor is essentially a low cost belt conveyor suitable for intermittent use and relatively low capacities. It is of the conventional belt type but is supported on the carry or product side within a steel pipe that provides structural support to span between the ends of the conveyor or intermediate points and continuous support for the belting in lieu of idlers. The design offers medium capacity

conveying and is generally considered to be an alternative to augers. It is much more hygienic insofar as it is

self-cleaning.

The design concept relies on the relatively low support belt pressures of small conveyors and copes with the additional friction forces if it is used in relatively short systems of short conveying lengths and modest handling rates by slight increases in power requirements. A typical arrangement of a tube conveyor is shown in Figure D.9.

D.4.4 Bucket elevators

Bucket elevators are the predominant technology of materials handling systems. They provide a proven means of raising grain at a central location well above the surrounding storage structures and rely on gravity to transfer grain via chutes to a multiplicity of locations.

Elevators can be classified generally as follows:

Support Freestanding

Guyed Fully supported and restrained

Trunking Single

Dual

Bucket Support Medium Chain

Belt

Fixed Floating

Screw Gravity

Flat Crowned Bar (self-cleaning)

Low speed High speed

Boot

Take-up

Pulleys

Buckets

122

> Idlers

Return

Walkway

Support tower

F IG U R E D .8 PIPE CONVEYOR

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

Elevation Belt

Return roller

Section ( A

F IG U R E D .9 TUBE CO NVEYO R

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

SUPPORTING PAPER 3

The reliability of elevators was a key issue in the late 1970s in North America, particularly at major terminals. As a result, the low speed elevator was developed. This was substantially more expensive and much larger than previous traditional industry designs but the lower speeds

significantly reduced mechanical wear.

These elevators required much larger buckets and materials such as high density polyurethanes were used. This was also partly to reduce the risk of explosions in the elevator casing by metal-to-metal sparking from damaged buckets.

In Australia, a wide variety of elevator designs have been used but the area of greatest demand is to increase

capacities at low cost. Trials by various bulk handling agencies have been carried out, including bottomless buckets (BGQ) and low profile buckets (SACBH).

D.4.5 Sidewall belt conveyors

Sidewall belt conveyors are constructed by vulcanising pleated vertical sidewalls to flat conveyor belting. The sidewalls may be located on the outer edge if the belt is not

to be used with convex vertical curvature. It must be set in from the edge for concave configurations.

Transverse full height cleats may also be fitted if the belting is to be used in very steeply inclined locations.

Sidewall conveyors can be installed at any angle of

inclination, including vertical. The product is contained within pockets and at steep angles; the transverse cleats prevent the material being handled from falling backwards.

The capacity of sidewall conveyors reduces as the angle of inclination increases. The belts are normally operated at speeds of approximately 30-50 per cent of conventional

conveyors (that is, 2 metres per second) partly to assist with conveyor discharge over the head pulley and partly to limit the flexing cycles.

With sidewall belts it is possible to construct conveyors in a vertical ' Z ' shape with horizontal load and discharge sections and vertical intermediate section. Almost any belt

profile is possible. Figure D.10 shows a sidewall belt conveyor.

Sidewall belt systems are expensive due to significantly wider specialised belting and associated wider and larger mechanical equipment. The belt does permit plant layouts not possible with conventional conveyors or which would otherwise necessitate long multiple conveyors.

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D.4.6 Sandwich belt conveyors

Sandwich belt conveyors consist of a sidewall belt in combination with a conventional belt and pairs of conveyors made from conventional belting and compressed by air pressure or mechanically. In all cases, the advantage of sandwich

conveyors lies in their ability to raise products vertically or nearly vertically and the various designs are particularly suitable to very high capacities.

The sidewall and conventional belt combination is used in a large proportion of self-discharging vessels in which the Stephens-Adamson design is used. This design is constructed on a large 'C ' shape (see Figure D.ll).

The Continental Conveyor Company of the United States has designed a high angle conveyor which uses a top cover conveyor belt pressed against the load by articulated spring-loaded rollers, while Simon Carves has developed a vertical elevator for its Simporter ship unloader (designed

for grain) and other commodities which uses air plenums to press the belts together.

The potential application of these systems is likely to be in port terminals where high rates and/or severe layout problems would prevent conventional systems being viable or cost-effective. All the above schemes are relatively expensive and are not considered suitable for general use. Further developments in the area of high angle conveying can be expected as a result of significant potential applications

in open-cut mining and self-discharging ships.

D.4.7 Pneumatic conveying and pumping

Pneumatic conveying and dry pumping are areas of technology not widely used in the grain industry. Lean phase pneumatic systems are prohibitively expensive to operate as a general handling technique; the main application at present is in the unloading of dry bulk commodities including grain and cement

from ships. Medium and dense phase systems have been used in such tasks as handling and may have wider applications in the grain industry for specific tasks. It seems unlikely they could displace conventional solutions, at least for the foreseeable future. Pumping of dry products also has potential applications in grain. Maintenance of quality is one of the more significant problems to be overcome.

D.4.8 Augers

The auger has been a traditional grain handling tool and is one of the least costly and most efficient techniques available. There are few, if any, grain installations in Australia where augers are installed with capacities above

200 tonnes per hour.

126

Elevation

Flexible side wall

Base belting

Cleats

Typical belt detail

FIGURE D.10 SIDEWALL BELT CONVEYOR

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

Typical Stephens-Adamson arrangement for continuous self-discharging vessels

FIGURE D.11 SAN DW IC H BELT CO NVEYO R

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

SUPPORTING PAPER 3

The Siwertell continuous ship unloader, designed in Finland, has been widely accepted and utilises large capacity vertical, horizontal and inclined augers in capacities up to 2000 tonnes per hour. These machines are in use unloading

grain, but the largest machines have been supplied to the coal industry.

Very large capacity augers are therefore a proven device but as yet have not found applications in the Australian grain industry. Large augers should do significantly less damage to grain than smaller sizes and are capable of spanning significant distances without support.

D.5 Rail loading

Improvements in port facilities, rolling stock and railway operations, including use of unit trains, have focused attention on the speed with which wagons can be loaded. One means of increasing loading rates is for larger wagon groups to be loaded at individual storages. This may necessitate

longer sidings so that there is sufficient room for a wagon rake either side of the loading point. The length of rakes will vary from site to site but ideally will enable one-third to half of a unit train to be loaded at each site.

The time available for wagon loading is also critical to an efficient railway operation and hence there is pressure for bulk handling agencies to complete loading to suit train scheduling. The time available will vary depending on crew

shift arrangements, scheduling requirements and the relative time distances between the depots being serviced by each train. Typically, the last wagon rake dropped will be the first to be collected and this will have the minimum time

available for loading.

Given that a typical grain train may vary in total capacity from approximately 1500 to 2400 tonnes, a rake of one-third of the wagons will require somewhere between 500 and 800 tonnes to be loaded at each depot (assuming three equal rakes). For many country facilities, wagon loading rates vary from 100 to 200 tonnes per hour; very few facilities are

capable of rates above this. Hence at present this operation may typically take from two-and-a-half to eight hours.

A possibility to alleviate this problem is to provide high rate rail-loading capability by means of large prefilled over-rail garner bins with adequate grain capacity to fill a typical rake (see Figure D.12)

Rake loading could then be undertaken in less than one hour and the bin refilled over the following 20 or so hours. However, problems will arise with any residual grain left in the garner bin if a different grade or grain type is to be out-loaded the following day.

129

r- Existing rail loading

Rail track

Existing road receival hopper, silos and bucket elevator

New rail loading bin 500 tonne capacity

Rail wagon

Elevation

FIGURE D .1 2 IMPROVED RAIL LOADING FA C ILITIE S : LARGE OVER RAIL GARNER BIN

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

APPENDIX E ON-FARM TECHNOLOGY

In this appendix, the results of a study into the likely changes in on-farm technologies are presented and discussed. The three areas of on-farm technologies discussed are, grain types and cultivars; grain harvesting, handling and storage;

and grain pest control. The expected changes in these areas relate not only to adoption of new technology but also more widespread adoption of existing technologies. The discussion concentrates on the expected impact of changes in on-farm

technology on the storage, handling and transport system under current and alternative institutional arrangements. This appendix is based on material prepared by the New South Wales Department of Agriculture in a consultancy conducted

for the Commission.

In the first part of the appendix the methodology used in the analysis is presented. In the final three parts of the appendix the results of the analysis for each of the three technology areas are discussed.

E .1 Methodology

The methodology used to determine what on-farm changes are likely in the future, along with the perceived impact of these changes on the storage, handling and transport of grain, was carried out in two stages. The first stage

involved a descriptive assessment by specialist groups to suggest an initial list of technologies.

The second stage involved the surveying of other experts in each field for suggestions on additional technologies along with their estimates of the likely adoption rates by the year 2000. This was done via three questionnaires sent to

relevant experts in each of the three technology areas.

. Grain Types and Cultivars Questionnaire, which was sent to each of the five mainland State's Principal

Agronomists;

. Harvesting, Handling and Storage Technology

Questionnaire, which was mailed to 74 industry

representatives to obtain a wide cross-section of industry on the existing situation and possible future developments; and

. Grain Insect Control Questionnaire, which was mailed to 60 grain insect experts to obtain a cross-section of expert opinion on possible developments in grain insect control.

Response rates for the above questionnaires were 100, 51 and 33 per cent respectively.

These results were then assessed at a second workshop where particular emphasis was placed on identification of the

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impacts of the likely changes in each technology area on the grain handling, storage and transport sectors.

E.2 Changes in grain types and cultivars

There have been continual changes in the number and quantity of different grain types and cultivars grown in Australia. While cereals predominate (with wheat the major crop, followed by barley, grain sorghum, oats, rice, maize and

triticale), oilseeds (mainly sunflowerseed, soybeans, rapeseed, safflowerseed, and some linseed) have increased in importance, and in recent years there has been increasing interest in the production of grain legumes (notably lupins,

field peas and chickpeas).

It can be expected that the mix of crop types will continue to fluctuate as the relative returns from different crops change. Thus it is difficult to predict any trend in future changes in this mix. Nevertheless, it appears likely that the relative importance of oilseeds and grain legumes will be higher than they have been in the past. The trend has been towards a more diversified mix of crops in Australia, with

less reliance on the traditional cereal grains, especially wheat.

Estimates of future areas sown to grain types were obtained from the questionnaire on a State basis. Overall, four main changes were identified by respondents to the questionnaire:

. an increased number of physical segregations in wheat;

. a significant increase in the production of winter grain legumes (predicted to be 15-20 per cent of total crop area by the year 2000);

. a significant increase in the production of winter oilseeds (again predicted to be 15-20 per cent of the total crop area by the year 2000); and

. an expansion, to significant levels, of cropping in high rainfall areas.

Grain legumes and oilseeds can require special harvesting equipment or treatment. These crops are likely to be harvested by cutting and windrowing (swathing) followed by harvesting with pick up header fronts. This increases the direct machinery cost of harvesting but it potentially allows it to be carried out earlier and could concentrate the harvesting period in a district into a shorter period. Where windrowing is not practised, harvesting speed will often be reduced because of lodging and crop lifters will be required on headers.

A number of crops present handling difficulties. Most grain legumes must be handled with bucket elevators and belt or drag chain conveyors rather than augers because of grain splitting. Sunflowers and other oilseeds can choke augers.

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The small and shiny seeds of oilseeds present major

difficulties in handling due to their fluid nature.

Several of the potential new crops can cause storage problems. The angle of repose of many crops, particularly oilseeds, is different from that of wheat so that storage facilities built for wheat, particularly horizontal ones, are not so effectively utilized. There is a significant risk of

spontaneous combustion with oilseeds unless they are stored with a low moisture content thus requiring the use of grain driers in some areas with a consequent impact on the optimum harvesting, storage and transport arrangements.

The small and shiny oilseed grains cause great difficulties in transport and necessitate use of road trucks (without hopper bottoms) since most rail wagons have hopper bottoms.

These difficulties mean that:

. the capital costs of harvesting and handling winter legumes and oilseeds are likely to be greater and, field losses greater, than for winter cereals;

. the costs and risks of storing winter oilseeds are likely to be greater than for the winter cereals and legumes so that direct transport from the header to central storage and crushers is more likely; and

. the use of road transport will continue to be favoured for oilseeds unless modifications can be made to rail wagons to make them suitable for carrying oilseeds.

Time of harvesting could well have a significant impact on the utilisation of harvesting, trucking and storage equipment where harvesting for the new grain types and cultivars occurs at a different time to that of crops currently grown, so that

such equipment can be jointly used for several crops. The advantages of higher utilisation may be partly or wholly offset, however, by special equipment requirements for new grain types as discussed above.

There are prospects for breeding cultivars of winter cereals (and perhaps other grain types) with staggered harvesting times which would spread the peak load problems faced by bulk handlers or private storers. There are two possible plant breeding courses which would reduce the harvest peak load problems:

(i) Delayed flowering. This breeding option means a change in the current breeding practise of breeding for uniform flowering times. There are, however, risks of significant yield penalties associated with later flowering, as later maturing crops may encounter a soil moisture deficit.

Consequently, later flowering cultivars could only be economically feasible where soil moisture deficits are not likely to occur later in the season.

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(ii) Weather proofing. There are a range of selection possibilities which could effectively 'weather proof' a ripe crop thus reducing the perceived risk of spreading harvest time. Possibilities include the breeding of a post harvest dormancy which reduces the losses from 'shot and sprung' grain after rain at harvest; and 'shatter proof' grain heads could lower the chance of grain falling from the head once ripe, as the loss of ripe grain from a standing crop due to strong winds or rain can be quite high.

Any increases in diversity and variability in crop production are likely to have significant consequences for grain storage, handling and transport. Increased diversity will

mean further segregations and there will be increased risk of admixture.

Any inefficiences produced by the current equalised pricing policies for bulk handlers for storing and handling

additional segregations are likely to be considerably increased with an increase in the number and variability of new grain types. That is, if the additional segregation costs imposed by these new crops are not reflected back to growers but are spread over all crops then the new returns perceived by growers will be greater than their real return

to the economy.

Other effects which have been identified include:

. Bulk handling agencies' ability to cope with increased numbers of segregations; in Western Australia both linseed and rapeseed have been handled by WACBH. However their horizontal storage have moveable partitions which enhance their ability to segregate. This ability is not available in most New South Wales GHA horizontal silos. It is possible that smaller

(possibly privately operated) storages could operate alongside bulk handling agency storages to cope with some of the smaller segregations which may arise from time to time.

. Increased cropping in high rainfall areas could also impose problems for the storage, handling and transport system as the high rainfall areas involve primarily grazing properties and as such, lack facilities for handling, storage and transport of grain. There are no bulk handling agency silos in these regions and neither road nor rail facilities are constructed to handle the extra traffic or weight of traffic which would occur.

E.3 Changes in on-farm harvesting, storage and handling technologies

It was felt that the most significant changes, relating to on-farm harvesting, storage and handling technology would be likely to occur in three areas:

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An increase in harvesting rate, the most important component of which would be the increased workrate of the average header. Also of significance would be improvements in the grain handling system such as

loading and unloading facilities, amount of field storage and transport to avoid delays, and greater investment in grain driers in some localities to allow more hours per day harvesting.

An increase in on-farm grain storage capacity with most investment in small (less than lOOt) elevated silos and increasing numbers of sealed and/or aerated silos able to hold grain to marketers' standards for longer periods of time.

Better use of information systems or high-tech

management, which covers the use of instrumentation at header/storage stage to monitor moisture, grain insect and protein levels; use of modern data collection

on-farm and rapid communications to the purchaser to improve scheduling and inventory management and sale by description.

E.3.1 Harvesting rate

In looking at on-farm technological changes which have the most potential to affect the operation of central storage and handling facilities, header workrates are of particular signficance. There is strong evidence to suggest that

farmers have, over successive time periods, invested in headers which have had increasing potential to take grain off quickly. (Kondinin Group 1986)

There is, however, uncertainty about the relative importance of factors which have driven this adoption of higher capacity headers. Technological change to higher threshing and overall workrate capacities has probably occurred largely in

response to high rates of yield increase in Europe and North America and because imported headers have formed a larger proportion of the total Australian market. A number of factors related to grain quality and quantity loss are also probably involved - introduction of greater penalties for weather damage by the AWB, perhaps introduction of varieties which are more susceptible to weather damage, extension of

grain production into areas with greater risks of weather damage and possibly new knowledge and greater awareness amongst farmers of the losses from late harvesting.

E.3.2 Storage capacity

The extent to which the capacity of on-farm storage expands in the future will be heavily dependent upon the incentives offered to farmers. The main factors mentioned in the survey were:

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. that adequate compensation be paid for delayed delivery of grain;

. an increase in the harvesting rate is, to a significant extent, dependent on farmers having more on-farm storage for at least temporary storage of grain;

. rationalisation within the storage, handling and transport agencies may offer inducements for on-farm storage.

Additionally, the increasing area planted to crops not handled by the existing bulk handling agencies is already providing incentive to increase on-farm storage levels.

In the survey, respondents were asked 'Where will most investment in new farm storage be placed over the next ten years?' The analysis indicated that the investment would be in silos rather than sheds with particular emphasis on

elevated silos of less than 100 tonnes capacity. This response indicates a desire to allow for segregation of crops into smaller unit storages, despite the lower capital costs of large flat-bottom silos.

E.3.3 Information services

Technology which falls under this heading could have the most impact on the harvesting, handling and transport sectors over the next 20 years. However, while much of the technology is presently available, its cost is high and it is nearly impossible to predict its rate of adoption.

There is potential to eventually have instrumentation in the system which objectively measures sample data such as protein, bulk density, moisture, insects, chemicals and temperature. Measurement for protein is currently available but only being used by some handlers because of instrument cost. Moisture content measurement is well established both in the marketing system and on the farm because of the ready supply of suitable cost-effective instruments developed for this need (instruments cost between $300 to $700). The future development of electronics will undoubtedly lead to a fall in the price of these instruments, making them

accessible to producers in much the same way that moisture meters are today.

E.4 On-farm grain pest control

Estimates of likely future adoption of currently available grain insect control measures were obtained from twenty experts involved in research and development or application of control measures.

It was predicted that with no major changes to the grain industry there would be a slight fall in the use of

organophosphorus insecticides although it is expected the

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percentage of farmers applying pest control measures would generally increase, that application techniques would improve (for example, increased use of sealed silos), and that use of non-chemical measures would increase.

With a restriction in the availability of pesticides (most respondents assumed a restriction of those used by bulk handling agencies), it is expected that more use will be made of fumigation in sealed or sealable storages. It is thought that the use of non-chemical control measures will become more important under this scenario (that is greater use of

controlled atmosphere and aeration).

Any increase in resistance of stored grain insects to residual chemicals is likely to result in substitution of chemicals, greater reliance on fumigation in appropriate conditions and more use of non-chemical control measures. Again it is envisaged that hygiene will improve as will

adoption of management of pests using sampling as a guide.

A shift in production from cereals towards oilseeds and legumes would lead storers and handlers to decreased use of residual insecticides and improved application of fumigants. These predictions reflect differences in the types of pests and effectiveness of control measures between stored cereals and oilseeds and legumes.

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APPENDIX F RESULTS OF THE COMMISSION'S SURVEY OF PRIVATE GRAIN HANDLERS

F.1 Introduction

As part of its considerations of grain storage and handling in Australia, the Royal Commission identified a need to examine the costs and other features of private handling and storage businesses currently operating in Australia. In addition to written submissions and oral evidence provided at public hearings, the Commission decided to gather

information by means of a written survey of private grain storers and handlers. This also provided the opportunity to obtain a range of other information relevant to the Royal Commission's considerations.

F.2 Survey background

In April 1987, the Commission prepared a survey sample of 43 privately owned storage facilities from information provided by the BAE, Barley Marketing Board of New South Wales, the Rural Traders Association and the Victorian Road Transport Authority. A questionnaire (see section F.4) was mailed out and a follow-up telephone call was made to encourage response. From the eighteen responses, seven were considered usable, six lacked adequate detail and five were of limited use because the businesses were dominated by other activities such as seed cleaning and grain transport. There were 25 non-respondents.

Due to the significant number of non-respondents, the initial survey was followed up in October and November 1987, first with a preliminary telephone call to potential respondents to confirm the relevant nature of their activities and followed by a written questionnaire identical in content to the questionnaire used in April.

A Commission officer subsequently visited all but one of the potential respondents to assist with completion of the questionnaires. This second survey sample was selected from incomplete and non-respondents in the first survey, and from additional names provided by the inquiry participants. An additional eleven relevant businesses were identified. Selection was based on involvement of the business in grain storage and handling.

Thirty businesses in total provided the sample in this second survey. Twenty-nine businesses were interviewed, and there were additional interviews with accountants to obtain any extra information that was necessary.

The areas covered by these visits included southern Queensland, the western slopes of New South Wales from Queensland to Victoria, the New South Wales-Victoria border area from near Mildura to Albury, and western Victoria. Sydney and Melbourne offices of large grain businesses were

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also visited. Three questionnaires remained unanswered despite the visit and reminders. A number of other responses were late, being incomplete at the time of interview, and subsequently posted to the Commission. The total survey

sample of 37 provided a basic sample of 34 respondents of which 23 were in New South Wales, six in Victoria, four in Queensland and one in Western Australia. While all these respondents provided useful information, a significant number provided only incomplete information on costs and revenue questions.

F.3 Results

F.3.1 Business types surveyed

Over 50 per cent of respondents were private companies; 14 per cent were partnerships. The balance was made up by public companies, cooperatives and family or unit trusts. The detailed breakdown is contained in Table F.l.

TABLE F.l BUSINESS STRUCTURE OF RESPONDENTS TO THE COMMISSION'S SURVEY OF PRIVATE GRAIN HANDLERS

Type Number Per cent

Private company 19 51

Public company 3 8

Family or unit trust 3 8

Partnership 5 14

Co-operative 2 5

Not answered 5 14

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

While the respondents all had a significant involvement with grain storage and handling, their total business interests were varied in character. Respondents included grain traders or merchants, stock and station agents, wheat and barley

agents, private storers, seed cleaners and graders, transport operators, grain millers and processors, and private marketing organisations.

The respondents had been involved in grain storage and handling for periods ranging from three to over 100 years.

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The average period was 21 years, with 42 per cent of

respondents having been in operation for 15 years or more.

Storage capacity ranged from 180 tonnes to over 175 000 tonnes; total storage was 870 000 tonnes. Average storage was 25 000 tonnes; 55 per cent of respondents had storage

capacity in the range 180-15 000 tonnes. Around 59 per cent of storage was in sheds, 28 per cent in silos, and 16 per cent in bunkers.

Segregation capacity was surveyed and defined as the ability of a storer to separate and hold discrete parcels of grain. Segregations usually ranged from two to twenty, although in one case more than seventy bins were available for small segregations. The average number of segregations was around seven and the mode was four, although segregation capacities of three and six closely followed. Segregation in most cases was a function of the volume stored: the higher the storage volume the fewer the number of segregations that could be handled.

In-loading and out-loading facilities were usually matched to storage and throughput requirements. Fill-and-close storages sometimes moved out-loading plant between storages. Excess capacity exists in some operations where storage and plant are idle for six to eight months yearly but are fully

utilised during harvest and out-loading periods.

Rail facilities were available to 36 per cent of respondents but only 21 per cent actually used rail transport. The other 15 per cent usually cited a preference for competitive road transport.

F.3.2 Nature of storage and handling operations

Receivals of grain fell into a six-to-eight-week harvest period for 94 per cent of respondents. In Queensland, there was also a summer crop, extending annual receival times and the utilisation of facilities. Receivals outside harvests came from on-farm storages, which were considered by many respondents to be growing in recent years. The type of grains handled included wheat, barley, sorghum, oilseeds, maize, triticale and oats. Grain legumes were also stored or handled by several respondents.

The number of grains handled by respondents varied between one and ten, the greatest frequency being nearly 19 per cent (six respondents) handling four grains over the four-year period 1982 to 1985. The detailed results are contained in Table F.2.

Nearly 70 per cent of respondents handled the same grains from year to year but all were subject to significant volume fluctuations, the most dramatic being the jump from 423 197 total tonnes of grains received by respondents in 1982-83 to 769 563 tonnes in 1983-84. Consequently, annual throughput ratios (receivals to storage capacity) for

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respondents varied from a low of zero to a high of 3.62. Averaged over the four years 1982-83 to 1985-86, most respondents had ratios of between 0.5 and 1.5.

TABLE F.2 NUMBER OF GRAIN TYPES HANDLED BY PRIVATE HANDLERS, 1982 TO 1985

Number of grain types handled

Frequency handling Per cent

1 4 13

2 5 16

3 2 6

4 6 19

5 5 16

6 3 9

7 4 12

8 1 3

9 1 3

10 1 3

No data or nil response 5 N/A

N/A: Not applicable.

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

The problem of fluctuating receivals is exacerbated for many private handlers because, in effect, they provide residual storage capacity for the bulk handling agencies. In this situation in low production years, most grain can be handled by the bulk handling agencies such that there is little

demand for private storage.

There was a noticeable increase in the volume of wheat handled with the introduction of permit wheat sales in the 1983-84 season and there was some evidence of respondents diversifying into a broader range of grains from 1984-85.

Storage periods for grain were mostly in the range three to six months (74 per cent). For individual grains, 59 per cent of wheat and 87 per cent of barley were stored for three to six months. The balance of wheat storage was for a range of periods up to a year, while the balance of barley was stored

for periods of seven and twelve months. Other grains reflected a peaking of storage in the three to six month period. Many respondents said that their storage times varied with the size of the harvest: the smaller the harvest

the shorter the storage period.

Transfer of grains between facilities was not widespread and only occurred with 18 per cent of respondents. Most

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transfers occurred with vertically integrated businesses or to facilitate segregations or multi-grain handling.

Nearly 70 per cent of respondents claimed some level of dealing with bulk handling agencies. These dealings tended to fluctuate with the size of the crops, the type of crops

being handled, and the nature or diversity of the business concerned. There were some cases of movement towards the handling of non-statutory crops because of the independence from regulations that this provided.

Involvement with some exports was indicated by 76 per cent of respondents. Most exports went through bulk handling agency facilities; those that did not were shipped in containers. Some respondents were uncertain whether their grain was exported or used domestically.

F.3.3 Insect control

Sensitivity to insect control issues was high and respondents tended to dwell on this question. With wheat and barley, the control measures were laid down by the respective

authorities, and spraying was commonly with fenitrothion, methyl bromide or bioresmethrin. With infestations, when detected, dichlorvos was widely used. Fumigation was carried out by registered contractors and the medium was usually phosphine. 'Fogging' agents were used on sheds prior to filling. Control of weeds and foliage around sheds was considered important.

Some respondents with relatively short storage periods did not consider that insect infestation was a problem during harvest. The likelihood of insect contamination was seen to increase with the length of time grain was held on farm or stored elsewhere. The 1 quality' message for exports of Australian wheat and barley was echoed widely and the responsibility to maintain this standard appeared to be taken seriously.

While the terms ' sealed' and 'sealable' were difficult to define precisely, it would appear that about 30 per cent of storage is readily sealable. For shed storage, 10 per cent was sealable compared with 40 per cent for silos and 88 per cent for bunkers.

The issue of residues was not directly addressed, but many respondents clearly knew and used the application rates for self-applied insecticides.

F.3.4 Operational constraints

Respondents were asked what they saw as the main operational constraints to the expansion of their businesses. Over 80 per cent of respondents raised the issues of

over-regulation, monopoly powers and restrictive practices of statutory boards as their main concerns. These were

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expressed in numerous ways, including the limitations on private operations caused by compulsory acquisition powers, GEB control over storage and grains in Victoria, unreliable throughput for private operators reliant on statutory grains, and the lack of incentive for private operators caused by excessive regulation.

The next major concern to over 62 per cent of private

operators was finance and the economy. Issues raised included the low return on capital, high interest rates, availability of capital and the general economic downturn.

Around 31 per cent of respondents raised issues related to reduced sowings, the limitations for their businesses of crop availability in marginal areas, and the small quantities of some grains grown.

A number of other issues were raised with lower frequency by respondents. These included concern with costly or

unreliable wharf services, limitations imposed by high labour costs, and the costs associated with meeting export hygiene standards.

F.3.5 Financial

Respondents indicated that grain storage charges of the respective statutory bodies largely set the industry standard.

Storers able to price independently of statutory bodies indicated that they were pragmatic and used most if not all of the suggested charging bases nominated in the

questionnaire, including grain density, volume of throughput, length of time in storage, type of storage used, 'package deals' and volume discounts. Thirty six per cent of

respondents indicated that they modified their pricing behaviour to meet competition. Other charging was commonly on an input/output/throughput basis.

The goodwill of regular and potential clients was considered important by all respondents, but closer questioning also indicated that customers believe that service and reputation must be matched with the right price - most claimed that even their best customers were particularly price sensitive.

F.3.6 Grain storage costs

Grain storage costs varied significantly between

respondents. An important factor was seasonal throughput fluctuations. In the 1982-83 drought season the small harvest reduced throughput in most establishments, causing a rise in costs, whilst in 1983-84 there was a record harvest

that ensured a high level of storage utilisation and lower costs. The years 1984-85 to 1985-86 had more normal levels of production, reflecting an average use of private storage facilities and average costs.

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The nature of businesses covered also caused some variation in storage costs. Some, notably stock and station agents, grain traders and rural merchants, had no separate accounting of their grain storage functions and figures were derived on an 'apportionment' basis, where necessary with advice from the businesses' accountants. In some other cases businesses could not provide a breakdown of cost data in the form required by the Commission.

Taking these difficulties into account, a sub-sample of eleven respondents was selected, these respondents being considered the most reliable. They represented

163 972 tonnes of storage capacity, or about 19 per cent of the available survey sample. Total throughput over four years averaged 172 875 tonnes per year, or 11 625 tonnes per respondent. Only six usable responses were available for

1982-83.

Some adjustments also had to be made for insecticide costs. For over 70 per cent of respondents the required pesticide was either paid for or provided directly by the marketing boards or handling authorities and no cost data were available from the respondent. In order to give a comparable value with other respondents, and to provide a sound basis on which to compare private handling with public handling costs, a pesticide cost of 0.50 cents per tonne was imputed where information was not provided. This figure was derived from information provided to the Commission by the bulk handling agencies.

F.3.7 Operating costs

Weighted average operating costs per tonne for the survey years were derived by weighting each site cost by the quantity of grain received. The results are presented in Table F.3.

The increased operating costs in 1982-83 were due to reduced throughput in the drought that year. The significantly lower costs in 1983-84 reflect the higher receivals due to that season's large crop.

F.3.9 Capital costs

Comments by respondents concerning capital costs indicated that there was a wide range of bases on which capital costs were estimated, giving rise to concerns by the Commission about the reliability of this capital data. As a means of

systematic comparison, capital costs were therefore imputed as a function of storage capacity and type using a 5 per cent discount rate (the resultant capital charges are presented in Table F.4).

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TABLE F.3 WEIGHTED AVERAGE OPERATING COSTS PER TONNE FOR RESPONDENTS TO THE COMMISSION'S SURVEY OF PRIVATE GRAIN HANDLERS

Year Weighted

average operating cost per tonne

Average receivals per respondent

tonnes

Equivalent GHA

operating costs3

1982-83 $4.97 5 875 $5.31

1983-84 $2.28 15 046 $3.21

1984-85 $3.24 11 369 $3.75

1985-86 $3.77 11 722 $3.95

Average for period $3.28 11 003 $3.83

a. Theoretically derived costs obtained by applying the private grain handlers' facility attributes to the operating cost function derived for GHA country receival points (see Appendix A).

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

TABLE F.4 IMPUTED CAPITAL COSTS FOR PRIVATE GRAIN HANDLERS ($)

Storage type Annuitised

rate per tonne

Silos 4.20

Sheds 4.00

Bunkers 2.42

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

Taken over total receivals for the four years, the imputed capital cost was estimated at $5.33 per tonne per year. It should be noted that in many cases this imputed value would overstate the cost of capital as perceived by the

respondents. Storage facilities were often built with their own labour and during periods when excess paid labour was

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available. Consequently, many respondents attributed little more than the cost of materials to their capital investment.

F.3.10 Cost function

In order to summarise the cost relationships revealed by the private handlers' survey, a cost function similar to those estimated for the GHA and SACBH was estimated using

regression analysis. The function, with estimated standard errors in parentheses, is

AOC = 4.98 + 2.24/Q - 10.96 (Q/C) + 3.65 (Q/C)2 + 0.84G (1.29) (0.63) (2.45) (2.11) (2.20)

(R2 = 0.49)

where:

AOC = average operating cost; Q = throughput (100 000) tonnes; C = storage capacity (100 000 tonnes);

G = number of segregations handled.

This function displays the same basic U-shape as those estimated for the bulk handling agencies and indicates that economies of scale and throughput are present. However, diseconomies eventually set in when throughput becomes excessive relative to the capacity of the site.

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F.4 Survey questionnaire

QUESTIONNAIRE TO PRIVATE GRAIN HANDLERS

CONFIDENTIAL

PART 1 - Operations

1] Where is your business located (nearest town)?

2] What is the nature of your business? How does the grain handling and storage activity relate to other business activities?

3] What is your relationship with the bulk handling authority (BHA) in your or other states? e.g. use of BHA services, use by BHA of your facilities.

4] What proportion of each grain type you handle is exported as compared to supply to the domestic market? Does any grain exported go through BHA facilities? If so, what proportion?

5] What is the average receival period for each grain type delivered? e.g. is it a 6 week period around harvest period or is it spread more evenly throughout the year. 6

6] What is the average length of time over which grain of each type is stored?

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7] How many segregations of grain can you store at one time?

8] Do you transfer any grain received to other facilities owned by you?

9] What insect control procedures do you use?

10] What type of inloading facilities do you have? What is its loading capacity (t/hr)?

11] What type of outloading facilities do you have? What is its loading capacity (t/hr)?

12] Is your facility served by rail? If so what proportion of grain is outloaded to rail?

13] What do you see as the main operational constraints to the expansion of your business?

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14] Please complete the following tables.

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

QUANTITY RECEIVED t t t t

- Wheat _____________________________________

- Barley _____________________________________

- Oats _____________________________________

- Grain sorghum ______ ’ ______________________________

- Lupins _____________________________________

- Oilseeds (specify type)

- Other

TOTAL RECEIVALS

STORAGE TYPE CAPACITY

(specify type, number and if sealable)

TOTAL CAPACITY

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CONFIDENTIAL

PART 2 - Financial

1] What is the basis of your charges? e.g. grain density, volume of throughput, length of time in storage, type of storage used, insect control, availability of package deals, discounts for large volume customers, etc.

2] Do you modify your pricing behaviour to meet any increases in competition that might occur? If so, how?

3] Do you modify your pricing behaviour to accommodate the needs of exporters in securing markets? If so, how?

4] How important to your company is good will - i.e. regular deliveries by some growers to your facilities each year?

5] How are your accounts kept? On a weekly/monthly/annual basis?

6] What is the equity base of your company? e.g. is it a public company, private company, a partnership or sole trader venture. 7

7] How long has your company been involved in the storing and handling of grain?

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8] Complete the following table. (total dollar amount - do not show in rate per tonne)

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

CHARGES AND RECEIPTS $ $ $ $

- Charges (by grain type) (b )

CONFIDENTIAL

- Other receipts (specify)

TOTAL RECEIPTS

(b) Charges on the basis of six months storage of a

particular grain.

9] Complete the following table. (Note: If possible please provide cost information specific to the grain handling and storage activity of your business. If these costs cannot be

isolated from other business costs, please specify the nature and size of the other business activities covered by the figures).

COSTS ($) 1982-83 1983-84 1984-85 1985-86

(total dollar amount - do not show in rate per tonne)

Capital (fixed) Costs

- Interest and loan expenses _______________________________

- Depreciation

- Repairs and maintenance _______________________________

- Insurance _______________________________

- Other (please specify) _______________________________

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CONFIDENTIAL

Operating Cost

- Labour cost - Wages and salaries . normal . overtime - Assoc, labour costs

(see note (a) below)

- Insecticides, fumigants etc.

- Fuel, light, power

- Cost of testing grain

- Transport costs - road . quantity transported . cost - rail

. quantity transported . cost

- Payments to BHA's (Please specify)

- Other (Specify large items)

TOTAL COSTS

(a) includes superannuation, retiring allowances, leave expenses, payroll tax and workers compensation.

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Alchian AA & Allen WR 1969, Exchange & Production: Theory in Use, Wadsworth, Belmont.

AWB 1984, Port Information Booklet, Melbourne, November.

BAE 1983, 'Wheat marketing in Australia: an economic evaluation', Occasional Paper No. 86, AGPS, Canberra.

Benson R, Espinas V, Andrews A, Johnston J, Price D & Small A 1987, 'On farm storage from a policy perspective - models, costs and utilisation' , paper presented at the 31st Agricultural Economics Society, University of Adelaide, February.

Dagher MA, & Robbins LW 1987, 'Grain export elevators: an economies of size analysis', Agribusiness, 3(2), 169-78.

French BC 1977, 'The analysis of productive efficiency in agricultural marketing: models, methods, and progress', in Martin LR (ed.), A Survey of Agricultural Economic Literature, Vol. 1, University of Minnesota Press, Minneapolis, 93-206.

Friedman M 1966, Price Theory: A Provisional Text, Aldine, Chicago.

GHA 1987a, Annual Report 1985-86, Sydney.

____ 1987b, 'Focus on the future - options for cost reduction in the G.H.A. handling system', Discussion Paper No. 1, Sydney.

Johnston J 1972, Econometric Methods, McGraw-Hill, New York.

Judge GE, Griffiths WE, Hill RC, Lutkepohl H & Lee TC 1985, The Theory and Practice of Econometrics, John Wiley and Sons, New York.

Kerin PD 1985, 'Optimal location, number and size of grain handling facilities in South Australia: (3) estimation of short-run and long-run cost functions', Technical Report No. 80, South Australian Department of

Agriculture, Adelaide.

Kmenta J 1971, Elements of Econometrics, Macmillan Publishing Co., New York.

Kondinin Group 1986, The Reapers Digest: The Essential Harvesting Manual, Lamb Printers, West Perth.

Lipsey RG, Langley PC & Mahoney DM 1981, Positive Economics for Australian Students, Weidenfeld and Nicolson, Sydney.

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Pasour EC 1981, 'A further note on the measurement of efficiency and economies of farm size', Journal of Agricultural Economics, 32(2), 135-46.

Spriggs J, Geldard J, Gerardi W & Treadwell R 1987, 'Institutional arrangements in the Australian wheat distribution system', BAE Occasional Paper 99, AGPS, Canberra.

Stollsteimer JF, Bressler RG & Boles JN 1961, 'Cost functions from cross-section data - fact or fantasy?' , Agricultural Economics Research, 13(3), 79-88.

1 5 4

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

LAND TRANSPORT

Supporting Paper 4 February 1988

CONTENTS

Page

1 INTRODUCTION 1

2 OVERVIEW OF THE GRAIN TRANSPORT ENVIRONMENT 3

3 GOVERNMENT INTERVENTION AND COMPETITION IN THE GRAIN TRANSPORT MARKET 7

4 POLICY ISSUES IN LAND TRANSPORT 12

4.1 Introduction 12

4.2 Deregulation of grain transport 13

4.3 Railways as commercial operations 14

4.4 Limiting restrictive trade practices 16 4.5 Transport cost recovery 16

4.5.1 Background 16

4.5.2 Financing practices and proposed reforms 18

4.5.3 Progress on policy reform 22

4.5.4 Implications of current policy for the Commission's recommendations 23

5 THE COSTS OF ROAD AND RAIL TRANSPORT 25

5.1 Road transport costs 25

5.1.1 Costs of using trucks 25

5.1.2 Costs associated with use of roads 27

5.1.3 Relationship between road charges and road costs 30

5.1.4 Avoidable costs 32

5.1.5 Overloading 33

5.2 Rail transport costs 33

5.2.1 Operating costs 33

5.2.2 Cost recovery relative to road 37

5.3 Implications of the cost recovery situation for the Commission's recommendations 40

6 ROAD FUNDING ISSUES 43

6.1 Introduction 43

6.2 Current funding arrangements 43

6.3 Alternative funding arrangements 46

6.3.1 Revised funding formulae 46

6.3.2 Local government rates 47

6.3.3 Direct cost recovery 48

6.3.4 Targeted funding schemes 48

iii

APPENDICES

A Cost structures for road transport 51

B Capital and cost structures for rail transport 79 C Developments in technology 92

REFERENCES 95

TABLES

2.1 Arrangements for country silo to port movement of grain, 1985-86 4

2.2 Grain tonnage and revenue for State rail authorities, 1985-86 5

2.3 Interstate grain movements, 1985-86 6

5.1 Road cost functions: financial cost, 1987 26

5.2 Road user charges and taxes: six-axle articulated truck, 1987 28

5.3 Road cost functions: resource cost, 1987 29

5.4 Cost breakdown for rail transport of grain: Victoria and South Australia 34

5.5 Comparative road and rail costs: branch line 37

6.1 Rural road expenditure by State and level of Government, 1984-85 45

A.1 Operating costs: six-axle articulated truck, 1987 57

A.2 Operating costs: B-double, 1987 58

A.3 Composition of road freight operating costs 59

A.4 Operating costs: two-axle rigid trucks, 1987 60

A.5 Road cost functions: financial costs, 1987 61

A.6 Road cost functions: resource costs, 1987 62

A.7 Functional classification of Australian roads 69

A.8 Unit avoidable cost for RoRVL three-axle rigid trucks by road class 70

A.9 Unit avoidable cost for RoRVL six-axle articulated trucks by road class 71

iv

A.10 Unit avoidable cost for RoRVL six-axle articulated trucks by road type 72

A.11 Unit avoidable road cost by road class 74

A.12 Average arterial road costs attributable to vehicles 76

A. 13 Western Australian grain haulage road costs 77

B. l National Freight Group presentation of cost structure 81

B.2 Summary of rail costs, 1985-86 83

B.3 Average railway grain tasks and cost recovery, 1985-86 84

B .4 Rail operating parameters and costs for main and branch line operations, 1985-86 costs 88

B .5 Rail operating costs for main line operations by distance, 1985-86 90

FIGURES

A. 1 Road cost and revenue functions - effects of additional grain transport 67

B. l Rail costs by volume for a 100km branch line 86

C. l B-Doubles 93

v

1 . INTRODUCTION

This supporting paper deals with issues relevant to the land transport of grain. Information contained in it has been drawn from submissions, evidence presented at public hearings, the Commission's own research, and other relevant research.

The Commission believes that grain transport, like the rest of the distribution system, should be 1 market-driven' rather than 'service-driven'. The Commission's concern with a service-driven system for grain transport is that the level

of service is usually fixed and unresponsive to the changing economic forces in the market place (whether it be the grain market, the transport market or the storage and handling market).

In Supporting Paper 6, dealing with pricing practices, the market-driven approach to provision of services is highlighted, as is the role of prices in conveying market

signals to participants in the system. Particular attention is given in that paper to the underlying issues and economic effects of current and alternative pricing practices for grain transport (as well as other components of the

distribution system). Pricing practices are also referred to in this paper, but it should be noted that a detailed

treatment of pricing practices is presented in Supporting Paper 6.

The paper has three main aims. The first is to examine the role of government, whether Commonwealth or State, in the grain transport market. Of particular importance are the questions of the nature of a 'level playing field' concept

and the extent to which road and rail transport should be permitted to compete and, if so, on what basis. The second is to consider the transport policy implications associated with a deregulated storage, handling and transport system.

Recent and expected developments in Commonwealth and State transport policy are reviewed in relation to this issue with particular attention given to road user charging and road funding policies. The third is to detail estimates of the

costs of road and rail transport, with a view to examining the comparative advantage that each mode might have in a deregulated storage, handling and transport environment.

The remainder of this paper is presented in six chapters. In Chapter 2, the key features of the current environment for grain transport in Australia are outlined. This is followed in Chapter 3 by a discussion of the role of government

intervention in the transport area and the circumstances under which it would be desirable, from a community

viewpoint, for the two modes to compete. In Chapter 4, some relevant transport policy issues are considered. Particular attention is given to policy developments in the area of road user charging. Estimates of the direct costs of road and rail transport are presented in Chapter 5 together with consideration of the indirect costs of road transport (such

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as road damage, congestion, pollution and road safety). Results from this analysis are used to assess the rate of road cost recovery that is likely for any additional road transport used for grain. Also in Chapter 5, the estimated road and rail costs are used to illustrate the comparative

advantage of each modes under different conditions. Discussion in this chapter draws extensively on detailed material on cost structures for road and rail transport presented in Appendices A and B . Chapter 6 examines the issues associated with road funding allocation and canvasses policy mechanisms that could be used if necessary to match

funding to the incidence of road damage.

2. OVERVIEW OF THE GRAIN TRANSPORT ENVIRONMENT

Land-based transport costs represent a significant proportion of total grain production costs, typically around 15 per cent of total production costs (including handling and storage charges). On a modal basis rail costs account for about

12 per cent, and road costs for about 3 per cent.

Traditionally, grain has been delivered by farmers to local silos, and bulk handling agencies have arranged for transport from local silos to export terminals. Road transport is used for all initial movement of grain to local silos; subsequent movement from local silos to export terminals is dominated by rail transport. More detailed information on the nature of the transport task is presented in Appendices A and B .

The road transport of grain from farm to local silo is organised and undertaken either by the grower, using a farm truck, or by a road transport contractor. Three types of

trucks are used for the movement of grain from farm to local silo: six-axle articulated vehicles with a gross mass of 38 to 41 tonnes; three-axle rigid vehicles with a gross mass of 20 tonnes; and two-axle rigid vehicles with a gross mass of 15 tonnes. In general, larger vehicles are used over

longer distances and the smaller vehicles, owned by growers, are used principally for short hauls. The distance travelled from farm to local silo ranges from an average of

8 kilometres in Victoria to 28 kilometres in Queensland. The roads used for farm to local silo deliveries are generally classified as 'rural local roads' and are frequently unsealed.

In all grain-producing States, the transport of grain intrastate from local silo to port is undertaken primarily by rail. The distance travelled by rail ranges from an average of 160 kilometres in South Australia to 500 kilometres in New South Wales. The dominance of rail over road for the silo to port terminal journey is not necessarily due to the inherent economic advantages of rail because there are significant restrictions to the use of road transport for movement of grain from local silo to port in all States (see Table 2.1). In South Australia there is a $2.50 per tonne surcharge levied by Australian National on grain conveyed by road from rail-served silos. In Western Australia it is government policy for grain where possible to be regulated to rail. In regions where silos are located away from railheads, road transport firms (under license) are used. In Victoria and Queensland the carriage of grain is generally restricted to rail for distances exceeding 60 kilometres and 120 kilometres respectively. (More detail on the nature of restrictions on road transport is provided in Supporting Paper 2). New South Wales has no regulations restricting the transport of grain from silo to port by road. There are, however, no road receival facilities at port, although the Grain Handling Authority of New South Wales is installing road receival hoppers capable of receiving limited quantities of grain at

3

Western Australia

Yes, except Kwinana.

South Australia

53

Yes

Grain restricted Nil to rail in rail served areas.

Transport Act 1966-1982 None

a. Includes some grain transported direct from farm to terminal and interstate deliveries. b. Range for 1983-84 to 1985-86. c. Consists primarily of direct farm to port movements.

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

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Port Kembla (currently under construction) and Newcastle terminals.

The transport of grain by rail from country silo to port represents a significant proportion of most State rail authorities' business, in terms of both tonnage and freight revenue (see Table 2.2). Grain is a particularly important traffic for V/Line, Westrail and the State Rail Authority of New South Wales but is of less significance for Queensland Railways and Australian National. The carriage of grain by all State rail authorities is now dominated by the use of

special purpose bottom discharge wagons, the SRA and V/Line using them exclusively.

TABLE 2.2 GRAIN TONNAGE AND REVENUE FOR STATE RAIL AUTHORITIES, 1985-86

Rail authority

Item SRA V/Line QR ANa Westrail

Grain tonnage ('000 tonnes) 7 688 3 302 3 488 1 702 4 875

Percentage of total freight tonnage

14.2 31.4 4.7 15.7 23.0

Grain revenue ($ million) 183 67.1 69.5 19.1 74.3

Percentage of total revenue 24.8 37.9b 7.7° 8.7d 37.0

a. Mainland operations only. b . Percentage of revenue excluding metropolitan passenger services. c . Percentage of QR revenue for all agricultural produce

excluding livestock and including mainly grain. d. Percentage of AN revenue for operations in all States.

Source: SRA, V/Line, QR and AN Annual Reports 1985-86; Westrail, personal communication, August 1987.

The scope for interstate movements of grain by rail is limited by the different gauges of the various State rail systems (with the exception of movements between Victoria and South Australia). In 1985-86, an estimated 850 000 tonnes of grain moved across State borders to export terminals. The majority of this was carried by road transport, which is

largely unrestricted except for State limits on vehicle mass and dimensions. Of the grain transported interstate, by far

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the largest movements are those from New South Wales to Victoria and Queensland (see Table 2.3).

TABLE 2.3 INTERSTATE GRAIN MOVEMENTS, 1985-86

Origin Destination Tonnage

NSW Victoria 492 000

Queensland 246 000

South Australia 2 000

Sub-total 740 000

Victoria South Australia 75 000

South Australia Victoria 35 000

Total 850 000

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

The rail movement of grain between South Australia and Victoria is subject to an agreement between the bulk handling agencies and rail authorities in these two States. The

agreement provides for the movement of grain from

north-western Victoria to Port Adelaide and from the south-east of South Australia to Portland, but the amount of grain transported is subject to a restriction that requires the revenue lost by each State to be equal.

In total, the interstate movement of grain to export ports accounts for only approximately 4 per cent of total grain exports. Further comment on interstate grain flows is provided in Supporting Paper 8.

6

3. GOVERNMENT INTERVENTION AND COMPETITION IN THE GRAIN TRANSPORT MARKET

The Commission received a variety of views about grain transport. Some rail authorities, local councils and unions suggested that the present transport arrangements, which restrict much of the grain transport task to rail, should be maintained. On the other hand, many grower bodies and other parties (for example, ACIL Australia Pty Ltd, the Australian Wheat Board (AWB) and the Bureau of Agricultural Economics

(BAE)) stressed the economic advantages of a transport system in which road transport is given the opportunity to compete for grain traffic. Another view that frequently emerged at public hearings was that it may be appropriate to have a mix of competition and administrative arrangements for grain transport. This last view reflects doubts about the efficiency of a totally deregulated transport environment but recognises the role of incentives and competition in achieving a desirable modal balance.

The Commission's task was, in the first instance, to identify an efficient, cost-effective and integrated storage, handling and transport system. The fundamental question in the

transport area is therefore whether such a system is more likely to emerge in a regulated, a deregulated or a partly regulated transport environment. In order to address this

question the Commission has defined what it understands the terms 'efficiency', 'cost effectiveness' and 'integrated' to mean. During discussions with a range of inquiry

participants it has received broad support for these definitions. These terms provide a basis against which any transport (or storage and handling) system can be assessed and are defined in brief as follows:

. an integrated system is a system in which storage,

handling, transport and port terminal services are combined such that grain flows along the least-cost path for the system overall;

. 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 way such that no more inputs than necessary are used to provide a particular service;

. economic efficiency embraces both 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.

A number of factors cast significant doubt on the capacity of a regulated transport system to meet these criteria.

First, a regulated (to rail) transport system necessarily restricts the choice of storage, handling and transport options and therefore makes it impossible to realise the

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major source of cost savings identified by the Commission in Supporting Paper 8. (An exception could be interstate movements that are substantially free of regulatory restrictions.) Of course, it could be argued that

policy-makers and administrators have assessed the alternative means of transporting grain and reached the conclusion that rail transport offers the least-cost solution. This has not occurred in Australia because the information on road and rail costs required to make such an assessment has not, until recent times (and even then on a very limited basis), been available to decision-makers in rail authorities and regulatory agencies. In any case, to administratively select least-cost grain paths would require substantial quantities of data and detailed strategies to cope 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 non feasible process.

Second, regulated transport systems rely principally on external pressures, such as those that stem from progressive management, public accountability requirements and reviews and inquiries, for pursuit of the cost-effectiveness objective. As pointed out in Supporting Paper 2, such pressures vary in their intensity, frequency and duration and cannot therefore be relied upon to consistently produce a cost-effective outcome. Furthermore, the general absence of performance incentives in a regulated (rail) transport system means that there has been less urgency to introduce

productivity improvements such as reduced crewing, increased wagon utilisation, line upgrading, and so on. In addition, the regulating of grain onto rail implies that rail

authorities must invest sufficient funds in locomotives and rolling stock to cope with peak years of production. In a highly variable grain production environment, such as that prevailing in Australia, this rolling stock may not be fully employed in years of lower production, thereby leading to possible overcapitalisation.

Third, efficiency in a distribution system requires that users and suppliers of transport services face prices that reflect the true economic costs (resource or social costs) of their decisions. Such prices are basic to achieving maximum benefit from employment of the community's resources and are

fundamental to efficient investment and disinvestment decisions. The importance of price signals in encouraging efficient resource allocation and the distortionary effects of transport pricing regimes that do not reflect the costs of service provision are dealt with in detail in Supporting Paper 6.

Historically, users and suppliers of rail services in a regulated grain transport environment have been unable to take decisions on the basis of resource costs because the prices faced have not, in general, been determined on this basis. More recently, however, State rail authorities have moved towards pricing regimes that are meant to approximate a competitive market outcome. Examples of this approach

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include the radial rating schemes in operation in Victoria and Western Australia (see Supporting Paper 6.)· However, except in South Australia where the transport sector is competitive, such schemes are only proxies for an unregulated transport market, and this raises questions about the role of regulation in the first place. Rail authorities have responded to this challenge by arguing that use of these pricing schemes in a regulated transport market provides the benefits of deregulation while maintaining grain traffic on rail and thereby enabling economies of throughput to be achieved. This argument denies the benefits that may accrue to growers and the community in general from competition between road and rail transport: there is no continuing pressure for reductions in the costs of rail transport nor commercial penalties for failure to achieve a road transport price target.

These problems with a regulated grain transport system mean that, in practice, the scope for improved efficiency in the grain transport system is largely limited to administrative pressure to reduce costs, and possibly more effective co-ordination at service interfaces. In this respect, there is clearly discrimination against the grain industry: for most other commodities rail is subject to competition from road.

At the opposite end of the regulation spectrum is the option of having a transport market where road and rail are free to compete for grain traffic, as is largely the case in South Australia. The proponents of deregulated markets of this kind have argued that competitive influences can be relied upon to produce a balance of road and rail transport that will be integrated, cost-effective and efficient. There is no doubt that a competitive market environment can generate

cost savings and stimulate efficiency; however, for an efficient system to develop in a deregulated transport market certain conditions need to apply. These conditions can be summarised briefly as follows:

. An efficient, deregulated transport market needs to be contestable in the sense that current and potential participants in the industry have equal access to all customers and to the most efficient technology, and entry to and exit from the industry must be costless. The grain transport industry does satisfy some aspects of contestability in that entry and exit costs for road transport operators appear to be low. Rail transport, however, is characterised by significant capital costs that largely become sunk. Competition in the supply of railway services, especially in the provision of the permanent way network, is not likely; nevertheless, given appropriate commercial incentives, railway operators are likely to behave in a competitive manner in a deregulated transport market due to the presence of actual or potential road competition.

. To encourage effective competition each mode should be free to compete on a commercial basis. Rail authorities

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should not be required to meet social obligations and should have the necessary operational and management flexibility to enable commercial opportunities to be independently pursued. The current configuration of most Australian rail authorities is not likely to allow

such flexibility.

Rail and road both should cover their avoidable costs, including, in the case of road transport, any costs imposed on the community through pavement damage, accidents, congestion and pollution. Both modes would also be expected to make some contribution where possible to their respective joint and common costs. This raises questions about the appropriate pricing and cost recovery policies for both road and rail.

A further requirement for an efficient deregulated transport market is the absence of 'destructive' competition. Competition between road and rail may be

destructive if it leads to a non-optimal modal balance. It has been suggested that, if rail tonnage decreases as a result of road competition, its fixed costs (for example, maintenance of the permanent way and corporate

overheads) must be recovered from a lower volume base. Rail may be forced to disinvest and leave the grain transport task in the hands of road transport, at an

overall higher cost to the community. The Commission's research reported in Supporting Paper 8 suggests that this is not likely to be a problem. While the rail

network may contract by withdrawing services from some high cost branch lines, rail operating costs are significantly below those of road transport in many other areas. Moreover, it could be expected that the nature of rail's cost structure will be influenced by the presence of potential competition from road transport.

An efficient transport system should also limit the scope for monopoly pricing and anti-competitive behaviour. Some inquiry participants have suggested that a possible outcome of a deregulated transport

setting is that in some areas rail will be far more efficient than road transport, thereby raising the possibility of rail authorities charging above stand-alone costs. In other cases predatory pricing by

either rail or road may be a potential problem. The Commission considers it reasonable for a competitive rail authority to recoup its fixed and joint costs where it can. In any case, the local road price is likely to provide an reasonable upper limit to the price rail

could obtain. Of more concern is the need for policies to address the potential for predatory pricing by either rail or road operators.

A final requirement for an efficient deregulated transport market is that all of the costs and benefits arising from grain transport are internalised to the

individuals or agencies responsible for their

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SUPPORTING PAPER 4

generation. Similarly, with road construction and maintenance, funds should be directed to the point where costs are incurred. If there are any costs or benefits that are not reflected in prices and funding

arrangements in a deregulated transport market it is likely that inefficiency will result. Of particular significance in this regard is the road pavement deterioration caused by road transport and costs associated with road accidents, pollution and

congestion. This requirement calls into question the effectiveness of current road user charging and road funding procedures.

Some of the conditions necessary for the potential cost savings to be realised in a deregulated transport market are currently likely to occur; however, in other cases, policy changes would be necessary. Thus, it appears that neither the regulatory nor the deregulatory options would necessarily provide an efficient, cost-effective integrated system: both approaches present a range of problems. Overall, the Commission is of the view that there is scope for significant deregulation of the grain transport market, provided that the issues raised above are addressed with some policy changes and regulatory solutions. This mix is outlined in the following chapter together with the policy implications of the Commission's preferred transport approach.

11

4. POLICY ISSUES IN LAND TRANSPORT

4.1 Introduction

In order to provide growers and other participants in the grain distribution system with freedom of choice between competitive land transport options, the Commission's preferred approach is the removal of all transport

restrictions that limit such choice and the introduction of policies that will allow the modes to compete on equal terms.

Some of the important issues associated with the

implementation of such a policy are issues 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 specific grain transport policies. 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;

(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;

(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;

(d ) the incidence of taxes and charges to be related to road usage and associated road damage;

(e) arrangements in existence to ensure that road funding matches incidence of costs;

(f ) effective prevention of restrictive trade practices and exploitative pricing practices.

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 in the following paragraphs.

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4.2 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

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 would

appear 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

13

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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 Commission is of the view that, unless clearly justifiable, restrictions on the physical characteristics of road vehicles should be lifted.

4.3 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 in Supporting Paper 3 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 Australian National.

The Australian National Railways Commission, trading as Australian National, or AN, is a Federal Government business enterprise that conducts its operations by virtue of the Australian National Railways Commission Act 1983 (the ANRC Act). Within South Australia, Australian National was created by amalgamation of the former Commonwealth Railways with the South Australian Railways; the terms of this

arrangement are set out in the Railways Agreement (South Australia) Act 1975 (Cwlth). There was a similar arrangement made relating to amalgamation of the former Tasmanian Government Railways into Australian National. Australian National gained effective management control of all of these railways on 1 March 1978.

The ANRC Act requires Australian National to act as a commercial business enterprise and gives it significant freedom to pursue commercial objectives without government intervention. In these respects, Australian National'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 Australian National to receive financial compensation for actions taken in response to government direction;

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SUPPORTING PAPER 4

. freedom to set charges, so long as they conform with principles established by the Commission and approved by the 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 Australian National's accountability provisions is the preparation each year of a corporate plan to be submitted to the Minister. As part of the corporate planning process Australian National 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.

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 Federal Government to cover losses incurred by Australian National's non-commercial activities, in particular, operations in Tasmania and all passenger services.

Commercialisation of rail also requires 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 must not continue. In some cases, outstanding debt should also 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 had a comparative advantage. This would lead to a better modal balance, exploiting the relative strengths of each mode.

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4.4 Limiting restrictive trade practices

Another element 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 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 to ensure that railway authorities are subject to the relevant legislation.

4.5 Transport cost recovery

Deregulation of grain transport and the commercialisation of the railways' grain business will increase the flexibility and responsiveness of the grain transport system. The benefits of these reforms will be maximised if the financial costs faced by the alternative modes accurately reflect the resource and social costs of providing the services. Elements (c) and (d) of the Commission's preferred transport policy are concerned with these issues.

4.5.1 Background

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

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and their implications for economic efficiency. State regulations adopted to protect rail authorities from road competition have been progressively reduced in most States in recent years; however, certain bulk cargoes, particularly grain, are still reserved to rail in some States through

State government controls such as the Transport Acts in Victoria and Queensland. Other problems arise from lack of uniformity between States with respect to vehicle weight and speed limits, road user charging and other regulations.

The inadequacies of the road financing and regulatory procedures in Australia have been recognised for some time and reform is currently under way. In the past, a patchwork of arrangements has tended to evolve as a result of

unco-ordinated State and federal policies involving a range of objectives. In 1983 the National Road Freight Industry Inquiry was established to consider various issues relevant to the road freight industry.

The Inquiry, which reported in 1984, concluded that the road freight industry generally delivers the high quality levels of service demanded by transport users; however, it identified a number of problem areas requiring attention,

among them the need to redress some inefficiencies related to cost recovery. In this regard the inquiry concluded

Recovery of public costs in both road and rail is

haphazard and information about it is kept obscure. On the evidence given to the Inquiry the principle of total cost recovery is not disputed. The inescapable

judgement however is that unless there is a co-ordinated attempt by the Commonwealth and State governments to apply some commonsense and equitable guidelines to future cost recovery charges, inherited inefficiencies and inequities will remain and may lead to more damaging

economic and social consequences. (NRFII 1984, p. 9)

The inquiry proposed a number of changes in the area of cost recovery and road funding, covering policy reform in the short, medium and long term. The changes were aimed at achieving a more uniform and systematic method of road user

charging based on the underlying principle of linking charges to road usage and associated damage. In 1985 the Federal Government announced its decision to implement, in co-operation with State and Territory governments, an initial

'fast track' package of the inquiry's recommendations.

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.

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4.5.2 Financing practices and proposed reforms

Definition of charges and hypothecation Element (c) of the Commission's preferred transport approach requires that both modes 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 drivers' licence fees'

(p. 251).

The Royal 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 taxes and charges incurred by road transport operators:

. 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 example, railway authorities and railway unions tend to argue that only hypothecated charges should be considered in determining the rates of road cost recovery.

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This attitude is also shared by the Commonwealth Treasury, which emphasises the need for governments to maintain flexibility in their funding arrangements. A similarly narrow view is taken by the Western Australian Department of Transport which, in a recent study of the grain transport

system in that State, considered only the various taxes and charges paid by road operators ' which accrue to the State' for the purpose of assessing the level of cost recovery. For

a road train operation, this component amounted to 12.2 cents per kilometre out of an estimated total taxes and charges impost of 28.1 cents per kilometre. (Brindal & Dumas 1987)

On the other hand, some parties with an interest in promoting the role of road transport tend to suggest that all taxes and charges should be offset against road expenditure. Such groups include representatives of the road freight industry

and some grower representatives.

Given this situation, the Commission can well understand the attitude of the Australian Road Transport Federation:

It is a truism that the market for freight services is influenced by all the taxes and charges paid to

governments, and not merely those that are defined by the Minister as relevant ... We are concerned therefore, that the definition of 'relevant taxes and charges' is

not merely arbitrary and momentarily expedient, but can be defended against the practical criticisms of those who must pay them. Of particular concern to us is the view of many operators that cost recovery depends more on definitions than on real pavement costs and real road

related taxes paid by truck owners. (ARTF submission to the Inter-State Commission 1987)

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 deficiencies 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 as taxes the

IAC 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' (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' (1984, p. 221). Clearly, it exacerbates the already difficult problem of getting widespread support for policy

initiatives.

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Accordingly, the Commission supports the IAC recommendation that direct charging for road infrastructure use should be pursued as soon as is considered practicable and that rates of 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 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 (pp.xxiv-xxvi).

Given a more appropriate structure of taxes and charges 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.

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 costs 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 Chapter 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 NRFII (1984) and the Industries Assistance Commission (1986) are aimed at a more systematic

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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 State and federal 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)

The levying of road user charges on the basis of distance and vehicle characteristics is aimed at ensuring, to the extent that it is feasible and practical, that charges match avoidable costs.

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 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. Vehicles must be grouped into classes according to physical characteristics, and then the same charge per kilometre is levied on every vehicle in a given class. The National Road Freight Industry Inquiry points out that for trucks such classification can be made on the basis of gross vehicle mass, the number and layout of axles, and the number of tyres in each axle. Some basis for establishing an

appropriate distance measure is also required and co-ordination between State and federal governments is necessary. These issues are discussed in some detail in the National Road Freight Industry Inquiry report and a

step-by-step agenda for implementing the reforms is provided. In the medium term, however, the Inquiry

recommended that governments make the following changes to improve the existing vehicle registration arrangements:

. adopt a uniform system of vehicle classification for the purpose of levying vehicle registration fees;

. standardise vehicle registration fees across the States (in the interests of tax neutrality);

. adjust the vehicle registration fees for interstate licensed trucks to the (uniform) levels then applying in all States;

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abolish the permit fees presently levied by some States on out-of-state vehicles seeking interstate work. (1984, p. 244)

4.5.3 Progress on policy reform

As noted, in 1985 the Commonwealth Government announced its decision to implement, in co-operation with State and Territory governments, an initial 'fast track' package of the

National Road Freight Industry Inquiry recommendations, including those medium-term policy changes listed above. 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.

Proposals are being formulated on the first two of the National Road Freight Industry Inquiry recommendations, and the fourth has been implemented. The third has been

partially achieved through the Federal Interstate

Registration Scheme. This Scheme sets registration charges for vehicles engaged solely in interstate trade and commerce, the level of charges being those recommended by the

Inter-State Commission. Under the Scheme, registration charges for each vehicle class can be paid either on the basis of actual annual distance travelled or as a flat annual charge (based on an assumed average annual distance travelled).

In determining the level of registration charges, the Inter-State Commission (1986, Chapter 15) took account of various factors. One factor considered in detail was the implication of cost recovery levels for interstate rail services. Others included constitutional, administrative and practical concerns. Thus, for instance, because any interstate vehicle could be registered under appropriate State or Territory legislation, the upper limit to any interstate registration charge is created by the registration charges set by the States and Territories.

In addition, for constitutional reasons the charge for vehicles engaged solely in interstate travel must be related to road 'maintenance and upkeep'. Thus, annual registration charges need to be determined by relevant technical factors, load carried and distance travelled, as these affect road damage. Although considerable averaging is involved, the current structure and levels of charges do take some account of this requirement.

The proposal for uniformity of registration charges between interstate-registered vehicles and vehicles registered under State and Territory schemes is seen by the Inter-State Commission as a necessary interim step towards a standardised and efficient charging system.

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The Royal Commission believes that the principles being developed by the Inter-State Commission for the registration of interstate vehicles are leading the way toward an efficient and uniform system of road user charges in Australia.

Apart from progress made by the Commonwealth Government, 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. (Department of Transport, personal communication, December 1987) It found that a more rational system would be 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 use charges and road programs.

As an initial step, the working party recommended the adoption of these principles for a more rational cost recovery and funding system. The second step would be restructuring the basis of registration charges to achieve uniformity across federal and State systems and a more direct relationship to road costs. The third step would be

restructuring the level of registration charges and earmarked fuel charges to achieve better cost recovery from trucks.

4.5.4 Implications of current policy for the Commission's recommendations

The question that arises, then, is whether the Royal Commission's recommendations for transport deregulation should be contingent upon further reform to the current road cost recovery and funding 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

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system. Road funding issues, which are related to

element (e) of the Commission's preferred transport approach, are addressed specifically in Chapter 6.

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 regard to the first issue, it is clear from the preceding discussion of transport policy developments that the shortcomings of current system of road user charging are well recognised and that a process of policy reform has been initiated. The Commission believes that the proposed changes are generally well justified and commends the recommendations of the National Road Freight Industry Inquiry and the Australian Transport Advisory Council's working party as the basis of an overdue rationalisation of the Australian road user charging system. 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

federal agencies such as the Inter-State Commission, the Bureau of Transport and Communication Economics, and State and federal departments of transport. Nevertheless, given that policy reform is in progress, the Commission considers that there are no grounds in this area for delaying the deregulation of grain transport.

A closer consideration of the second issue, namely the current relationship between grain cost recovery on road and cost recovery on rail operations, is presented in the next chapter as part of an analysis of the cost structures of rail and road transport.

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5. THE COSTS OF ROAD AND RAIL TRANSPORT

In this chapter, some estimates of the costs of road and rail transport are presented. Section 5.1 focuses on road transport and includes estimates of the costs of using trucks for grain transport, an examination of the costs associated with the use of roads, and a discussion of the relationship between road charges and road costs. Section 5.2 provides

some estimates of the costs of rail transport. The

discussion on the costs of road and rail transport is presented here in summarised form; full details are provided in Appendices A and B .

In considering the costs of the alternative transport modes, the Commission applied an approach that was consistent with its focus on economic efficiency. Calculations were done in resource cost terms to account for the true cost to the economy of alternative paths; primary interest was placed on the avoidable costs involved because these were regarded as the most appropriate additional costs to be weighed against

any additional benefits from policy changes; and, finally, changes were assessed on an incremental basis, that is, the costs and benefits of changes from the current system for grain transport were examined in determining the case for change. Note that the cost analyses were conducted on the basis of current transport technology. Some new developments in transport technology are discussed in Appendix C.

5.1 Road transport costs

5.1.1 Costs of using trucks

Estimates of the direct costs of road transport can be made on the basis of observed grain freight rates or by means of a cost-budgeting process. The Commission has used both approaches and has considered grain transport from farm to

silo as well as line-haul from either farm or silo to port.

For the journey from farm to silo, two types of vehicles are generally involved: grower-owned two-axle rigid trucks and contractor-owned six-axle articulated trucks. Current contractor charges are around $5 per tonne for short-haul trips of approximately 20 kilometres. However, these charges can fall to as low as $3.50 per tonne under market pressure. Conversely, if the access road is poor, rates are increased. A recent Bulk Grains Queensland survey found that growers pay

an average of $7.42 per tonne for delivery to their depots.

Line-haul road operations are generally undertaken by contractors operating six-axle articulated vehicles. These are either tippers or flat-top trucks with tarpaulins. Distances hauled range from 50 kilometres to over

400 kilometres. The rates charged are remarkably uniform across the various States, lying in the range of 5.5 cents per net tonne-kilometre for the longer hauls to 7 cents per

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net tonne-kilometre for shorter distances. The rate charged has two components:

. a fixed element to cover standing time for loading and unloading, typically $1 to $5 per tonne depending on the operation and the expected delays;

. an element variable with distance, typically around $1.50 per kilometre.

To augment the analysis of contractor rates the Commission has budgeted out the direct costs of road transport. Cost functions for three types of vehicle, a two-axle rigid, a

six-axle articulated and a B-double are derived in Appendix A and are presented in Table 5.1. By way of example, the cost function for a six-axle articulated vehicle can be applied to a 300 kilometre fully laden journey with an empty return leg. Assuming an average speed of 80 kilometres per hour, the cost would be $470 or 5.3 cents per net tonne-kilometre. If two hours waiting time for loading and unloading is included, the extra cost would be $53.20 or 0.7 cents per net tonne-kilometre (ntk).

TABLE 5.1 ROAD COST FUNCTIONS: FINANCIAL COST, 1987

Capacity Cost variables Est. cost

Vehicle

tonnes

per hour $ per km $

per ntk cents

2-axle rigid 10 12.00a 0.32 12.4b

6-axle articulated 25 26.60 0.45 6.3C

B-double 41 36.50 0.72 5.7°

a. Excludes vehicle capital costs. b. Assumes 50 kilometre round trip, 80 kilometre per hour speed. c. Assumes 600 kilometre round trip, 80 kilometre per hour

speed.

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

It is commonly accepted that calculations of road transport costs in which labour and capital are costed conventionally suggest that the industry must operate at a loss. The Commission's research has also suggested this to be the case. The only way in which current market rates can be reconciled with the budgeted cost structure of road transport is by assuming a lower wage rate, a lower cost of capital and/or some overloading of vehicles.

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The costs presented in Table 5.1 can be adjusted to resource cost terms by eliminating the tax element from fuel (approx. 23 cents per litre) and sales tax (20 per cent) from the purchase price of vehicles and spare parts and tyres, and by removing the value of fuel franchise fees, stamp duty, registration and other fees. The annual capital costs of the vehicles have been calculated at a real rate of interest of

5 per cent over the life of the asset, which is estimated to be eight years. The calculations involved for a six-axle articulated truck are presented in Table 5.2.

The direct resource costs for owning and operating the three vehicle types are presented in Table 5.3. Inspection of the table shows that, when the costs represented by the functions are determined on a net tonne kilometre basis, the taxes paid

by the truck operators amount to approximately 2.4 cents per net tonne-kilometre for two-axle farm truck, 1.7 for six-axle articulated vehicles and 1.6 for B-Doubles. These figures are derived from comparisons of Tables 5.2 and 5.3.

The costs included in Table 5.2 are based on a standard round trip with no backhaul. It is likely that some road carriers would be more flexible than that and it is unclear as to what a backhaul would be in a more competitive environment. A

backhaul from a port might be back to the initial region, back to another region, or maybe on to a major city with a non-grain load before returning to a grain region. Some trucks may operate virtually as taxi services, or like some

shipping services with no regular home destination.

5.1.2 Costs associated with use of roads

In addition to the direct resource costs as estimated, road transport activities result in some costs that are not shown, or are shown only in part, in the accounts of the suppliers of these services. Such costs are not paid for by those who give rise to them, and they are referred to as ' external costs'. Nevertheless they result in costs that must be met, directly or indirectly, elsewhere in the economy. The

following are the external costs most commonly referred to in the provision of road transport services:

. road damage not recovered from the road user;

. road accidents, to the extent to which they are not

covered by insurance payments;

. noise and pollution;

. congestion that affects non-road users or other classes of road users.

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TABLE 5.2 ROAD USER CHARGES AND TAXES: SIX-AXLE ARTICULATED TRUCK, 1987

$ cents ger

net

tonne km

Sales taxes 20% and stamp duty (2%)

Prime mover and trailer - on purchase 22% of $200 000 44 000

- recovery on sale after 4 years -40% assumed = $17 600 -present value at 5% 14 480

- gives net present value: 29 520

- annuitised over 4 years gives 8 325 0.5

Tyres*3- 20.3 tyres/yr x $400 @ 20% 1 624 0.1

Registrations, weight taxes etc

Annual registration fees and taxes (prime mover and trailer): New South Wales 3 177

Victoria 1 697

Queensland 1 815

South Australia 1 776

Western Australia 2 112

- assumed average per annum 2 100 0.1

Fuel taxes including royalties and franchise fees c/litre

Total of fees : New South Wales 22.72

Victoria 25.22

Queensland 19.15

South Australia 22.64

Western Australia 25.60

- assume average of 23 c/litre and 1.85 km/litre fuel consumption gives 1.0

Total taxes (as calculated) 1.7

a. Calculated assuming 130 OOOkm/yr usage made up of half with full payload of 25 tonnes and half with no load. b. Calculated for 22 tyres per truck, average life of 141 000 km, 20% sales tax. c. Capital city fee levels taken as indicative.

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

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TABLE 5.3 ROAD COST FUNCTIONS: RESOURCE COST, 1987

Capacity Cost variable Est. cost

Vehicle

tonnes

per hour $ per km $

per ntk cents

2-axle rigid 10 11.168 0.22 10.0b

6-axle articulated 25 21.50 0.30 4.6°

B-double 41 29.70 0.47 4.1°

a Excludes vehicle capital costs. b. Assumes 50 kilometre round trip, 80 kilometres per hour speed. c. Assumes 600 kilometre round trip, 80 kilometres per hour

speed.

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

Road damage - previous studies A number of studies have documented the avoidable costs and the total costs of road construction and maintenance that can be attributed to the use of different vehicle classes. The main components of these costs have been found to be damage

caused to bridges and roads. Avoidable costs of road damage are the appropriate measure of the costs associated with a particular transport task. By definition, they are those

maintenance costs that would be avoided if a particular transport task was not undertaken.

Engineering research has related vehicle types to damage caused to road pavements and bridges. As a general rule, damage from vehicles has been found to be related to

approximately the fourth power of axle loads and to distance travelled. Less important determinants of road damage are road type, tyre pressure and suspension type. However, the engineering research into this question has been restricted mainly to major sealed roads. Whilst the fourth power rule

is generally accepted for sealed major highways, it is considered to be less realistic for poorer quality roads. Values of the exponent ranging from 2 to 8 have been proposed in this context, highlighting the uncertainty associated with

this area of damage estimates.

Vehicles involved in the transport of grain to terminals in most States are mainly articulated trucks with six axles or more, and with an average payload capacity of at least 20 tonnes. A number of studies have found that avoidable

damage costs for six-axle articulated trucks using arterial roads lie in the range between 0.25 and 1.5 cents per

tonne-kilometre in 1985 dollar values. (Webber et al. 1978;

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Transport Economics Centre 1981; Nicholas Clarke & Associates 1984; ISC 1986)

The Victorian Government submission to the Inter-State Commission's inquiry into interstate transport (Vic. Govt. 1986) indicated that road damage costs were about two times higher for local roads than they were for arterial roads. Canac Consultants (1984) estimated the cost of increased use of local roads at about 1 cent per tonne- kilometre if rail branch lines were closed and road transport was used to transport grain from local silos to central

receival points on main lines in Victoria. The Victorian Road Construction Authority and various municipalities claim that the cost of increased use of local roads could well be double the estimate made by Canac Consultants.

Other external costs Other external costs of increased grain transport by road would include any extra road accidents, pollution or road congestion that might occur. The Commission's research has indicated that little increase in direct delivery to ports by road transport is likely and 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.

A number of studies have focused on the relationship between road accidents and truck operations. For example, Aitkins (1978) estimated costs associated with road accidents in Australia and Rosengren and Webb (1980) reviewed some overseas studies as well as examining the impact of trucks on

accident rates in Australia. Most studies have concluded that trucks do not increase the rate of accidents, but they do increase the number of fatal injuries. Forsythe (1985) undertook a broader study of road-rail competition and emphasised the need to consider external costs associated with road and rail transport.

Apart from the very important human aspect of road accidents, which is impossible to evaluate in economic terms, the unrecovered economic cost to the community of road accidents is reflected in the excess of cost above health, workers' compensation, accident and vehicle insurances. The Commission believes that these insurances would account for most of the economic cost of road accidents.

5.1.3 Relationship between road charges and road costs

From the discussion above it would appear that road damage could potentially be the most significant external cost of additional road usage. The Commission, therefore, undertook some detailed analysis in this area with the assistance of consultants Travers Morgan Pty Ltd. A number of studies have been undertaken which examine the relationship between road damage costs and the recovery of such costs. Some studies of road costs have considered only government expenditures on

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the construction and maintenance of road pavements; others have considered all government expenditures on roads. Some have ignored expenditures but have estimated the economic opportunity costs of providing roads.

Similarly, studies have varied with respect to which government charges should be considered as road user charges. Road users pay many government charges but, as discussed in the previous section, not all of those charges can be clearly identified as charges for road use. Luck and Martin (1987) point out that, depending on the definition of

attributable charges, road user payments for all of Australia range from an estimated $2615 million to $9196 million. The lower estimate includes only vehicle registration fees and that portion of charges on the sale of petroleum allocated

(or hypothecated) to road works; the upper estimate also includes customs duties on motor vehicles and parts, sales taxes on motor vehicles and parts and tyres, drivers' licence fees, stamp duty and other miscellaneous taxes.

Differences in assumptions about which imposts should be regarded as road-user charges largely account for differences in cost recovery results. For example, the cost analysis provided by the BTE in its submission (pp. 70-73) implies an avoidable cost recovery rate for six-axle articulated trucks of between 45 and 85 per cent, depending on the extent of road damage involved. However, this is based on a revenue contribution of only 1.1 cents per net tonne-kilometre which does not include a number of taxes.

Luck and Martin (1987) also examined the cost recovery situation for various vehicle classes using the national road network and estimated that six-axle articulated trucks recover approximately 50 and 34 per cent respectively of

short-run avoidable and fully allocated costs (the avoidable cost is defined as expenditure required to restore roads to an acceptable standard and which could be avoided if vehicles were not using existing roads). As with other cost recovery

analyses, Luck and Martin's results are (as they point out) highly dependent on the assumptions adopted. Central to their results suggesting under-recovery by heavy trucks is

the assumption that taxes other than those collected through charges on the sale of petroleum and State motoring charges, are not included in the cost recovery calculation. Further, their avoidable cost estimate is a short-run value and does not account for economies and cost savings that would occur

as a result of future upgradings of roads.

The Commission has undertaken its own research into road cost recovery and, on the basis of arguments presented in

Chapter 4, has taken the view that all indirect taxes paid by truck operators affect the use of road transport and thus on economic efficiency grounds should represent an offset against road expenditure. The extent to which road funding

and costs are related in practice and the government policies and processes involved are separate issues and are considered in the next chapter.

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In considering the issue of cost recovery, a distinction is made between recovery of avoidable costs and recovery of total road expenditure which includes joint and common costs. Again, on economic efficiency grounds the Commission believes that attention must be focussed on avoidable costs with joint

and common costs being recovered from the various traffics when and where this is possible. A further comment is made on this issue in Section 5.3.

5.1.4 Avoidable costs

A shift to greater road transport of grain would not

necessarily increase the use of local roads. Increased direct delivery of grain from farms to sub-terminals or ports may not result in a significant increase in the use of local roads since all grain is already transported to local silos over local roads. The only increase to the use of local roads would involve hauling that grain the additional distance to the nearest arterial road. In some instances, there would be no increase in traffic since some local silos are located on arterial roads. In other instances, there may be a reduction of road transport on local roads since grain growers would be closer to arterial roads than to their local silos. The net effect on damage costs of a change to greater road transport of grain on local roads is further confounded by the extent to which there is a change from growers' rigid trucks to larger (but less damaging) articulated vehicles.

In the Commission's analysis the estimation of avoidable costs for road is based on a life-cycle analysis, which 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, the avoidable costs were determined at around 1 to 1.5 cents per net tonne-kilometre for six-axle

articulated trucks on arterial roads and better secondary roads. Any increase in the use of road transport for

deliveries from farm to sub-terminal or from farm to port is likely to involve such trucks used mainly on arterial roads. Thus the Commission believes that 1-1.5 cents per net tonne-kilometre represents an appropriate value for incremental road costs. From other calculations related to resource cost adjustments (see Section 5.1.1) the Commission 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 any additional road transport that may become involved in grain

transportation, especially from farm to sub-terminal and

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port, is likely to incur sufficient taxes to offset

additional long-term avoidable road costs. Where trucks are used extensively on poorer quality roads, the extent of avoidable cost recovery is likely to be less.

5.1.5 Overloading

The issue of overloading in relation to road costs warrants attention. The Commission recognises that excessive road damage is caused by overloaded grain trucks and commends any action on the part of road transport authorities or 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.

5.2 Rail transport costs

5.2.1 Operating costs

Railway systems in Australia record their input costs in considerable detail but it is not a straightforward matter to

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translate these costs into output costs for specific traffic; this is because of the high proportion of joint costs such as fixed track costs and administration. Consequently, the determination of railway costs for a particular traffic is, to some extent, arbitrary, although the Commission has been able to obtain estimates of avoidable and joint and common costs from most rail authorities on a consistent basis. The data supplied by rail authorities follows the National Freight Group Costing Convention.

In broad terms, 'rail costs' includes train running costs, semi-variable costs, corridor fixed costs and overhead costs. Estimates of the relative importance of these costs can be derived from the AN and V/Line submissions and are presented in Table 5.4. These estimates provide a general guide to the importance of different cost components.

TABLE 5.4 COST BREAKDOWN FOR RAIL TRANSPORT OF GRAIN: VICTORIA AND SOUTH AUSTRALIA

Item Approximate percentage of financial cost3

Victoria South Australia

Train running costs 47 43

Semi-variable costs 14 25

Corridor fixed costs 32 20

General overhead costs 7 11

Total 100 100

a. Excludes capital costs.

Sources: Victorian costs based on Appendix 13 of V/Line submission; South Australian costs based on estimates in Figure 5.1 of AN submission.

The largest component of rail costs are train running costs. These comprise mainly labour, fuel, and maintenance of rolling stock. Semi-variable costs include the costs of marshalling, shunting and operation of yards and terminals.

Corridor fixed costs are substantial and comprise mainly the maintenance of tracks. Overhead costs include some grain-specific costs and a share of general administration costs.

Maintenance of rail tracks appears to be a major component of costs for rail transport of grain. This is especially so where lines are dedicated to grain, and all of the

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maintenance costs for those lines must be attributed to the grain task. The State Rail Authority of New South Wales submitted that fixed maintenance costs are $7500 per kilometre per year, and Canac Consultants (1984) estimated that the costs of maintaining Victorian branch lines were

about $6000 per kilometre as a fixed cost and a variable cost of about 0.1 cents per gross tonne-kilometre.

Fixed maintenance costs are particularly important to the economics of transporting grain along branch lines. Where such lines carry low volumes of traffic, fixed costs are

shared over relatively few tonnes, resulting in a greater average cost per tonne.

From the information supplied by State rail authorities it is evident that costs vary significantly between States. Total costs for grain transport in 1985-86 range from an estimated 4.5 to approximately 8 cents per net tonne-kilometre.

There are several reasons why the costs of rail transport vary between States. In brief, a number of factors are responsible:

. The railway systems differ with respect to their

allocation of joint and common costs between traffics.

. Track maintenance costs may be lower for some railways (such as AN) because of more favourable terrain

conditions relative to other railways such as the SRA and QR, where the maintenance task is more difficult.

. Some States face higher train crew costs than others, reflecting the fact that three-man crewing still occurs on some services.

. Maintenance costs differ between States depending, in particular, on maintenance work practices and the age of locomotives and rolling stocks.

. Differing volumes of grain are carried.

While most studies of railway costs produce different cost estimates, there is general consensus that rail experiences significant economies as tonnage increases. Such economies relate to increasing tonnages on a set piece of track and do not imply that a railway with a large infrastructure should be more efficient than a small railway. Although a large railway may have a higher annual tonnage, it may also have a more extensive network and the tonnage per network-kilometre may well be smaller. It is the density of railway

operations, as reflected in the capacity to accumulate volume, that is critical in determining costs.

In addition to cost information, most rail authorities have supplied the Commission with data on revenue 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

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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.

To augment the rail cost and revenue information provided by State rail authorities, the Commission has used a rail operating cost model, developed by its consultant Travers

Morgan Pty Ltd, in order to examine more closely current and potential cost structures. Two important points emerge from this analysis.

First, rail costs are sensitive to a number of operational parameters, including journey distance, operating speed, loading and unloading rates, wagon cycle time, payload, the number of wagons (and therefore the quantity of grain) that can be hauled by locomotives, the number of crew, and the train configuration. Such sensitivity is not surprising and is consistent with the rail authorities' own views on their operating environment. For example, Australian National suggested that improvements in turnaround times (say, from 96 to 48 hours) and train size (say, from 15 to 35 wagons) have the potential to reduce operating costs by up to a half

(AN submission, March 1987, p. 26). Second, it is apparent from the results obtained from the model that branch line operating costs are considerably higher than main line operating costs. The extent of the difference is dependent upon the specific operating parameters for the branch line and main line; this is discussed further in Appendix B. The Commission also used the rail cost model to examine the comparative freight economies of block train operation and road transport. This exercise drew on input cost data derived from published statistics for the Queensland rail system and was carried out for a 100-kilometre block train journey over a branch line. The total cost of such a journey is estimated to be 3 cents per tonne variable cost plus a $6500 per kilometre cost for maintenance. The implications of these per kilometre costs for the clearance over a branch

line of a range of annual tonnages are shown in Table 5.5 which also shows estimates of clearing the same annual tonnages by road, assuming a road operating cost function of $1.00 per tonne plus 6.5 cent per net tonne-kilometre. An allowance of 1 cent per net tonne-kilometre has been made for road maintenance costs.

Inspection of the Table 5.5 suggests that it may be more economical to clear branch lines carrying less than 100 000 tonnes of grain per annum by road. Furthermore, it appears that any line with an annual volume in excess of around 150 000 tonnes is likely to be more economically cleared by rail. These results accord generally with the views put by the State Rail Authority of New South Wales concerning the economics of branch line operation. In particular, the SRA submitted that rail becomes cost competitive with road transport on branch lines at an annual tonnage in the range of 100 000 to 150 000 tonnes.

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TABLE 5. 5 COMPARATIVE ROAD AND RAIL COSTS: BRANCH LINE

Tonnes Rail costs Road costs

per annum ' 000 Variable

$'000

Track $'000

Total $'000

Truck $'000

Main­ tenance $'000

Total $'000

10 30 650 680 75 10 85

20 60 650 710 150 20 170

50 150 650 800 375 50 425

100 300 650 950 750 100 850

250 750 650 1 400 1 875 250 2 125

500 1 500 650 2 150 3 750 500 4 250

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

The results presented in Table 5.5 should only be regarded as indicative. The decision between road and rail in any particular instance will depend upon the local costs in question. For example, some branch lines maintained on a annual basis may cost only $3000-$4000 per track-kilometre.

Also, Australian National have submitted that it can be competitive with road transport over short hauls, providing it can obtain sufficient volumes of grain and is able to quickly load and unload wagons. AN also noted that in some circumstances rail can treat short hauls as opportunity traffic, with extremely low marginal costs. For example, to reduce short-haul costs it may be feasible to do one of the following:

. use shunt locomotives and crews when they are not

otherwise engaged in terminal activities;

. top up scheduled trains that are running at less than their maximum capacity;

. utilise resources during idle time when they are not required for longer hauls. (AN submission, July 1987, p. 3)

5.2.2 Cost recovery relative to road

There is some debate about the appropriate basis for establishing the level of rail cost recovery for comparison with road. A number of submissions to the Commission, particularly from railways, emphasised the high level of cost recovery achieved by grain rail freight operations and

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contrasted this with the supposedly lower rate of recovery from road transport. For example, Westrail state that

As a State owned organisation, any deficit between Westrail income and expenditure must be met from Government funds, and can be seen to represent a subsidy to the railways. Provided revenue from a particular traffic covers all costs associated with it however, it cannot be regarded as being subsidised in this way.

The accounts do not show any amounts specifically granted for grain, and so additional subsidies should not be included in determining the recovery situation

for it. (Westrail submission, November 1987, p. 10)

Most rail authorities have supplied the Commission with data on revenue 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 full cost recovery from grain haulage. If corridor fixed costs are removed from total costs and only short-term variable

costs considered then it appears that all systems, except the SRA, recover these costs.

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 good 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 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 for competitive freight business.

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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.

Overall rail cost recovery levels were reviewed recently by Holthuyzen (1987). Holthuyzen found that in 1985-86 for Australia's government railway system as a whole, 65 cents were recovered for every dollar spent; in 1980-81, 66 cents were recovered. This system-wide figure hides the individual performance of the rail systems over the period 1980-81 to

1985-86:

. cost recovery levels improved for QR from 74.6 per cent to 96.6 per cent and in AN from 74.3 per cent to

80.3 per cent,

. for the SRA, cost recovery levels rose fractionally, from 62.0 per cent to 62.3 per cent, and for Westrail they fell fractionally from 83.1 per cent to 82.0 per cent,

. Victoria's level of cost recovery fell from 52 per cent in 1980-81 to 30.4 per cent in 1985-86.

Looking specifically at freight operations, it is likely that recovery would be somewhat better than these figures suggest because the figures are adversely influenced by the poor returns on passenger services.

Some additional information on interstate rail freight cost recovery is contained in the report of the Inter-State Commission's investigation into cost recovery arrangements for interstate land transport (ISC 1986). In its terms of reference, the Inter-State Commission was directed to recommend appropriate registration charges for vehicles registered under the interstate road transport legislation, taking into account the cost recovery levels of competing

interstate rail and road services. The Commission's report, An Investigation of Cost Recovery Arrangements for Interstate Land Transport, concluded that interstate rail freight just covers its avoidable costs while recovering 66 per cent of

fully distributed costs. In comparison with this figure for fully distributed cost recovery, the lowest cost recovery ratio estimated for road was 72.5 per cent. (The Inter-State Commission was restricted in the costs it could attribute as road user charges.) The Commission concluded

Given assumptions which are unfavourable to road this [result] is such that other methods of calculating cost recovery ratios could not change the fundamental conclusion that the cost recovery ratio for interstate road transport substantially exceeds that for interstate rail. (ISC 1986, p. 360)

It is also likely that the Inter-State Commission figure for interstate rail freight recovery will be higher than for rail

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freight as a whole because of the comparative advantages that rail has on long interstate hauls. On the other hand the payment of the diesel fuel excise by rail will tend to slightly improve cost recovery rates.

Although definitive figures are not available 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.

5.3 Implications of the cost recovery situation for the Commission's recommendations

Although there are inperfections in the current road user charging arrangements, the Commission concludes that the cost recovery rates for additional grain transport by road would be sufficient to allow deregulation to occur without unduly favouring either mode. Thus, given that reform of road user charging policy is underway and that current restrictions actively discriminate against grain, the Commission sees no justification on these grounds for delaying the removal of restrictions on the road freighting of grain.

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 long-run 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.

It has been suggested that the problem may remain that road competition across all types of transport business may be such that total joint and common costs cannot be fully recovered by the railways. Although the Commission considers these issues of total road and rail infrastructure funding to be in the broader arena of government transport policy and as such largely beyond its terms of reference, some observations can be made. The option of continued government subsidies cannot be supported because of the inevitable distorting effects of taxation and the difficulty of establishing and maintaining an appropriate subsidy limit. On the other hand, the contraction of railway operations that could result from

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a rigid imposition of a full cost recovery budget limit could lead to a sub-optimal modal balance. An approach that appears to the Commission to have merit is the administrative allocation of road and rail joint and common costs across both road and rail traffics in a way that minimises the disruption of the modal balance. In this regard, the

submissions from the Western Australian Department of Transport are of interest. Supporting Paper 6 contains further discussion of pricing policies.

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.

One final aspect of transport deregulation that is of interest is its impact on other parts of the grain

distribution system. The Commission is seeking an integrated system whereby grain flows along its least-cost path for the system overall. Decisions concerning this least-cost path will involve a number of factors, including the type and

location of country storage and handling (either on farm or off farm), the transport mode, and the port that offers the most attractive storage and handling, and port disbursement and voyage costs. Of course, the number and costs of

alternative paths will be influenced by the institutional arrangements prevailing for storage and handling, land transport, port services and sea transport.

While changes to the storage and handling, port services and sea transport areas have not been considered in this document, deregulation of land transport, by itself, would affect these other elements of the distribution system. In particular, the storage and handling of grain, both on farm

and off farm, would be affected by transport deregulation. In some cases, it may become attractive, from an economic viewpoint, for growers to increase their on-farm storage of grain before transporting it directly to a sub-terminal or port.

Howard and Lawrence (1986) found that the quantity of on-farm storage had increased significantly over the past decade. To some extent, this storage is available for keeping grain on farm for later delivery to the central handling system, although the quantity available for such use may be limited by competing uses of storage, such as livestock feeding or

short-term buffer storage during harvest.

If deregulated road transport resulted in a significantly higher level of direct deliveries from farms to sub-terminals or ports, handling and storage companies would need to consider how such deliveries could be managed. Any costs associated with investment in port storage or road receival, or both, would most likely be borne by growers delivering by road through a commensurate increase in storage and handling charges. On the other hand, bulk handling agencies could use

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price incentives to encourage receivals where and when they want them, or they could institute an appointment system such as that practised in Canada. Other options would be to use

the price mechanism to attract deliveries at port by vehicles able to unload quickly and/or to use rail receival facilities for grain receival by road, as is currently practised at Geraldton and Portland.

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6. ROAD FUNDING ISSUES

6.1 Introduction

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 claim

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 chapter 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 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 proposed system for storage, handling and transport.

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 road funding issues.

6.2 Current funding arrangements

Australia has about 800 000 kilometres of roads, comprising the following:

. national roads (16 000 kilometres), made up of the

National Highway System (which links mainland State and Territory capital cities, Brisbane and Cairns, and Hobart and Burnie) and a number of declared

developmental roads;

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. urban arterial roads (7000 kilometres), which represent the major routes within urban areas;

. rural arterial roads (98 000 kilometres), which are the major rural road links and broadly correspond with State highways and classified main roads in each State;

local roads (74 000 kilometres urban and 596 000 kilometres rural), which are largely those roads for which local councils are responsible, although some State road authorities have extensive responsibilities

for local roads in unincorporated areas.

The Constitution does not provide specific powers to the Commonwealth Government in respect of roads or road funding. As a consequence, the primary responsibility for roads rests with the States. Under Section 96 of the Constitution, however, the Commonwealth Government may make grants to the States on such terms as the Parliament sees fit and this has provided the constitutional basis for roads assistance to the States since 1922.

Commonwealth road funds are currently provided under the Australian Bicentennial Road Development scheme and Australian Land Transport Program. The funds are

hypothecated from part of the fuel excise levied by the Commonwealth, enabling attribution of a revenue source to roads expenditure for cost recovery purposes. Funds from the Federal Interstate Registration Scheme are distributed to the States for expenditure on maintenance of roads used by

interstate vehicles. The Scheme is based on the 'user pays' principle, with registration fees linked to damage cost estimates.

National roads are almost completely funded by the

Commonwealth Government which also makes substantial contributions to assist in the restoration and upgrading of arterial and local roads. These roads are the responsibility of State and local governments. State governments decide which arterial roads they want funded under federal roads programs.

In addition to receiving Commonwealth road grants, State and Territory governments have their own sources of road user revenues. These include registration fees, driver licence fees, regulation charges and fuel franchise fees. Since 1979 all States except Queensland have introduced fuel franchise fees.

Local government is responsible for a significant proportion of Australia's road network. Commonwealth and State funds are allocated to local government to supplement its own

funding sources of rates and loans.

Approximately $4000 million is spent each year in roughly equal shares by each level of government to maintain and extend the road network. A significant proportion of this

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goes to rural roads. Table 6.1 shows rural road expenditure by level of government. Commonwealth government funding is mainly for road construction, with maintenance expenditure being mainly borne by State and local governments (81 per cent in 1984-85).

TABLE 6.1 RURAL ROAD EXPENDITURE BY STATE AND LEVEL OF GOVERNMENT, 1984-85 _________________________ ($ million)___________________

State

Level of government

Commonwealth State Local

New South Wales 277.8 240.5 161.4

Victoria 155.6 130.5 82.6

Queensland 207.0 192.5 105.2

Western Australia 105.8 74.5 37.2

South Australia 75.1 47.0 31.3

Total 821.3 685.0 417.7

Note: Figures are in constant 1983-84 prices.

Source: Bureau of Transport Economics submission, May 1987.

Although the lines of funding responsibility are sometimes blurred, 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 Federal 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, and ALTP schemes the allocation of local road grants between State road authorities and local authorities, and among local

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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)

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.

6.3 Alternative funding arrangements

It would be difficult to implement 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) because of the problems of monitoring road usage and damage and assembling the information necessary to administer such a scheme. In the following paragraphs these problems are discussed in more detail and some alternatives are

considered.

6.3.1 Revised funding formulae

One study that has recently examined the issue of alternative funding criteria is the Cameron Committee's inquiry into the distribution of federal road grants (Cameron 1986). The Committee's terms of reference were to report on the

allocation among the States of Commonwealth grants for urban arterial, rural arterial and local roads. The Committee was asked to examine the principles that might be applied in determining the distribution of these grants and, on the basis of those principles, to recommend a proportional distribution of the grants not allocated in Australian Land Transport Program legislation for the years 1987-88, 1988-89 and 1989-90.

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The Committee reviewed various criteria for the allocation of road funds, including population, area, road length, traffic volume, axle loading, road occupancy (passenger car equivalents), and the costs of restoration and upgrading.

It selected axle loading, road occupancy, and restoration and upgrading costs as the most appropriate indicators for allocating the funds, with the respective weights given to each indicator varying depending on the policy objective being pursued. The indicators were selected to recognise the need to maintain and upgrade roads, to cater for actual road use, and to account for potential road damage.

Although the recommendations of the Cameron Inquiry have been strongly criticised by local government for failing to give consideration to the 'wider social role that roads play, particularly as means of access to property', the indicators suggested could potentially form the basis of an efficiency

factor in the allocation of road funds which could compensate for increases in grain transport on particular roads. However, the scope for such a scheme is severely limited at present.

The main reason for this limited scope is the serious lack of data about the pattern of usage of rural roads, especially local roads. The Cameron Inquiry made recommendations on a State basis only for the main broad road categories, as described. Even for this aggregated level of allocation the Committee and others have highlighted the need for more data to improve the accuracy of the indicators. For example, an important source of data for establishing the indicators is the Australian Bureau of Statistics Survey of Motor Vehicle

Usage (SMVU) conducted triennially; however, this survey determines traffic volume only on an urban/rural basis rather than by road category, and consequently other sources of information were used in conjunction with SMVU data to derive the necessary parameters. As the Australian Council of Local Government Associations (1987) pointed out, 'There has never been an appropriate inventory undertaken to determine the actual proportion of distance travelled by vehicles on local roads as opposed to travel on arterials, or of the vehicle mix by road category.'

Given the current level of available information, 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 the movement of policy in that direction and the development of systems to collect the necessary data to implement such a policy. In the interim, several alternatives are worthy of consideration.

6.3.2 Local government rates

In some cases an increase in local government rates to pay for the increased road damage may be considered. It could be

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argued that this option is appropriate where the local roads carry mainly local traffic (that is, traffic either to or from places within a local government area). Under these circumstances it is the local property owners who use and benefit from the road system and therefore should pay.

(National Inquiry into Local Government Finance 1985, p. 134)

As a general rule, the Commission does not regard this option as efficient. Rates provide only an indirect link between road use and road charging, with the result that those benefiting most (and causing the most damage) will not necessarily be contributing most to cost recovery. Furthermore, in many cases the changes in grain transport patterns will affect a number of local government areas, particularly where grain is taken from farm to sub-terminal or port. It may be possible for affected councils to act together to introduce a common road-rating policy but generally this is not likely to be feasible and it does not overcome the basic inadequacy of rates as road user charges.

In any case, the Commission considers the scope for local governments to raise additional revenue is limited by their relatively narrow taxing base, their sparse populations, rate pegging legislation, and restricted borrowing capacity. Other alternatives are likely to have more practical value.

6.3.3 Direct cost recovery

Another alternative is for the grain industry to directly compensate local councils for road costs associated with grain transport. This is a possibility where road transport comes under the direct administrative control of one of the agencies involved in grain handling, storage or transport; for example, where a bulk handling agency undertakes significant transfers of grain from one of its facilities to another. Payment could be negotiated on the basis of net tonne-kilometres for movements over particular local roads in a given period.

It is debatable whether such an approach is justifiable given that truck operators already pay road user charges. In any case, considering the number of local governments and grain handling agencies that could be involved and the difficulty of implementing and policing agreements between the parties, the Commission sees such an approach as cumbersome and unlikely to have much merit as a workable policy

alternative. It is also likely to be incompatible with the general deregulation of the grain storage, handling and transport system which allows for price signals and freedom of choice to determine the grain paths that will be used by grain growers and handling companies.

6.3.4 Targeted funding schemes

If in some particular circumstances there is a significant shift in the modal balance for grain transport from rail to

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local roads, the Commission supports the view of the Local Government Association and Shires Association of New South Wales that this 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 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. Councils are invited to submit applications for funds for such works and allocations are made if it is found that the level of service provided by a road in question has been reduced to an unacceptable level. Funding is subject to some council contribution, which is no greater than the contribution for normal allocations. The type of work considered for special impact funding would generally be improvements to the road network to assist in the development of projects of major significance to the State, or where there has been a marked increase in non-local traffic as a result of the impact of government policies or tourist development. 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

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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 State Rail Authority'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. The Commission notes two issues that should be recognised in the operation of such schemes. First, a long-term rather than a short-term perspective should be taken in targeting funds. Accordingly, investment analysis procedures should be adopted which account for the long-term economies of upgrading roads and ensure that adequate funds are provided to develop the road network in accordance with demand. Second, as targeting schemes develop, some co-ordination between States may be appropriate to facilitate an efficient allocation of expenditure from a national viewpoint.

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 structure of taxes and charges levied on road transport. In the meantime, the Commission considers that specific Commonwealth funding support for targeting schemes, on a joint basis with the States, may be warranted.

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APPENDIX A COST STRUCTURES FOR ROAD TRANSPORT

A. 1 Introduction

In this appendix the cost structures of grain transport by road are described. The analysis deals with the two

principal cost components of the road transport system. First, the operating cost structure of road transport is investigated in Section A.2. This is followed in Section A.3 by an analysis of the external costs of road transport, principally road damage. The analyses were conducted in conjunction with the Commission's consultants, Travers Morgan Pty Ltd.

A.2 Operating costs and charges

The road transport industry is characterised by a large number of operators and relatively easy entry and exit from the industry. The resources involved, primarily trucks and

trailers, are flexible in their usage and tend to be deployed when and where there is demand. Freight rates, therefore, are primarily determined by competitive pressures and are likely to reflect the operator's costs. Two approaches are

adopted in this section to investigate the direct costs of the road transport of grain. The first is a review and

analysis of quoted contract rates; the second is a budgeting approach, in which the components of operator's cost are established. The results of these two approaches are then compared and reconciled.

The analysis of contract rates considers two distinct types of operations, from farm to silo and from farm or silo to port. Three types of vehicle are considered:

. a two-axle rigid truck;

. a six-axle articulated tipper;

. an eight-axle B-train.

A distinction has also been drawn between 'grower' and 'contractor' vehicles, reflecting different operating conditions associated with each type of vehicle.

A.2.1 Farm to silo

Preliminary results from a recent BGQ survey indicate that around 55 per cent of growers in Queensland use contractors to cart grain to their local silo. Most of these growers also use their own trucks: some 86 per cent of all growers deliver some of their grain to the depot in farm trucks. The South Australian studies by Kerin (1984, 1985a, 1985b) in 1983-84 and the State Transport Study Group (for New South Wales) in 1983-84 indicated that two types of vehicles are generally involved in trucking from farm to depot: a

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grower-owned two-axle rigid truck, and a contractor-owned six-axle articulated truck, although some growers own articulated trucks and some contractors operate rigid trucks.

In South Australia, Kerin found that around 25 per cent of all grain delivered in 1983-84 to silos was delivered by contractor. The average load delivered by contractors (19 tonnes) was double the average load delivered by growers

(9-10 tonnes) and contractors' vehicles comprised only around 14 per cent of the vehicles delivering grain. At that time (1983-84), the most popular vehicle used by growers was a two-axle rigid truck of about 10 tonnes capacity, or a truck-trailer combination carrying about 15 tonnes. Contractors generally, but not exclusively, used six-axle articulated vehicles with a capacity of about 24 tonnes.

Contractors tended to carry grain for significantly longer distances than did growers; the average one-way distance in the survey was 24 kilometres for farm vehicles and

103 kilometres for contractors. There was a strong

correlation between distance travelled and size of truck for both growers and contractors.

Contractor rates Contract rates for farm to silo hauls are typically higher than those for longer distance operations. This is partly due to the influence of fixed loading/unloading and queuing charges but also reflects the high proportion of the trip that is made on gravel or poorer quality roads, which

increases fuel consumption, driver time and other elements of vehicle operating cost. Also, more small trucks are used than in line-haul operations.

Quotes derived from submissions to the Commission for farm to local silo movements in 1986-87 were typically around $4.50 to $6 per tonne for distances of 10 to 20 kilometres (one way). Similarly, current contractor charges in Queensland are around $5 per tonne for short-haul trips

(around 30 minutes, or 20 kilometres, from the silos), but these can fall to as low as $3.50 per tonne under market pressure. Conversely, if the access road is poor rates are increased; rates of $14 per tonne for hauls of 100 kilometres have been quoted in such circumstances. The BGQ survey found an average of $7.42 per tonne for contract rates to growers'

local silos (a distance of approximately 30 kilometres).

Cost analysis In order to investigate more rigorously the factors affecting costs, the Commission reviewed previous studies. The study by Kerin (1984, 1985a, 1985b) provided the most comprehensive data on transporting grain from farm to silo. The discussion that follows is largely based on his work, although the Commission has also drawn on data collected by the State Transport Study Group in New South Wales in 1983-84 and the

Grain Elevators Board in 1986-87.

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Kerin's South Australian data was collected at 30 sites (26 silos, one sub-terminal and three terminals), with a one-day survey being conducted at each site. Nearly 700 drivers were interviewed and queuing times were observed for over 3000 trucks.

The farm to silo operation is essentially a simple one: the truck loads at the farm, travels to the silo and joins a queue for unloading. It passes through a testing station, goes over a weighbridge and finally unloads into a road hopper. Time taken to do this is dependent on several

factors:

Time to load - this was estimated by Kerin to be in the order of 22 minutes per vehicle for farm trucks and 37 minutes for contract trucks. The New South Wales State Transport Study Group estimated a loading time of

35 minutes per vehicle.

Time to travel to and from depot - Kerin found an

average speed of 40 kilometres per hour for farm trucks and 60 kilometres per hour for contractors. The State Transport Study Group indicated that 50 kilometres per hour would be an appropriate assumption for both types of vehicles.

Queuing time - Kerin found that queuing time depends on the number of vehicles waiting to unload and the

capacity of the site to accept grain. Kerin's analysis in South Australia showed queuing time is most closely related to the number of road hoppers available. The two principal equations estimated by Kerin for queuing time were

TQT (D) = .0055 QD-9 ( QD1*9/NHH1 '9 ) (A.l)

and

TQT (H) = 2.1 x 10_5QH'8(QH1'6/NH1·6 ) (A.2)

where

TQT (D) QD NHH

and

total queuing time in minutes per day quantity received per day (tonnes) hopper-hours per day

TQT (H)

QH NH

total queuing time in minutes for the harvest quantity received during the harvest number of hoppers on site

The expression for queuing time during the harvest period as a whole indicates that for a site with

throughput of, say, 10 000 tonnes per hopper over the period, average waiting time per vehicle would be about

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90 minutes. A site with half the throughput per hopper would have an average waiting time of only around 30 minutes.

A recent BGQ survey found average time spent at depot to be 40 minutes early in the harvest, 100 minutes in the middle of the harvest, and 45 minutes late in the

harvest. This is not all queuing time as it also

includes unloading time.

. Time taken to weigh, test and unload - this was

estimated by Kerin to be 12 minutes for 'farm' trucks and 21 minutes for 'contract' trucks. The State

Transport Study Group suggested that 20 minutes would be a typical elapsed time for weighing, testing and unloading.

Kerin collected detailed data on contractor rates in 1983-84. He attempted to relate them to the quantity of grain carried and expected queuing delay but neither of these factors was significant in his analysis, even though 30 per cent of contractors claimed these were factors they

considered in setting their charges.

The cost function eventually derived by Kerin was:

C = 3.88 + 0.059D (A.3)

where

C = cost per tonne, in dollars D = distance from farm to silo, in kilometres

For a contractor with an articulated truck, this is

equivalent to a fixed charge of $90 and a per

vehicle-kilometre cost of about $1.40. The high level of the fixed charge is clearly predicated on a waiting, loading and unloading time, at farm and silo, of around two to three hours and is equivalent to $1-2 per tonne per hour. This waiting time is in line with estimates obtained by the State Transport Study Group of 3.5 hours for a complete

load-unload-load cycle in a 'normal' harvest. The BGQ survey found turnaround times ranging from one hour and 50 minutes early in the harvest, to two hours and 50 minutes

mid-harvest, and one hour and 55 minutes late in the harvest.

A.2.2 Farm or silo to port (line haul)

Contract rates Line-haul road operations are predominantly undertaken by contractors operating six-axle articulated vehicles, either tippers or flat tops with tarpaulins. Road trains are becoming more common, especially in South Australia and Western Australia. Distances hauled range from 50 kilometres to over 400 kilometres. The rates charged are remarkably uniform across the various States; 1986-87 rates fell in the

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range from 5.5 cents per net tonne-kilometre for the longer hauls to 7 cents per net tonne-kilometre or more for shorter distances. The rate charged has two components:

. a fixed element to cover standing time for loading and unloading, typically $1-5 per tonne depending on the operation and the expected delays;

. an element variable with distance, typically around $1.50 per kilometre (or 5-6 cents per net

tonne-kilometre).

The overall rate charged is a combination of these two components. For short-haul (up to 100 kilometres)

operations, overall rates are $5-10 per tonne, reflecting high unit fixed costs. Longer distance (200-300 kilometres) line-haul rates are dominated by the distance component and are the equivalent of about 6-7 cents per net

tonne-kilometre. Where road trains are allowed, their economies of scale reduce these rates by about 15 per cent, to 5-6 cents per net tonne-kilometre.

Two examples of current rates are $30-35 per tonne from Roma to Brisbane (504 kilometres, equivalent to 5.9-6.9 cents per net tonne-kilometre) and $14-16 per tonne from a farm 180 kilometres to Brisbane (equivalent to 7.8-8.9 cents per net

tonne-kilometre).

To augment the analysis of contractor rates, the direct costs of road transport were also examined using a budgeting approach leading to a set of general cost functions.

Cost analysis Road vehicle operating costs can be divided into two broad groups: fixed costs and variable costs. The fixed costs include vehicle registration fee, insurance,

distance-independent depreciation, and business overheads. Variable costs cover fuel, oil, tyres, vehicle maintenance and repair, distance-based depreciation, and driver's time.

The first five of these variable costs are variable with distance and the last is variable with hours worked. The variable costs are also affected by the nature of the terrain over which the vehicle is operated, the condition of the road, the operating speed and the level of congestion. Operating costs were estimated for the typical contractor vehicles (six-axle articulated vehicles and road trains) and then for a two-axle rigid farm truck. The sensitivity of these costs to operating conditions is also examined using the vehicle operating cost component of the NIMPAC model

(NAASRA 1984) used regularly by the State road authorities.

The costs of contractor vehicles are based on two main sources: the Australian Road Transport Federation - Transport Workers Union (ARTF-TWU) methodology for interstate owner-driver cost calculations; and the 1984 Australian Bureau of Statistics Transport Industry Survey.

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The ARTF-TWU methodology is the basis for the calculation of rates applying to interstate haulage under the ARTF-TWU Owner-Drivers Agreement. Although these 'official' rates are often undercut in the market place, they are the best estimate available of costs incurred in the long term. Table A.1 sets out the cost components and method of calculation.

The costs in Table A. 1 total about $1.00 per

vehicle-kilometre. A round trip with an empty return leg would therefore cost about $2.00 per kilometre (one-way distance). Market rates are significantly below this estimate (say, about $1.60 based on 25 tonnes at 6.5 cents per net

tonne-kilometre) due, in particular, to the number of hours worked. Table A. 1 is based on a 40 hour week whereas a

50-60 hour week is quite common. This would reduce the labour cost by about 30 per cent, to $9.40 per hour.

The costs in Table A. 1 are also sensitive to the annual utilisation assumed for the vehicle. The estimates assume 131 000 kilometres per annum, as in the ARTF-TWU Agreement, but the contractors in the Kerin survey averaged only

100 000 kilometres per annum. A more useful approach is to consider these costs on an hourly basis: assuming 2500 hours utilisation per annum, the fixed costs average about $17 per hour.

In summary, current operating costs for a six-axle

articulated prime mover and trailer are given by:

C = 26.60HR + 0.45D (A.4)

where

C= operating cost for a given journey HR= hours taken to complete the journey D= distance, in kilometres.

For a trip of 300 kilometres and return, carrying 25 tonnes at an average speed of 80 kilometres per hour, with an empty return leg and two hours' waiting time, the total cost would be $520, or 6.9 cents per net tonne-kilometre.

Market rates can be below even this figure indicating that these rates may also be affected by high average operating speeds and/or overloading.

Synthesised costs for a B-double with an assumed 41-tonne payload are given in Table A.2. These costs assume the same utilisations as Table A.1. On this basis, a B-double operation carrying 41 tonnes is about 10 per cent cheaper than a comparable articulated vehicle carrying 25 tonnes. This corresponds well with the 15 per cent differential derived from the analysis of market rates in Western Australian, where the payloads for roadtrains are about 48 tonnes.

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TABLE A . 1 OPERATING COSTS: SIX-AXLE ARTICULATED TRUCK, 1987

Cost Consumption Unit cost Cost

category

$ c/km

Variable costs

Fuel 1.93 km/1 47.70 c/1 25

Tyres -prime mover 0.142/000km 243.76a 3

- trailer 0.126/000km 242.50a 3

Maintenance -prime mover - - 12

- trailer - 2

Sub-total 45

Driver wages 12.90/hrb 22

Fixed costs

Lease - prime mover 25 000 pac

- trailer 5 900 pa

Insurance - prime mover 5 750 pa

- trailer 750 pa

Registration - prime mover - trailer

900 pa

Administration 4 750 pa

Sub-total 43 050 pa 33

Total 100

a. Average cost; allows for 1.7 retreads per tyre annum. b. Transport Workers Union rate, with allowance for

on-costs and meals. Per kilometre rate assumes

57 kilometres per hour. c. On basis of buying 4-year-old prime mover and keeping for four years.

Note: Calculations assume average usage of 131 000km per year.

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

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TABLE A.2 OPERATING COSTS: B-DOUBLE, 1987

Cost category $/hr $ pa c/km

Variable costs

Fuel 40

Tyres - prime mover 3

- trailer 7

Maintenance - prime mover 18

- trailer 4

Sub-total 72

Driver wages 14.20 25

Fixed costs

Lease - prime mover 37 500

- trailer 11 800

Insurance - prime mover 8 625

- trailer 1 500

Registration 900

Administration 500

Sub-total 65 325

Total 147

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

The general pattern of expenditure shown in Table A. 1 is summarised in Table A.3. and compared with the breakdown of costs for long-distance hauliers obtained in the 1984 Transport Industry Survey.

The broad pattern of costs between the two sources is similar, although the Australian Bureau of Statistics was surveying companies with a range of vehicle types, rather than owner-drivers. The companies have business overheads of about 20 per cent; these are the marketing and administration

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costs associated with accepting freight and either carrying it themselves or passing it on to subcontractors.

TABLE A. 3 COMPOSITION OF ROAD FREIGHT OPERATING COSTS

ATRF-TWU ABS

Item Per cent of Per cent of

operating total operating total costs costs costs costs

Motor vehicle operating Fuel 26 31

Repairs, tyres etc 21 17

Fixed costs 30 25

Drivers wages 23 27

Sub-total 100 96 100 68

Sub-contractors 15

Overheads (admin.etc) 4 17

Total 100 100

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

Farm vehicles are typically two-axle trucks used for general work on the farm. They have a very low annual utilisation; the South Australian survey estimated average utilisations of around 5000 kilometres per annum. There is little doubt

that these vehicles would be retained for general farm use even if they were not used to carry grain from the farm to the silo, and it is assumed therefore that their fixed costs can be ignored for practical purposes.

The cost of hauling grain in these vehicles therefore comprises variable vehicle oprating costs (fuel, oil, tyres, repairs and maintenance) and the cost of the driver's time.

The operating cost of this type of vehicle can be estimated from existing operating cost models such as that contained within the NIMPAC model (NAASRA 1984), together with data collected by Kerin in 1983-84 and indicators such as the New

South Wales General Carriers Contract Determiniation. The estimated costs are set out in Table A.4.

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TABLE A.4 OPERATING COSTS: TWO-AXLE RIGID TRUCKS, 1987

Cost Consumption Unit c/ km $/hr

category Cost

Fuel 3km/l 50c/l 17

Tyres 0.12/000km 143.80a 2

Maintenance - - 13b

Sub-total 32

Drivers' wages - - - 12.00

a. Assumes each tyre is retreaded once. b. Based on Kerin survey, 1983-84. c . Includes 20 per cent on-costs.

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

A.2.3 Variation of costs with operating conditions

Vehicle operating costs (VOC) are an important input to road planning studies and are routinely estimated with computer models. One long-established model, NIMPAC, is incorporated in the National Association of Australian State Road Authorities (NAASRA) Road Planning Model and is regularly

used by State road authorities to estimate vehicle operating costs and road damage costs. Using the operating cost component of the model variable vehicle operating costs were calculated for a variety of speeds and road conditions. During the recent Review of Road Vehicle Limits (RoRVL) study the validity of the VOC estimates generated by the model was examined and a number of revisions made to the model; these have been incorporated in the current estimates.

The model requires a set of input parameters giving a set of unit costs. Estimates of current parameter values were collected and the model was then used to produce the variable components of VOC, adjusted to a December 1986 price basis.

Estimates of costs were made for the three typical grain haulage trucks: two-axle rigid trucks; six-axle articulated trucks; and eight-axle B-doubles. Operating costs were estimated for a range of road conditions and the two extremes of rural road traffic conditions; the situation of free-flow vehicles, with minimal interactions within the traffic

stream; and congested traffic conditions, in which there is considerable interaction between vehicles in the traffic stream.

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The variable financial costs ($/truck-kilometre) were found to vary with both road condition and speed. A poor quality road may cause vehicle operating costs to be twice as great as those for a good quality sealed road and this will be reflected in haulage charges. The impact of speed is less marked: vehicle operating costs increase with speed (more

fuel is used, tyres wear out faster) but this is generally counterbalanced by the reduction in driving wage cost per kilometre and the improved utilisation of the vehicle.

A.2.4 Cost Functions

In this section the results documented above are summarised with a set of general operating cost functions. A

corresponding set of resource cost functions is derived by correcting operating costs for sales taxes, fuel taxes and other fees.

Financial costs It is commonly accepted that calculations of road transport costs in which labour and capital are conventionally costed tend to overstate the cost structure of the industry. This

occurs in this study, where a lower wage rate, lower capital costs and/or some overloading would have to be assumed before current market rates could be reconciled with the budgetted costs of road transport. The general cost functions derived

from the cost analysis are summarised in Table A.5.

TABLE A.5 ROAD COST FUNCTIONS: FINANCIAL COSTS, 1987

Vehicle Cost variable

type Capacity per hour per km

2-axle rigid 10 12.00a 0.32

6-axle articulated 25 26.60 0.45

B-double 41 36.50 0.72

a. Excludes vehicle capital costs.

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

Resource costs Resource costs of operating a vehicle can be inferred from the financial costs by making deductions for taxes associated with vehicle acquisition and use. These taxes include a sales tax of around 20 per cent on purchase of the prime mover and trailer (plus stamp duty), annual registration

fees, vehicle weight taxes, and excise tax on distillate, and

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State fuel franchise fees and royalties. (No deduction is made for the federal crude oil levy, however, since this is designed to achieve import parity pricing - and hence reflects the opportunity cost of potential sale of

domestically produced oil to world markets). Most of the financial burden of these taxes comes from the use of fuel. The remainder consist of annual fixed costs to the operator, which have been averaged over the number of tonne-kilometres hauled, or capital-related costs which are amortised over the life of the asset. More detail on this resource cost

adjustment is provided in Section 5.1 of this paper. The resource cost functions are summarised in Table A.6.

TABLE A.6 ROAD COST FUNCTIONS: RESOURCE COSTS, 1987

Vehicle Cost variables

type Capacity per hour per km

2-axle rigid 10 11.16 0.22

6-axle articulated 25 21.50 0.30

B-double 41 29.70 0.47

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

Industry cost functions The analysis presented above is based on individual road transport operators. Given that large volumes of grain could potentially be transported by road it is necessary to look

beyond the costs of individual operators to an industry cost function. Studies have shown (for example, Winston 1985; Bayliss 1986) that there are few economies of scale within the trucking industry and optimal firm size is small. Bayliss found that larger firms may be able to operate a more efficient mix of vehicle sizes but the fleet size has no influence on the operating costs of specific vehicles

(including corporate overheads).

There are no restrictions on entry into the trucking industry except for the normal operational regulations applicable to all operators (for example, special drivers' licences and registration) and limits placed on the use of some vehicles

(for example, B-doubles and road trains) in most States. When the industry was deregulated in the mid-1950s the ease of entry was clearly demonstrated (see Joy 1964): widespread entry occurred. One reason for the high level of entry is that road operators incur virtually no sunk costs.

The high turnover rate generally observed for hauliers (from business failure, especially inability to maintain vehicle repayments), both here and in other countries, is sometimes

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cited as a cause for concern. Whilst individual haulage firms may display instability, experience shows that in its dealings with users the industry itself is both stable, in that a service is continuously available, and efficient in technical operation.

In a number of submissions to the Commission it has been claimed that this would not be the case and that road freight rates would increase significantly if substantially more grain was to be transported by road. The Commission believes that, given the competitive nature of the industry, the

flexibility and mobility of the resources involved and the relative ease of entry for new operators, this is unlikely to occur.

A.3 External costs of road transport

A.3.1 Introduction

In addition to the direct costs determined above, road transport activities result in some costs that are not shown, or are shown only in part, in the accounts of the suppliers of these services. Such costs are not paid for by those who give rise to them, and they are referred to as ' external

costs'. They nevertheless result in costs that must be met, directly or indirectly, elsewhere in the economy. The following are the external costs most commonly generated in the provision of transport services:

. road damage not recovered from the road user;

. road accidents, to the extent to which they are not

covered by insurance payments;

. noise and pollution;

. congestion that affects non-road-users or other classes of road users.

As discussed in Section 5.1, the Commission is of the view that potentially the most significant of these costs is likely to be road damage with congestion, pollution and accidents being less of a problem.

A.3.2 Estimating the cost of road damage

A particularly important issue for the Commission was the extent to which additional road grain transport would contribute to the avoidable costs of road damage. Avoidable cost is defined as expenditure required to restore and maintain roads to an acceptable standard after damage due to vehicular use. It is the cost that could be avoided if

vehicles were not using roads.

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A range of methods has been used to estimate road costs and allocate them across different vehicle classes. The main approaches to this type of analysis are discussed below.

Traditional approaches The allocation of road costs among vehicle categories is normally associated with road pricing or cost recovery studies. Both the Bureau of Transport Economics (BTE 1985) and the Inter-State Commission (ISC 1986) have recently reviewed Australian road cost recovery studies. A common feature of most of these studies is the fairly arbitrary classification of categories of aggregate expenditure as

'avoidable', ' common' or 'joint', followed by a further apportionment of each class to vehicle types.

Such an approach was taken, for example, by Luck and Martin (1987) and by the consultants to the National Road Freight Industry Inquiry. The latter stated

The basis of allocating a category of expenditure as an avoidable truck cost is to consider that if trucks were not present on parts of the network what items of

expenditure would have been different. For instance, if heavy vehicles did not have to be provided for, road pavement depth (and perhaps width) would have been less, and bridges could be built to lower design standards.

(NCA 1984)

The NRFII study, as with the other 'traditional' studies, allocated costs for a single year on the above basis. However, as was noted in the report

It must be reiterated that the estimation of avoidable truck and car costs cannot be based on actual practice. The expenditure consequences of different design requirements, excluding trucks or cars can only be postulated on a subjective basis. The estimates have been based on the judgment of road engineers obtained through direct discussion or based on what evidence could be gleaned from the literature. (NCA 1984)

This traditional approach to cost allocation relies heavily on judgments about costs in a specific period (normally one year) and is in contrast to the more comprehensive life-cycle approach used by the Commission.

The life-cycle approach The development of life-cycle modelling for Australian roads originated with the Webber, Both and Ker ( 1978) study of separable (or avoidable) pavement costs. This study considered four components of pavement cost attributable to trucks:

. the remaining life of pavements;

. pavement reseal frequency;

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. routine pavement maintenance;

. pavement strength (thickness) requirements.

Using a life-cycle approach and data from the Economics of Road Vehicle Limits (ERVL) study (NAASRA 1976), Webber et al estimated these four components of avoidable cost for each of seven vehicle types. This was done by simulating the effects of removal of each of the vehicle types from the total fleet; the avoidable cost for each particular vehicle type was calculated as the difference in total costs over a 25-year period between a base case with all vehicle types included and the case where the particular vehicle was excluded. One significant finding of the Webber et al study was that over 90 per cent of the cost attributable to trucks results from alteration in the timing of necessary expenditure. This is because the remaining useful life of the pavement changes,

and thus so do the discounted costs.

More recently the NAASRA Road Planning Model, NIMPAC, has provided the life-cycle modelling basis for a number of major Australian studies (BTE 1984; NAASRA 1984; Bayley & Kinder 1984; Review of Road Vehicle Limits - NAASRA 1986). An

extension and enhancement of the NIMPAC methodology was used by the Commission to assess the impact of an incremental change in road grain transport. The enhancement allows

computation of 'avoidable cost' for selected categories of vehicle. A cost stream difference approach similar to that used by Webber et al is used, but with all engineering cost

components (except bridge costs, which are generally not avoidable) being considered across all types of improvement and with cars and light commercials explicitly included.

The Commission believes that the life-cycle approach provides the best available estimates of incremental construction and damage costs following the addition of a class of traffic (in this case the addition of two classes of vehicles for grain transport following the removal of transport restrictions.) Unlike alternative methods, it focusses on the long-term

incremental costs of changing traffic volumes and thus provides cost estimates that are appropriate for the Commission's purpose: that is, to assess the additional cost of road damage caused by increased grain transport that can be compared with the additional revenue that would be generated by road user taxes and charges.

The estimates provided by the life-cycle modelling approach can be illustrated conceptually in Figure A.1 which shows the relationship between the road user taxes paid towards road damage, construction and maintenance; the cost of road damage, construction and maintenance; and the number of ESA's

(An ESA (equivalent standard axle load) is equivalent to a single axle-load of 8.2 tonnes carried on dual tyres and is used here as the unit of road usage).

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In Figure A.1:

LRTR =

AB =

LRTC =

ESA's before removing restrictions

ESA's after removing restrictions

Current revenue for road use

Revenue from road user charges following removal of road transport restrictions

Total revenue function for additional grain transport

Current deficit for road use after restrictions are removed, using existing road network

Current short-run total cost curve for road use (existing road standards)

New short-run total cost curve for road use

following removal of road restrictions and justifiable upgrading of roads

Long-run total cost function derived from the envelope of short-run total cost curves.

In the figure it is assumed that 100 per cent recovery of avoidable road damage costs occurs at X.. . This point is open to debate but may not be unrealistic given that X consists largely of cars and lighter farm trucks which have a high level of cost recovery. It should be noted that

six-axle articulated vehicles do not account for a

significantly high percentage of X^ ESA's.

With the existing road system, removal of restrictions would increase road costs from TC = TR. (where full cost recovery is occurring) to TC, yielding a funding deficit of AB. The

deficit is particularly significant because six-axle articulated vehicles are of considerable importance when transport restrictions are removed and such vehicles operate on the existing road system (ie six-axle vehicles account for a high proportion of ESA's at X^ compared to X ^ ).

The life-cycle methodology used by the Commission estimates the costs associated with moving from TC.^ to TC2 ' "that is, the upgrading and continuing maintenance costs based on the most efficient road standard for the change in traffic volume. As discussed in detail below, the results suggest that this avoidable cost is more than met by the additional revenue generated under the current regime of 'road user charges' when sales tax and other charges are included; in Figure A .1 this means that the cost difference CD is

covered. At X„, therefore, cost recovery from grain

transport will still be achieved as indicated at TC= TR2 ·

6 6

LRTC

TC = TR;

LRTR

TC = TR

ESA’s

FIGURE A.1 ROAD C O ST AND REVENUE FU N C TIO N S — EFFECTS OF A D DITIO NAL GRAIN TRANSPORT

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

SUPPORTING PAPER 4

A.3.3 Avoidable road costs

For the Commission's analysis the truck types and loadings follow the distributions derived from the RoRVL

Classification, Mass and Dimension Surveys. The base conditions assumed for the rural arterial roads are the projected states as at January 1987, whilst the stream of road costs covers the 30-year period 1988-2017. The year-by-year differences are discounted and aggregated to a present value.

The 'base case', with all vehicles included, was calibrated so that the costs generated are consistent with current average levels of expenditure. This was done by adjustment

of the road standards and policy variables of the model in line with the approach used in the RoRVL study (NAASRA 1986). The starting point for this process was the FIDO standards derived by the NAASRA Roads Study (1984). The final standards used by RoRVL were adopted for the current study as

providing an adequate calibration for the estimation of avoidable costs.

Fleet results To estimate the long-run avoidable costs of interest in this study the road life-cycle modelling process was applied to the two predominant truck types used for grain haulage, three-axle rigid trucks representative of two and three

axle farm trucks and six-axle articulated trucks

representative of contractor trucks.

Cost estimates were derived by determining the impact of each vehicle type on the volume and timing of road reconstruction, rehabilitation and maintenance expenditure. Changes in the pattern of expenditure are determined and discounted over a thirty-year period to give an estimate of unit avoidable costs (in cents per truck-kilometre) which reflect the following:

. the loading distribution for the vehicle type;

. the relative distribution of that vehicle type across the road network;

. the condition and mix of roads in the network.

The road network used in the analysis was the rural and outer urban arterial road network in each of New South Wales, Victoria, Queensland, South Australia and Western Australia.

These roads are classified by NAASRA into nine 'functional classes', according to their role in the network (see Table A.7).

Since the estimation process yields disaggregated costs, results are reported by functional class. These estimates show the variations in unit avoidable cost that arise across functional classes due to differences in vehicle mix, vehicle loading, average traffic levels and road condition and

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standards. The results of the analyses for the three-axle rigid and six-axle articulated truck categories are presented in Tables A.8 and A.9 respectively.

TABLE A . 7 FUNCTIONAL CLASSIFICATION OF AUSTRALIAN ROADS

Category Function

Rural roads Functional Class 1 for movement of people and goods

between the major cities and regions

Functional Class 2 for movement between major cities and towns and between the towns

Functional Class 3 for movement between important

centres and towns and also as feeder roads to Class 1 and 2 roads

Functional Class 4 for the provision of road access to properties and houses

Urban roads Functional Class 6 for the large volume movement of

goods and people - these are

arterial roads in urban areas.

Functional Class 7 for the movement of large volumes of traffic for distributing it to the local street systems and to

supplement the Class 6 roads - these are the sub-arterial roads in urban areas

Source: NAASRA.

The various sections of the road network vary in condition, from sections requiring immediate attention, to sections that have been recently reconstructed and will not require further rehabilitation within the thirty-year time horizon. The results support a previous finding (Bayley & Kinder 1984) that sections of road in these two extremes of condition tend to have lower avoidable costs: in such cases avoidable cost arises predominantly from a difference in maintenance costs, with only a small (or zero) difference in the construction

cost component.

Tables A. 8 and A.9 include both sealed and unsealed roads in varying proportions in each functional class. The disparity between unsealed and sealed road costs is brought out in

Table A.10, which shows that unit avoidable costs on unsealed roads are generally more than double the unit avoidable costs on sealed roads.

69

TABLE A.8 UNIT AVOIDABLE COST FOR RoRVL THREE-AXLE RIGID TRUCKS BY ROAD CLASS _________________ (cents per truck-kilometre)_____________

Function class

State 1 2 3 6 7 Total

NSW 3.6 7.8 7.3 3.0 3.9 4.9

Vic 2.7a 4.1 7.1 4.6 4.2 4.7

Qld 8.4 6.6 12.0 4.1 5.0 8.1

SA 14.0b 7.4 12.6 4.0 c 11.0

WA 6.9 6.1 13.4 6.4 6.1 8.1

WA (inc. trailers) 9.3 6.3 14.7 5.9 10.0 9.1

a. Low figure due to relatively recent construction of much of this system. b. High figure due to the large proportion of road system that is unsealed and the high cost of improvements of

unsealed parts. c. Insufficient trucks of this type were recorded on this class of road to provide meaningful results.

Note: A 5 per cent discount rate is applied to future road expenditure; December 1986 prices are used.

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

Cost variability The unit avoidable costs reported in Tables A. 8 and A. 9 represent the weighted average cost for all vehicles of these particular types traversing all roads in the particular network. Clearly, for any specific subset of the vehicles traversing particular roads unit avoidable costs will differ. The following are major factors which lead to variation in unit avoidable costs:

. differences in the condition of the road;

. seasonal variation in both susceptibility to damage and loading patterns;

. variations from the 'fourth power rule' for low quality pavements;

. differences in average daily traffic volume;

. variation in vehicle loading distributions.

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TABLE A.9 UNIT AVOIDABLE COST FOR RoRVL SIX-AXLE ARTICULATED TRUCKS BY ROAD CLASS (cents per truck-kilometre)

State

Functional class Total 1 2 3 6 7

NSW 5.2 10.4 9.4 5.1 5.1 6.5

Vic 3.9® 6.1 9.7 6.9 5.3 5.6

Qld 8.3 10.0 13.9 5.9 8.0 9.1

SA 13. lb 10.9 4.3° 4.0 d 8.2

WA 10.6 8.4 14.8 9.7 6.7 9.9

WA (incl. 15.3 12.7 22.3 9.3 24.6 14.6

(road trains)

a. Low figure due to relatively new condition of much of this system. b . High figure due to very high costs on the unsealed

portion of the system. c. Low figure because road costs are distributed over a high volume of six-axle articulated truck traffic. d. Insufficient trucks of this type were recorded on this

class of road to provide meaningful results.

Note: A 5 per cent discount rate is applied to future road expenditure; December 1986 prices are used.

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

Road condition As noted, roads in very good or very poor condition tend to have lower avoidable costs, since construction work is either not required for a long time, or is immediately and

unavoidably required. This is a direct consequence of the number of years of pavement life remaining in the two situations.

Seasonal variation The seasonal variation in the rate of traffic-induced deterioration and the susceptibility to catastrophic damage occurs because of variations in the ambient moisture level. Moisture may dramatically affect the load-bearing properties

of materials, affecting the magnitude of the pavement deflection caused by passage of a vehicle axle. Pavement lives can vary by 50 per cent depending on whether traffic is concentrated in the wet or dry season.

71

TABLE A. 10 UNIT AVOIDABLE COST FOR RoRVL SIX-AXLE ARTICULATED TRUCKS BY ROAD TYPE _________________ (cents per truck-kilometre)______

State Unsealed

Rural roads Sealed Ratio

NSW 10.3 6.5 1.6

Vic 14.0 5.5 2.5

Qld 36.0 9.2 3.9

SA 25.8 7.4 3.5

WA 25.7 9.7 2.6

WA (incl. road trains) 42.6 12.2 3.5

Note: A 5 per cent discount rate is applied to future road expenditure; December 1986 prices are used • Source: Royal Commission into and Transport.

Grain Storage, Handling

Fourth power rule The destructive effect per axle load is proportional to the fourth power of the load. Whilst the general form of the equation is not in serious doubt, the value of the exponent used is sometimes questioned. The fourth power rule is generally taken as a usable compromise for arterial roads but may be less realistic for lower quality roads; values of power law exponents ranging from 2 to 8 have variously been proposed for use in this context.

Traffic volume Irrespective of any tendency of lower quality pavements towards a higher power damage law, any given increase in the rate of pavement loading will have more rapidly noticeable consequences on more lightly trafficked roads; that is the

remaining service life will generally suffer a greater reduction on lightly trafficked roads for a given loading increase than will the more heavily travelled highways.

Vehicle loading The unit avoidable costs reported in Tables A. 8 and A. 9 reflect the loading distribution for the respective vehicle types. However, there is a rapid increase in the road damage factor (equivalent standard axle (ESA) loads per truck) for the three-axle rigid and six-axle articulated truck types as load increases. (An ESA is the equivalent of a single axle-load of 8.2 tonnes carried on dual tyres. ) For example, for a six-axle articulated truck, 30 per cent overloading

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causes increases of about 150 per cent in road damage because of the non-linearity of the road damage factor.

Conversion of road costs to per ESA kilometre basis can show the effect of differing vehicle loadings. A summary of the results on a cost per ESA-kilometre basis, is presented in Table A.11.

A.3.4 Interpretation of results

Any application of these costs in a context different from that in which they were derived must recogise that the following factors affected the estimates:

. the loading distribution for the vehicle type;

. the relative distribution of that vehicle type across the road class;

. the road standards required for a particular vehicle type (width, strength, etc.)

. the condition and mix of roads in the class.

Because the first three factors vary from one vehicle type to another, the estimated road cost for different vehicle types will vary, even when partially standardised on a 'per ESA-kilometre' basis. Notwithstanding these caveats, Table A.11 provides the only consistently based set of disaggregated nation-wide unit costs produced in Australia to date.

Examination of Table A.11 indicates that there is significant variation between States and road classes, depending primarily on the conditions of the roads involved and the

type of truck operating. Data are not available on the number and loads of grain trucks on particular road classes. However, in practice, farm to silo traffic will be

predominantly on Class 3 and 4 roads, farm to sub-terminal traffic is predominantly on Class 2 and 3 roads, and silo and farm to port traffic would be mainly on Classes 1 and 2.

Costs were not specifically calculated for a two-axle rigid truck, which is the predominant vehicle type used by farmers for local farm to silo cartage: the unit costs per

ESA-kilometre derived for three-axle trucks are a reasonable approximation.

Rigid farm trucks with a 12-tonne load average 4.2 ESAs in the loaded direction and 0.2 in the empty direction; six-axle articulated trucks with a 25-tonne load average 5.5 ESAs in the loaded direction and 1 in the empty direction. An

approximate average cost per net tonne-kilometre can thus be estimated for each of the vehicle types. For farm trucks, these averages are around 2 cents for farm to port traffic (road Classes 1 and 2), increasing to around 2.5 cents for

farm to sub-terminal traffic on road Classes 2 and 3. For

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six-axle articulated trucks, average damage levels are around 1 cent per net tonne-kilometre for farm to port and around 1.5 for for farm to sub-terminal. On an ESA-kilometre basis,

six-axle articulated trucks tend to do less damage because of their more efficient axle configuration.

Although there are variations between States, the Commission regards these figures as reasonable estimates of the average levels of avoidable road damage that would be incurred if additional grain transport occurred on these roads.

TABLE A.11 UNIT AVOIDABLE ROAD COST BY ROAD CLASS (cents per ESA-kilometre)

Functional class

State 1 2 3 6 7

Farm truck

NSW 2.8 5.7 4.0 1.8 1.6

Vic 2.1 3.7 5.3 4.3 3.7

Qld 7.7 6.0 9.2 4.6 4.1

SA 8.0 4.4 11.2 2.6 a

WA 5.4 5.5 10.6 6.1 3.0

6-axle articulated truck

NSW 2.0 3.9 3.7 2.0 1.4

Vic 1.5 3.3 6.0 3.8 3.0

Qld 4.2 5.2 7.0 3.1 4.0

SA 5.4 5.0 2.0 1.8 a

WA 5.9 4.9 11.3 4.3 3.5

WA (incl. road 6.1 train) 3.9 8.0 3.3 10.5

Note: A 5 per cent discount rate is applied to future expenditure; December 1986 prices are used.

a. Insufficient trucks of this type were recorded on this class of road to provide meaningful results.

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

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Compatibility of results Any comparison of the costs reported in this study with values derived elsewhere must take account of the variability in assumptions about road conditions, seasonal conditions, traffic volumes and loading distributions. Lack of knowledge on these matters tends to rule out meaningful comparison with most of the studies reported by the Inter-State Commission

(ISC 1986). Table A. 12 sets out a series of estimates of unit avoidable cost from several studies undertaken for arterial roads over the last decade. For purposes of comparison. Commission estimates for Victoria are given in

the right-hand column. If allowance for changes in the price base is made, the costs . are broadly consistent with the current results. Note that Table A.12 assumes a 10 per cent

discount rate; 5 per cent has been used elsewhere.

Another study with a methodology comparable to that of the present study, and for which the price base and route coverage is known, was undertaken as part of the Canac Consultants study into the Victorian Grain Handling System

(Bayley and Kinder 1984). When recalculated on a basis consistent with the present study, the costs per

truck-kilometre from the Canac study are higher than those estimated here for Victorian roads. This is to be expected since average truck loading in the Canac study was greater than the fleet average. Unit costs per ESA-kilometre, which allow for this, are generally similar to those for Victoria in Table A.11.

Results obtained by the Western Australian Main Roads Department in a recent study have been recalculated using a December 1986 price base and a 5 per cent discount rate.

These results are shown in Table A.13 and are similar to the Commission's Western Australian figures in Table A.11; the per vehicle-kilometre unit costs are high compared with those presented in Table A. 10 because of the greater mean gross vehicle mass used in the Western Australian study (as was the case with the Victorian Canac Consultants study).

Using a different approach, Luck and Martin (1987) recently calculated road damage costs and assessed the cost recovery situation for various vehicle classes using the national road

network. Their analysis accounted for expenditure on all roads and therefore did not focus in particular on the roads used for grain transport.

Luck and Martin estimated the short-run marginal cost (or avoidable cost) and annual road expenditure over and above avoidable cost to be $2000 million and $2200 million respectively in 1986-87. The method used in the Luck and Martin study was to distribute the cost of road expenditure

across the various vehicle types on the basis of the

estimated total ESA-kilometres imposed on the system by the vehicle type. This measure was regarded as an approximate measure of the damage imposed by each vehicle. The total ESA-kilometres were derived from the survey conducted by the

recent RoRVL study team (NAASRA 1985).

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TABLE A.12 AVERAGE ARTERIAL ROAD COSTS ATTRIBUTABLE TO VEHICLES ____________________ (cents per vehicle kilometre)_________

Source*3 Webber Both Both MOT Vic.Gov. Commissii 1978 1980 1980 1984 1986 estimate

Methodology ERVL ERVL ERVL ERVL Life Life

indexed indexed cycle cycle

Price base 1976-77 1976-77 1979-80 1983-84 Mar 84 Dec 86

Coverage Aust Vic Vic Vic Vic Vic

Costs - cents per vehicle

2-axle rigid 1.9 1.3 1.7 2.7 3-5

3-axle rigid 2.6 1.1 1.4 2.2 4.3 5-6

4-axle rigid 3-6 1.2 1.5 2.4 5-7

3-axle artic 4.0 2.8 3-6 5-6 5-2

4-axle artic 5-2 3-3 4.2 6.5 5.8

5-axle artic 6.0 3-4 4.3 6.6 6.0

6-axle artic 7-5 2-9 3-7 5-5 5-3 6.5

Car - - - - 0.4

a. Calculations based on a discount rate of 10 per cent. b. Refer to reference list for source publications.

Source: Publications as indicated.

SUPPORTING PAPER 4

TABLE A.13 WESTERN AUSTRALIAN GRAIN HAULAGE ROAD COSTS

Location

Cents per

vehicle- kilometre

ESA- net tonne-

kilometre kilometre

Geraldton 84.0 15.3 3.9

Kwinana 29.0 5.3 1.4

Albany 38.8 7.1 1.4

Bunbury 42.9 7.8 1.6

Esperance 56.3 10.2 2.0

Geraldton 37.9 6.9 1.4

Mean value (weighted) 32.3 5.9 1.4

Note: December 1986 prices are used.

Source: Western Australian Main Roads Department.

Luck and Martin estimated that, from a total avoidable pavement cost of $2000 million, six-axle articulated trucks account for $761 million and impose 4966 million

ESA-kilometres on the system. This implies an average avoidable road damage cost imposed by six-axle articulated trucks of 15 cents per ESA-kilometre.

Several points should be made about this latter estimate. First, it represents an average cost allocation of the avoidable road damage costs across all vehicle types. To the extent that there are joint and common road maintenance costs that cannot be attributed directly to a particular type of vehicle, it will be a larger figure than the true avoidable

(incremental) cost that would be incurred for an incremental change in the use of a particular vehicle type. Second, the study uses data on all roads and is not therefore directly comparable with the Commission's study of arterial roads. The non-arterial roads included in the study account for a major proportion - approximately half - of the total expenditure on road maintenance but a much smaller proportion of the total ESA-kilometres. These factors explain why the ESA-kilometre damage rate of 15 cents is higher than the rates estimated by the Commission (Table A.11).

In its submission (p. 71) the Bureau of Transport Economics adopt the Luck and Martin figure as the upper limit of their suggested range of likely road damage for a six-axle articulated truck. As a lower level it suggested 8 cents per ESA-kilometre. By assuming 3.8 ESAs per loaded truck (and

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zero ESAs for unladen) it derived figures of 30.2 to 56.6 cents damage per truck-kilometre for a truck loaded with 24 tonnes of grain. This gives a cost per net tonne-kilometre of 1.26 to 2.36 cents. Note that if the ESA per truck

figures assumed in the Commission's study (5.5 loaded and 1 unloaded) were applied to the BTE figures, the cost per net tonne-kilometre would range from 2.1 to 4.1 cents.

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APPENDIX B CAPITAL AND COST STRUCTURES FOR RAIL TRANSPORT

In this appendix rail funding arrangements and railway cost structures are described. The analyses involved were conducted in conjunction with the Commission's consultant Travers Morgan Pty Ltd. The cost structure presented follows

the National Freight Group costing convention and was examined by the Commission because of its importance to the analysis of alternative grain distribution systems as well as the competitiveness of rail vis-a-vis road transport and the potential for reduced rail costs.

B .1 Funding arrangements

Non-urban public railway services in Australia are operated by a number of statutory authorities and one government department. The four statutory authorities are the State Rail Authority (SRA) in New South Wales, established under

the Transport Authorities Act 1980 (NSW); the State Transport Authority (V/Line) in Victoria, established under the Transport Act 1983 (Vic); the Australian National Railways (AN) Commission in South Australia and Tasmania, empowered by

the Australian National Railways Commission Act 1983 (Cwlth); and finally the Western Australian Government Railways Commission (Westrail), established under the Government Railway Act 1904 (WA). The Queensland Railways Department

operates Queensland Railways (QR) under the provisions of the Railways Act 1914-85 (Qld). The departmental head is the Commissioner for Railways who is responsible to the Queensland Minister for Transport.

The rail authorities in New South Wales, Victoria and South Australia finance their annual operating expenditure as far as possible from their operating revenue. Where this is insufficient, they normally receive additional funding from

their State consolidated revenue fund. The State rail authorities in Queensland and Western Australia pay all operating revenues to the State consolidated revenue fund. In turn, their operating expenditure is sourced from the

consolidated fund (thus any profit or loss is contained within the consolidated fund). The operating revenues of the SRA, AN and Westrail also include a reimbursement for concessional passenger fares and freight.

All rail authorities except QR finance their capital expenditures through a combination of borrowings, often from semi-government organisations, asset sales and payments from consolidated revenue. Outright grants from the Federal Government are also received from time to time for the

finance of specific projects. AN can borrow only in

accordance with its Loan Council borrowing program; the State rail authorities must compete with other State agencies for loan funds within their State's borrowing limit.

QR receives finance for capital expenditures from the Queensland Government through a series of special financing

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measures. The Queensland Government, in turn, receives revenue from mining companies, which are required to fund virtually all railway and rolling stock required for export mines. Over the period 1979-80 to 1986-87, QR received over

$2 billion from these special sources, which means that funds otherwise deployed for mineral transport are available for other purposes, including grain transport.

B.2 Structure of railway costs

The railway systems in Australia generally record their input costs in great detail. However, determining the cost of transporting a specific type of freight from these input costs is difficult because of the complexity of railway operations and the consequent interdependence of the various sections of the railway. Further difficulties arise with

fixed track costs and administration, which are incurred by all traffic hauled by rail. The allocation of these costs between traffics is inevitably somewhat arbitrary.

B.2.1 National Freight Group costing structure

The most common railway costing methodology currently in use is the National Freight Group (NFG) costing convention. The components of this approach (see Table B.l) can be divided into four broad categories:

. Train running costs - these costs are related to train operation and can be taken as 100 per cent variable in the medium term with the volume handled. This category includes crew costs, fuel, maintenance of rolling stock, and a proportion of track maintenance (that amount which is variable with tonnage). Rolling stock and track capital costs are included since both are variable in the long term with the volume handled, as measured by net tonne-kilometres.

. Semi-variable costs - these costs are also broadly variable with volume in the medium to long term and include shunting and terminal handling of passengers and freight. As most of these costs are incurred at

terminals, they are more closely associated with tonnes and passengers embarked rather than tonne-kilometres or passenger-kilometres.

. Corridor fixed costs - these costs are related to the maintenance of the network infrastructure and include maintenance of the permanent way, electric overhead and signalling system as well as track capital. By

definition they are fixed as long as the size of the network remains unchanged. If the size of the network changes they will alter accordingly. These costs are essentially a function of track-kilometres (with signal operating costs related indirectly to train-kilometres) and their allocation to traffics is arbitrary. It is most often done in proportion to gross tonne-kilometres.

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Corporate overheads - these costs cover the central administration and management of the railway. In the long term they are variable with the 'scale' of the railway and thus can be taken as variable in the very long run with the volume of traffic handled.

TABLE B.l NATIONAL FREIGHT GROUP PRESENTATION OF COST STRUCTURE

Category Cost Items Variable with

Train running Enginemen, guards, conductors Crew hours Diesel fuel and traction electricity gtk Loco servicing, maintenance Loco-km,loco-hrs Wagon maintenance Wagon km, wagon-

days

Carriage maintenance Carriage-km, carriage-days

Track maintgnance3 Other costs"

gtk -

Rolling stock capital Loco-hrs, wagon- days

Track capital0 gtk

Semi-variable Passenger duties Passengers

Shunting Vehicles shunted

Train examiners Vehicle-km

Freight handling Tonnes

Parcels duties Parcels

Trading and^catering -

Other costs" -

Corridor fixed Track and bridge maintenance” Track-km Signal duties Track-km/

train-km

Signal maintenance Track-km

Overheads Normally

(freight, passenger allocated on

and corporate) basis of gtk

a. Variable component. b. Road services. c . Rail renewal based on a main line track life of 200 million tonnes. d. For example, bogie exchange, gauge transfer.

e. Fixed component.

Source: National Freight Group

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Conventionally, train running and semi-variable costs are regarded as variable and corridor fixed costs and corporate overheads as fixed. It could be argued, however, that corporate overheads would also react to changes in traffic volume in the long run; for the purposes of this study, this approach has been adopted.

One problem that arises in allocating railway costs between these four categories is the measurement of capital costs. As noted, capital funding for railways can arise from a number of sources, including direct funding from State governments, which means capital costs and interest charges

are spread among a number of State government accounts and can be inextricably intertwined with debt charges arising from a variety of other authorities.

Faced with these difficulties, the capital costs of track and rolling stock are normally calculated from first principles and included as an imputed cost for traffic costing

purposes. The principles currently adopted by Australian railways for calculating these costs are to use the

replacement costs of track and rolling stock but to ignore the cost of land and existing buildings and require a rate of return of 4 per cent per annum above the rate of inflation,

for new and/or replacement assets.

In theory, these principles should be applied to all assets owned by the railway; however, valuation difficulties and doubts about whether many of the assets would in fact be replaced at the end of their life means that, in practice, the only assets included at present are track and related infrastructure, rolling stock and goods handling equipment

(for example, cranes and vehicles).

The maintenance costs included in working expenses would normally cover all the costs required to perpetually maintain the infrastructure in a state of good repair and would

include the cost of relaying the track when necessary. In practice, though, no such allowance for track relaying is made and so the costs must be represented in the form of a capital charge. Consequently, in the costing structure presented in Table B.l there are two 'track' components in the train running expenses: one for general maintenance and one for rail renewal.

All capital costs associated with rolling stock have been amortised over its assumed life using a real interest rate of 5 per cent per annum. Unit costs were then derived by using

the average utilisations obtained by the railways.

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B.3 Cost structure for grain haulage

B.3.1 Costs and revenue

The Commission asked each of the mainland railway systems to provide data concerning the estimated cost of hauling export grain. AN, the SRA, V/Line and Westrail provided such estimates based on the NFG convention, although some minor differences in the method of recording occurred between

systems. Where possible, these differences have been eliminated and the data made as uniform as possible.

Queensland provided no detailed cost figures to the Commission and the cost of grain haulage had to be estimated from data in the QR Annual Report and some operating

statistics.

The resultant average costs, along with upper and lower bounds, are presented in Table B.2. It is evident that total costs between rail systems vary significantly, from 4.3 cents to 7.9 cents per tonne-kilometre. Furthermore, the

individual components also vary significantly, partly due to differences in the way railways record their costs and partly due to operational differences. Perhaps the most important point arising from Table B.2 is the fact that fixed costs and

corporate overheads represent an estimated 28 per cent of total railway costs.

TABLE B.2 SUMMARY OF (cents per RAIL COSTS net tonne-

, 1985-86 kilometre)

Item®

Lower bound

. b Average

Upper bound

Train running 2.8 3.7 4.4

Semi-variable 0.1 0.9 1.9

Corridor fixed 0.6 1.2 1.8

Corporate overheads 0.2 0.5 0.7

Total 4.3° 6.2 7.9'

a. Some railways include costs in different categories. For example, some items included in train running costs by one railway may be included in semi-variable costs by another. b . A simple average of all systems. The size of each

railway's task is not reflected in this average. c . Total for specific railways. Components in the columns belong to different railways and do not add to the total.

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

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These costs, when compared with revenue (see Table B . 3), reveal that few railways are earning sufficient revenue to recover the costs allocated to grain haulage. Only AN and Westrail are achieving full cost recovery from grain haulage. The largest loss, $68.2 million by the SRA, would require a 50 per cent increase in revenue, from 4.6 to 6.9 cents per net tonne-kilometre to achieve full cost recovery. If corridor fixed costs are removed and only variable costs are considered then all systems except the SRA would recover costs.

Caution needs to be exercised when comparing the different costs between States because of the different accounting practices, technical and operational conditions and work practices. For example, rolling stock maintenance and some other factors such as fuel consumption will also vary between

systems depending on the task performed. In New South Wales, locomotives hauling grain to port must traverse the Great Dividing Range, with the equipment being operated at its limit, generating considerable wear and tear and greater fuel consumption. In comparison, the haul to port in Western Australia is relatively flat and locomotives do not generally incur such high maintenance costs. Railway costs are also affected by factors beyond the control of management. As government authorities, they are obliged to accept government directives and this may impose increased costs.

TABLE B.3 AVERAGE RAILWAY GRAIN TASKS AND COST RECOVERY, 1985-863

Item

Lower bound Average

Upper bound

Tonnes ( ' 000) 1706 4290 7750

Net Tonne km (m) 290 1392 2983

Revenue ($m) 19.4 68.9 137.0

Cost ($m) 18.9 85.2 205.2

Profit/loss 3.1 -16.3 -68.2

Revenue (c/ntk) 4.4 5.7 7.1

Cost (c/ntk) 4.3 6.2 7.9

a. Values for specific railways. Components in the columns belong to different railways and are not necessarily directly related.

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

84

SUPPORTING PAPER 4

One of the most important variables affecting costs is the annual tonnage carried. Whilst most studies of railway costs produce different cost estimates, all agree that rail experiences significant economies as tonnage increases. To illustrate this effect the Commission used the rail cost

model described in Section B.3.2 to estimate costs for a range of tonnages carried on a branch line. The results are shown in Figure B.l. Such economies relate to increasing tonnages on a set distance of track and do not imply that a

large railway should be more efficient than a small railway. A large railway, while having a higher annual tonnage, may also have a more extensive network and the tonnage per network-kilometre may well be smaller. It is the 'density' of railway operations that is the major factor in determining

costs because it allows fixed costs to be spread over

increased tonnages. This density factor also substantially accounts for the cost differentials between main line and branch line operations.

The major fixed cost, particularly important in the cost of branch line operations, is track maintenance. This cost is substantial even for basic maintenance but the Commission notes that maintenance cost estimates vary between States and depend on the maintenance philosophy and costing approach of the railway concerned. AN, for example, pursues a minimal maintenance policy for its grain only branch lines. Where possible, lines are temporarily closed for part of the year, no maintenance being performed until a week prior to

re-opening. For 1985-86, AN indicated that branch line maintenance costs (including labour on-costs but excluding district and branch administration overheads) were approximately $3000 per kilometre. This does not include

allowance for the major maintenance program that is required from time to time. On the other hand, the SRA quoted

$7500 per kilometre, which includes a component for periodic major maintenance. On the basis of these figures and

information from other rail authorities, the Commission has chosen to use a figure of $6500 per kilometre as a

representative figure for the annual cost of long-term branch line track maintenance.

In addition to this fixed maintenance cost there will be a variable maintenance component that reflects the higher level of maintenance and standard of track needed to cope with

larger tonnages. This component lies between $1.50 and $2.50 per thousand gross tonne-kilometres. As tonnage (that is, traffic density) increases the variable component increases proportionally but the fixed component per tonne decreases,

thus giving a lower unit cost.

85

SUPPORTING PAPER 4

B.3.2 Examining railway operating costs for grain transport

Although general observations can be made about the reasons why costs vary between railways, a better understanding of current and future operating costs requires a detailed budgeting approach. To this end, the Commission has used a

spreadsheet budgeting model that was developed by its consultant, Travers-Morgan Pty Ltd, to estimate the operating cost of different grain transport operations. In this

appendix the model is used to examine the different costs associated with branch line and main line operations, and to consider the cost effects of improved operating efficiency. The following variables must be specified in the model and can be varied to determine the effect:

. distance;

. operating speed;

. loading and unloading time;

. wagon cycle time;

. net/tare ratios;

. ruling load;

. crew size;

. train configuration (for example, number of locomotives and wagon configuration).

Cost of main and branch line operations Comparisons between branch line and main line train operating costs can be made with the model. To do so it is necessary to make certain assumptions about the configuration and operation of the train involved, as specified by the parameters listed above. An illustrative calculation showing operating cost differences between branch line and main line operations for a representative train configuration is presented in Table B.4. (Note that the unit costs presented

are representative of a relatively efficient rail system). The results indicate that, for the assumptions listed, branch line costs per tonne-kilometre are approximately 25 per cent higher than main line operations. The results are quite sensitive to changes in the model's base assumptions but, in general, branch line costs will be above those of main line operations.

Efficient costs All railway systems have plans to improve the efficiency of their operations by various operational and administrative changes. The eventual outcome of these plans is uncertain

given the current institutional arrangements, which limit the incentives to minimise costs; nevertheless, it is of interest

87

TABLE B.4 RAIL OPERATING PARAMETERS AND COSTS FOR MAIN AND BRANCH LINE OPERATIONS, 1985-86 COSTS ____________________________ ($)__________________________

Unit costs

Main line

Branch line 2-man 3-man

Operating parameters Distance (km one-way) 100.00 100.00 100.00

M/1 locos (no.) 2.00 0.00 0.00

B/l locos (no.) 0.00 2.00 2.00

Per cent ruling load 100.00 100.00 85.00

Wagon spares ratio 0.15 0.15 0.15

Brake vans (no.) 0.00 0.00 1.00

No. en-route shunts (no.) 0.00 0.00 0.00

Loading rate (tph) 300.00 200.00 200.00

Unloading rate (tph) 300.00 300.00 300.00

Train speed (kph) 50.00 30.00 30.00

Constants/weight

M/1 loco (t) 90.00 90.00 90.00

B/l loco (t) 60.00 60.00 60.00

Wagon tare (t ) 20.00 20.00 20.00

Payload (t) 40.00 40.00 40.00

Brake van (t ) 22.00 22.00 22.00

Ruling load (t) 2000.00 1000.00 850.00

Tonnes/train - tare 666.67 333.33 283.33

Tonnes/train - load 1333.33 666.67 566.67

Tonnes/train - total 2180.00 1120.00 992.00

Wagons/train 33.33 16.67 14.17

Train (km) 200.00 200.00 200.00

Train (hrs) 12.89 12.22 11.39

Wagon (km) 6666.67 3333.33 2833.33

Gross tonne kilometres 302.67 157.33 141.73

Wagon cycle time (hrs) 24.00 24.00 12.00

Wagon-days 38.33 19.17 8.15

Operating costs $ $ $

M/1 loco (km) mtce 0.50 200.00 0.00 0.00

M/1 loco (hrs) mtce 18.00 464.00 0.00 0.00

B/l loco (km) mtce 0.50 0.00 200.00 200.00

B/l loco (hrs) mtce 15.00 0.00 366.67 341.67

Train (hr) crew 85.00 1095.56 1038.89 968.06

Train (hr) guard 40.00 0.00 0.00 455.56

Gross tonne kilometres (000) fuel 2.25 681.00 354.00 318.90

Wagon-km (000) exam 20.00 133.33 66.67 56.67

Wagon-km (000) mtce 55.00 366.37 183.33 155.83

Br van krn(OOO) mtce 200.00 0.00 0.00 40.00

8 8

SUPPORTING PAPER 4

TABLE B.4 (cont'd)

Unit costs

Main line

Branch line 2-man 3-man

Gross tonne kilometre (000) track 2.30 696.13 361.87 325.99

Unload hrs 150.00 666.67 333.33 283.33

Sub total 4303.36 2904.76 3146.00

Capital costs

M/1 loco (hrs) 24.00 618.67 0.00 0.00

B/l loco (hrs) 16.00 0.00 391.11 364.44

Wagon day 13.50 517.50 258.75 109.97

Brake van day 36.00 0.00 0.00 17.08

Gross tonne kilometre ('000) rail 0.70 211.87 110.13 99.21

Sub total 1348.03 759.99 590.71

Total 5651.39 3664.75 3736.71

Per tonne ($) 4.24 5.50 6.59

Per tonne km (c ) 4.24 5.50 6.59

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

here to consider the extent of potential efficiency

improvements that appear possible in the rail systems. The actual operating costs incurred in New South Wales and Queensland for grain transport have been provided to the Commission; so-called efficient costs are available for

Victoria, South Australia and Western Australia. ' Efficient' costs reflect what the particular railway believes it will be able to achieve within the next three to five years and incorporate anticipated savings from improved labour

productivity and operating practices.

Due to the confidential nature of the estimates, the results for individual States are not presented. Instead, the Commission has averaged the results for the 'actual' cost systems and compared this against the average for the

'efficient' cost systems. Operational differences between States have been removed by using the rail cost model and standardising the train configuration used. The train configuration is 'hypothetical' but its use does enable a

8 9

SUPPORTING PAPER 4

comparison of actual and efficient costs. Nevertheless, this comparison must be qualified by recognising that costs vary as a result of factors other than operational efficiency. Differences between States mean that savings achievable in one State may not be achievable in another. The results (see Table B . 5) suggest that an efficient cost operation will reduce train operating costs, on average, by around 15 per cent.

The most significant aspect of Table B . 5 is that, even over short distances, rail operating costs for two-man operation are below the costs of owning and operating a six-axle articulated truck, which are approximately 6.5 to 7.5 cents per net tonne-kilometre.

TABLE B .5 RAIL OPERATING COSTS FOR MAIN LINE OPERATIONS BY DISTANCE, 1985-86 _______________ (cents per net tonne kilometre)________

Distance

km

Average ofj

Actual costs0 Efficient costs

100 4.51 3.81

200 3.38 2.88

300 3.03 2.60

400 2.89 2.47

500 2.76 2.37

a. New South Wales and Queensland. b . Victoria, South Australia and Western Australia.

Note: Table assumes two locomotives, two-man crew, 300 tph loading and unloading rates, 50-tonne payload wagons, and a 2000-tonne train (wagon tare + payload).

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

A range of operational changes is being implemented or is planned by the railways in their moves to reduce costs. These include measures to improve train operating speed and loading and unloading rates, increase loads, and reduce crew numbers. To estimate and illustrate the nature and extent of savings that may result from these changes the rail cost model was used. Train operating parameters were varied to represent the types of improvements being pursued by the railways. The primary results can be summarised as follows:

90

SUPPORTING PAPER 4

. Operating speed - the principal impacts are in crew costs and rolling stock capital costs, both of which decrease as speed increases. Overall, the operating costs reduce by about 15 per cent as the speed increases

from 20 kilometres per hour to 40 kilometres per hour.

. Loading and unloading rates - faster loading and

unloading rates decrease train waiting time. Both loading and unloading rates were varied and the costs changed by about 20 per cent as the loading rate was increased from 100 tonnes per hour to 500 tonnes per hour.

. Wagon cycle time - this is defined as the time required for a wagon to load grain, proceed to the port terminal, unload, and return to the country ready for its next loading. Reducing the wagon cycle time enables greater utilisation from each wagon and hence a smaller number of wagons is required to complete a given task.

Reducing wagon cycle time from three days to one day reduces operating costs by around 4 per cent.

. Net/tare ratio - this is a measure of the proportion of payload to total weight. Since the hauling power of locomotives is limited, the higher the net/tare ratio is, the greater proportion of the total train weight is accounted for by the payload. The impact of a variation in payload from 40 tonnes to 55 tonnes in a

20-tonne-tare wagon is to reduce operating costs by approximately 10 per cent, or about 0.5 cents per net tonne-kilometre.

. Ruling load - this is the amount that can be hauled by locomotives; it has a major influence on costs.

Increasing the ruling load from 800 tonnes to 1800 tonnes will reduce operating costs by about 20 per cent.

. Two-man crewing - this is one of the greatest changes in railway operations in recent years. Operating costs reduce by about 12 per cent when the guard and his

accompanying brake van are removed from the train.

The cost estimates outlined above for current and 'efficient' rail operations are used in Supporting Paper 8 as the basis of rail cost inputs in the alternative systems analysis.

91

APPENDIX C DEVELOPMENTS IN TECHNOLOGY

Developments in transport technology were examined by the Commission's consultant, GHD Planner West Pty Ltd. The most significant developments are outlined in this appendix.

C.1 Road transport

Reduced transport costs are most likely to occur through the introduction of larger, more technically advanced trucks. Trucks such as B-doubles have a potential payload capacity of at least 36 tonnes, which is approximately 50 per cent greater than current six-axle articulated vehicles. This increase in capacity is achieved without similar increases in capital and operating costs and so enables lower costs on a cents per net tonne kilometre basis. The Commission has estimated B-double costs (capital and operating) to be approximately 10 to 15 per cent below those of six-axle articulated trucks on a cents per net tonne kilometre basis.

B-doubles also have the advantage of similar axle loadings to existing vehicles and so do not increase road damage on a net tonne kilometre basis. For example, in Queensland, a six-axle articulated vehicle is allowed a six tonne load on

the front axle, 15 tonne on the dual driving axles and

20 tonne on the rear triaxle (41 tonnes in total). A

B-double is allowed the same axle loads for the first three axles and an additional 15 tonne on the fourth axle pairing, giving a total of 56 tonnes.

B-doubles have been introduced on a trial basis in most Australian States. At present, not more than two or three such units are believed to be in service in any State and most are operating on a permit basis only.

Although State regulations vary, approximate specifications for a typical B-Double are as follows: a maximum gross vehicle mass of 56 tonnes, a potential payload capacity of 36 to 41 tonnes and a maximum overall length of 23 metres. The maximum width is 2.5 metres and maximum height 4.3 metres

(excluding stock transport vehicles). A typical B-Double arrangement is shown in Figure C.l.

One drawback of B-Doubles for grain transport is that the front trailer is not suitable for rear tipping and side tipping must be used. This may require modifications to be made to some receival facilities.

The cost effectiveness of B-doubles has been proven in other industries (for example, the sugar industry). However, B-doubles are not permitted to operate in some States due to existing road regulations; in States where they do operate restrictions are often placed on operations, for example, in Queensland B-doubles are restricted to several major highways. While B-doubles do not increase road damage costs

92

ο οο οοο οοp n|lyp*c»l)*"

« τ — 1 *

FIGURE C.1 B-DOUBLES

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

SUPPORTING PAPER 4

on a tonne kilometre basis they do generate concern in thecommunity regarding environmental issues such as truck noise and road user safety. It is these factors which appear to have caused restrictions to be placed on B-double

operations.

C.2 Railways

For the railways, the most significant future cost savings are likely to result from improved management and work practices. Improved rolling stock technology is unlikely to result in substantial reductions in costs; the rail systems have either already introduced newer technology rolling stock or are in the process of doing so (for example, more powerful locomotives and larger, hopper style wagons). Some applications such as automatic door opening (either pneumatic or electrical) on discharge are possible but are not cost effective at this time.

The use of larger rail wagons as in the United States and Canada has also been considered by the Commission. Typically grain wagons in Canada and the United States gross 91 tonnes compared with 55 to 75 tonnes in Australia. The Commission found that a limiting factor to introducing larger wagons is the structural design limitations of bridges, especially on branch lines. Where such limits do not exist larger wagons may prove cost-effective, and in the cases of AN and

Westrail, have already been introduced.

In the United States, remotely controlled shunting locomotives are used at port terminals where there are large scale shunting operations. The use of such locomotives in Australia is unlikely to be cost-effective as the scale of

shunting operations at port terminals is considerably smaller than in the United States and so the utilisation levels needed to justify the investment are unlikely to be achieved.

Improvements in port facilities, rolling stock and railway operations, including use of unit trains, has also focussed attention on the speed with which rail wagons can be loaded. Some developments in storage and handling technology aimed at improving train loading rates and turn-around times are discussed in Supporting Paper 3.

94

REFERENCES

Advisory Council for Inter-Government Relations 1984, 'Responsibilities and resources of Australian local government', Report No. 7, AGPS, Canberra.

Aitkins AS 1981, Economic and Social Cost of Road Accidents in Australia, Centre for Resource and Environmental Studies, Australian National University, Canberra.

AN 1986, Annual Report 1985-86.

Australian Bureau of Statistics 1984, Transport Industry Survey, AGPS, Canberra.

Australian Council of Local Government Associations 1987, The Implications to Local Government of the Cameron Report, report from the ACLGA Roads Working Party, Canberra.

Bayley & Kinder 1984, 'The impact on road costs of increased transport of grain by road', Australian Road Research Board Report AIR1129-1A.

Bayliss BT 1986, 'The structure of the road haulage industry in the UK, and optimum scale', Journal of Transport Economics and Policy, Vol. 20(2), May, 153-172.

Both GJ 1980, 'Road costs and tax payments attributable to trucks'. Country Roads Board, Victoria.

Brindal D & Dumas R 1987, 'Transport of the Western Australian grain crop', Transport Strategy Committee Interim Report, Western Australian Department of Transport, Perth.

BTE 1984, 'Economic evaluation system for rural arterial roads: an extended NIMPAC', Reference Paper 62, Canberra.

1985, 'Review of Australian road cost recovery studies and alternative estimates for 1981-82', Reference Paper 105, AGPS Canberra.

1987, 'Australian road financing statistics 1975-76 to 1984-85, Information Paper 21, AGPS Canberra.

Cameron RJ (Chairman) 1986, Report of the Inquiry into the Distribution of Federal Road Grants, AGPS, Canberra.

CANAC 1984, Grain Handling and Transport in the State of Victoria, consultant's report prepared for the Grain Handling Review Group, Melbourne.

95

SUPPORTING PAPER 4

Derewlany M, Williams L, Yeomans G & Bones T 1987, 'Options for a more cost-effective system for the storage, handling and transport of grain in New South Wales', 12th Australian Transport Research Forum Papers, Vol. 1, 147-171, Brisbane.

Forsythe PJ 1985, 'Road user charges, cost recovery and road-rail competition', Discussion Paper No. 125, Centre for Economic Policy Research, Australian National University, Canberra.

Holthuyzen F 1987, 'The finances and performance of Australia's railways', 12th Australian Transport Research Forum Papers, Vol. 1, 17-42, Brisbane.

Howard P and Lawrence M 1986, 'Australian grain storage capacity', Quarterly Review of the Rural Economy, 8(4), 330-334.

IAC 1983, 'The wheat industry', Report No. 329, AGPS, Canberra, September.

____ 1986, 'Certain Petroleum Products - taxation measures', Report No. 397, AGPS, Canberra.

ISC 1986, An Investigation of Cost Recovery Arrangements for Interstate Land Transport, AGPS, Canberra.

____ 1987, A Review of Federal Registration Charges for Interstate Vehicles, AGPS, Canberra.

Joy S 1964, 'Unregulated road haulage: the Australian experience', Oxford Economic Papers, 2(2), 275-85.

Kerin PD 1984, 'Optimal location, number and size of grain handling facilities in South Australia: (1) model development', Technical Report No. 63, South Australian Department of Agriculture, Adelaide.

____ 1985a, 'Optimal location, number and size of grain handling facilities in South Australia: (2) road and queuing costs at handling facilities: 1983-84 harvest survey', Technical Report No. 68, South Australian Department of Agriculture, Adelaide.

____ 1985b, 'Optimal location, number and size of grain handling facilities in South Australia: (3) estimation of short-run and long-run cost functions', Technical Report No. 80, South Australian Department of

Agriculture, Adelaide.

Lloyd AG 1986, Rural Economics Study: a report to the Victorian Minister for Agriculture and Rural Affairs, Melbourne, July.

96

SUPPORTING PAPER 4

Luck DP and Martin IJ 1987, 'Transport - who pays', 12th Australian Transport Research Forum Papers, Vol 2, Brisbane, July.

Ministry of Transport, Victoria 1984, 'Submission to national road freight industry inquiry'.

NAASRA 1976, 'Pavements', ERVL Study Report, T4, Sydney.

____ 1978a, Economics of Road Vehicle Limits Study, Sydney.

____ 1978b, NIMPAC Road Planning Model, documentation prepared by Commed Associates, Sydney.

____ 1984, 'Use of NIMPAC', NAASRA Roads Study Technical Report T-7.

____ 1985, Review of Road Vehicle Limits, Sydney.

____ 1986a, 'Results of commercial vehicle surveys', RoRVL Study Technical Supplement, Vol. 1, Sydney.

____ 1986b, 'Systems and procedures', RoRVL Study Technical Supplement, Vol. 3, Sydney.

National Inquiry into Local Government Finance 1985, Report, AGPS, Canberra.

NCA 1984, Assessment of cost recovery levels: road and rail, Nicholas Clark & Associates, consultant's report to NRFII, Melbourne.

NRFII 1984, Report, AGPS, Canberra.

QR 1986, Annual Report 1985-86.

Rcsengren E & Webb G 1980, 'The Australian road freight industry: is there a need for government regulation?', Australian Economic Papers, December, 299-308.

Spriggs J, Geldard J, Gerardi W & Treadwell R 1987, 'Institutional arrangements in the Australian wheat distribution system', BAE Occasional Paper 99, AGPS, Canberra.

SRA 1986a, Wheat Transport, November.

____ 1986b, Annual Report 1985-86.

TEC 1981, Pricing Tasmania's Roads, University of Tasmania, Hobart.

Travers Morgan Pty Ltd 1987, 'Report on grain haulage road costs for Department of Main Roads', Ref. 1050.

97

SUPPORTING PAPER 4

Victorian Government 1986, 'Submission to the Inter-State Commission Investigation of Cost Recovery Arrangements for Interstate Land Transport'.

V/Line 1986, Annual Report 1985-86.

Webber JR, Both GJ & Kerr IR 1978, 'Commercial vehicle costs and charges: a study of separable pavement costs', Proceedings of the 1978 Annual Conference of the Australian Road Research Board, Vol. 9, 301-311.

Westrail 1986, Annual Report 1985-86.

Winston C 1985, 'Conceptual developments in the economics of transportation: an interpretive study', Journal of Economic Literature, 57-94, March.

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING & TRANSPORT

PORT SERVICES AND SEA TRANSPORT

Supporting Paper 5 February 1988

CONTENTS

Page

1 . INTRODUCTION 1

2. INTERNATIONAL PORTS AND SHIPPING 2

2.1 World seaborne grain trade 2.1.1 Volumes 2.1.2 Sea transport freight rates

2.2 Factors influencing world shipping 2.2.1 Ship chartering 2.2.2 Characteristics of grain importing ports 2.2.3 Characteristics of grain 8

exporting ports

2.2.4 Trends in shipping 10

2.2.5 Technological developments 11

3. AUSTRALIAN PORTS AND SHIPPING 12

3.1 General port description 12

3.2 Charter arrangements 12

3.2.1 Wheat 12

3.2.2 Other grains 15

3.3 Ship scheduling and the 'fair share' rule 15 3.4 Two-port loading 16

4. AUSTRALIAN PORT SERVICE AND SEA TRANSPORT COSTS 18

4.1 Port services 18

4.1.1 Port disbursements 18

4.1.2 Wharfage 18

4.1.3 Stevedoring 22

4.2 Sea transport 22

5. PRICING PRACTICES FOR PORT SERVICES AND SEA TRANSPORT 31

5.1 Services paid for by the marketer 31

5.2 Other services 31

5.3 Pricing practices 33

5.4 Impact of price disaggregation 35

6. POLICY IMPLICATIONS 39

iii

σι 4^ N> N>

APPENDICES

A Technological developments 43

REFERENCES 46

TABLES

2.1 World seaborne grain trade, 1975 to 1986 2

2.2 Total seaborne grain trade, 1984 and 1985 3

2.3 Reported single-voyage charters 5

2.4 Reported single-voyage grain chartering 5

by major grain houses

2.5 Distribution of grain trading vessels, 10

by size, 1970 and 1980-85

3.1 Port capacities and maximum out-load rates 13

3.2 Days allowed to load vessels under the 14

Australian Wheat Charter

3.3 Shipments requiring two-port loading, 17

1985-86

4.1 Port disbursement charges by port for 19

a 31 400 dwt vessel

4.2 Port disbursement charges by port 20

for a 61 500 dwt vessel

4.3 Wharfage charges, by port, May 1987 21

4.4 Estimated stevedoring charges, by port 23

4.5 Comparison of selected grain sea transport 25 costs - low market (29 000 tonne cargo)

4.6 Comparison of selected grain sea transport 26 costs - medium market (29 000 tonne cargo)

4.7 Comparison of selected grain sea transport 27 costs - high market (29 000 tonne cargo)

4.8 Comparison of selected grain sea transport 28 costs - low market (59 000 tonne cargo)

4.9 Comparison of selected grain sea transport 29 costs - medium market (59 000 tonne cargo)

iv

4.10 Comparison of selected grain sea transport 30 costs - high market (59 000 tonne cargo)

5.1 Wharfage charges and deductions, by State 34

and port, 1986-87

5.2 Tonnage of grain received at eastern State 38

ports in base case and alternative case

v

SUPPORTING PAPER 5

1. INTRODUCTION

This supporting paper provides background information on issues relevant to port services and shipping. The paper draws heavily on a report prepared for the Commission by Australian Shipping Consultants Pty Ltd, a report to the Western Australian Grain Transport Strategy Committee by the Western Australian Department of Transport (Dumas 1987b) and a report by Ocean Shipping Consultants (1986).

Port services and sea transport charges are particularly relevant to Australia because of the significance of grain exports and the significance of the charges in the overall costs of grain distribution. Approximately 70 per cent of Australian grain production is exported each year. Moreover, port service and sea transport costs accounted for

approximately 15 per cent of the average cost, insurance, freight (c.i.f.) wheat price in 1986-87 and 25 per cent in 1987-88.

Chapter 2 provides background information on international ports and shipping. This is followed by a discussion of Australian ports and shipping in Chapter 3. The costs of port services and sea transport from Australia, and the

related pricing practices are discussed in Chapters 4 and 5 respectively. The final chapter deals with policy

implications. Appendix A provides some details of

technological developments in ports and shipping.

1

2. INTERNATIONAL PORTS AND SHIPPING

2.1 World seaborne grain trade

2.1.1 Volumes

Table 2.1 shows world seaborne grain trade for the period 1975 to 1986 in tonnes and tonne-miles. The total volume of grain traded by sea fluctuated around 200 million tonnes per annum between 1980 and 1984, following a period of steady growth in the preceding five years. Volumes declined in 1985 and figures for 1986 indicate a continuation of the downward trend.

TABLE 2.1 WORLD SEABORNE GRAIN TRADE, 1975 to 1986

Year Grain volume

(million tonnes)

Grain

tonne-miles ('000 millions)

1975 137 734

1976 146 779

1977 147 801

1978 169 945

1979 182 1 026

1980 198 1 087

1981 206 1 131

1982 200 1 120

1983 199 1 135

1984 207 1 157

1985 181 1 004

1986a 160 875

a. part estimate.

Source: Fearnleys 1986.

Seaborne grain trade by origin and destination in 1984 and 1985 is shown in Table 2.2. The United States is the major exporter of seaborne grain and was responsible for 50 per

cent of such trade in 1985. Other major exporters are Argentina, Australia and Canada. The major importers of seaborne grain in 1985 were East Europe (23 per cent), Japan (16 per cent), other Far East (12 per cent), and the Americas

(12 per cent).

2

TABLE 2.2 TOTAL SEABORNE GRAIN TRADE. 1984 AND 1985

(million tonnes)

Origin and US Canada Argen- Austra- Others Total Total

Destination tina lia 1985 1984

UK/Continent 7-5 1.2 1.8 0.1 2.1

Mediterranean 6.0 0.5 2.3 0.1 1.6

East Europe 15.3 7.1 8.8 2.5 8.4

Other Europe 2.9 0.2 0.4 - 0.4

Africa 9-2 1.5 0.9 2.8 5.4

Americas 14.3 2.4 3-6 0.3 0.8

Near East 2.7 1.7 0.5 4.6 2.3

Indian Ocean 2.4 0.6 1.5 3-6 0.8

Japan 21.0 2.3 1.9 2.8 0.5

Other Far East 12.1 2.9 1.4 3-6 2.4

Not specified 0.2 0.1 - 0.2 0.1

12.7 13.4

10.5 11.5

42.1 46.0

3-9 4.9

19.8 23.0

21.5 23.3

10.8 11.3

8.9 13.4

28.5 30.7

22.3 28.0

0.6 1.1

Total 1985 93.6 19.5 23.0 20.6 24.8 181.5

Total 1984 118.6 25.4 20.1 30.0 21.5 206.7

Note: 'Grain' refers to wheat, maize, barley, oats, rye, sorghum and soybeans. Figures may not add due to rounding.

Source: Fearnleys 1985.

SUPPORTING PAPER 5

2.1.2 Sea transport freight rates

Sea transport freight rates for grain shipments fluctuate significantly in line with movements in the general dry cargo freight market. In addition, freight levels for grain carrying vessels are directly influenced by the seasonality of grain production and purchasing demand. The market is traditionally volatile and major purchases of grain may have a significant effect upon grain freight levels.

The dry bulk shipping market was at a depressed level until the second half of 1987. The market situation reflected excess worldwide ship-building capacity and increased competition between ship-building yards. Reductions in world agricultural trade levels in 1986 and a fall in steel production (resulting in decreased demand for shipments of coal and iron ore) have also contributed to market

circumstances.

2.2 Factors influencing world shipping

2.2.1 Ship chartering

Grain shipping is organised by grain charterers in

conjunction with ship owners. The majority of grain charters are fixed in the spot market, reflecting the nature of grain trading and the seasonality of shipping patterns and crop production. The most common types of charters are voyage charters, time charters and long-term contracts.

Voyage charters are for one shipment of a single cargo. The ship charterer pays a freight amount per tonne that covers all the costs of shipment except discharge costs. The other main charter is a time (trip) charter. The hire charge for a time charter reflects the prevailing market level and is paid per day for the duration of the charter. The shipowner defrays all of the vessel's daily running costs, but

additional costs such as fuel costs, port expenses, and stevedoring charges are paid by the ship charterer. There are also long-term contracts, usually of one to five years' duration, and the possibility exists for charterers to have vessels designed for a particular cargo on a long-term basis. Major areas of export (such as North America and Australia)

have grain charter agreements. Australia's major grain charter agreement, known as AUSTWHEAT, operates on a voyage charter basis.

Grain charters accounted for around 50 per cent of total reported single-voyage cargo charters between 1981 and 1984 (see Table 2.3), but these declined to about 30 per cent in 1985. The decrease in 1985 largely reflects the depressed freight market (which induced a higher level of chartering activity in other bulk commodities) and is not expected to be a long-term trend.

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TABLE 2.3 REPORTED SINGLE-VOYAGE CHARTERS

_______________________ (million dwt)______

1981 1982 1983 1984 1985

Grain Total Per cent grain

55.3 107.9 51.0

55.7 106.1 52.0

59.4 109.4 54.0

59.4 123.9 48.0

51.8 158.7 33.0

Note: Figures apply to cargoes in excess of 4 000 dwt

Source : Drewry Shipping Consultants Ltd 1986.

Table 2.4 shows the dominance of the large grain houses in world grain shipping activities. The five major

multinational grain houses controlled between 40 and 45 per cent of all single-voyage grain charters reported during the period 1981-1985.

TABLE 2.4 REPORTED SINGLE-VOYAGE GRAIN CHARTERING BY MAJOR GRAIN HOUSES

_______________________ (million tonnes)______________

1981 1982 1983 1984 1985

Tradax (Cargill) 8.9 9.1 8.8 10.1 9.1

Continental Grain 5.5 5.3 5.3 8.2 6.1

Dreyfus 4.4 3.5 3.8 3.7 2.1

Toepfer 3.0 3.0 3.4 3.0 2.5

Bunge 2.9 2.9 3.0 2.8 2.2

Total 24.7 23.8 24.3 27.8 22.0

Note: Figures apply to cargoes in excess of 4 000 dwt.

Source : Drewry Shipping Consultants Ltd 1986.

Major importers (the Soviet Union, Japan and China) only acquire grain on free-on-board (f.o.b.) sales terms, using their own transportation.

2.2.2 Characteristics of grain importing ports

The major grain importing areas are the Soviet Union, Egypt, China, Japan, South Korea, the Middle East and South East

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Asia. The characteristics of the ports in these areas are governed by the uncertainty of import demand, the inventory costs involved (which favour smaller shipments), and the economic circumstances in developing nations. There are a total of 126 discharging terminals open to bulk carriers in excess of 35 000 deadweight tonnes (dwt), with 20 per cent of these open to vessels of 80 000 tonnes or more.

The Soviet Union The Soviet Union has one deep-water port, at Tallinn, capable of handling vessels up to 100 000 dwt. A second deep-water port is currently under construction at Yuzhny and will be

capable of handling vessels of up to 200 000 dwt.

The Soviet Union's other grain ports are relatively small. Approximately half are restricted to vessels of less than 28 000 dwt while the other half can accommodate vessels up to

50 000 dwt. Port efficiency is also constrained by unloading rates, which are low by world standards, typically averaging between 200 and 600 tonnes per hour (tph). The relative

smallness of Soviet ports has led to the use of some foreign ports, such as Rotterdam, to import grain in large vessels. For example, in early 1986 a shipment from Kwinana was unloaded at Rotterdam and then railed to the Soviet Union.

Egypt Egypt is the largest grain importer in North Africa. There are four main ports; the newly constructed Damietta terminal, which can unload vessels of up to 80 000 dwt (Panamax upper limit) and the ports of Alexandria, Adibiya and Safaga. Average maximum discharge rates are between 500 and 700 tph which is slow by world standards.

The large volume of grain imported in recent years has caused significant port congestion and this has led to the upgrading of the ports of Alexandria, Adibiya and Safaga as well as the construction of Damietta.

China China has several small ports that are capable of unloading 35 000 dwt or less. One port, Luhuashan, is capable of unloading larger ships of up to 80 000 dwt. However, this port is not specifically built for grain discharge and does not permit easy unloading (the grain discharge rate is approximately 400 tph).

China has invested significantly in port development programs in recent years in order to improve ship-handling capacity and reduce congestion at a large number of its ports. However, emphasis has been placed on exporting rather than importing facilities.

Vessel sizes in the Chinese shipping fleet are expected to be in the 'handysize' range (35 000 to 45 000 dwt) over the next few years.

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Transhipment facilities designed for grain are a possibility in China in future years and, the advent of such facilities would see a marked increase in vessel sizes loading grain for China from Australian ports.

Japan Grain ports in Japan are generally well developed with a number of ports capable of handling grain vessels of Panamax size and over. The largest grain terminal in terms of ship capacity is Kokusai at the port of Yokohama. This terminal is able to handle vessels of up to 170 000 dwt and discharge vessels at a rate of 2400 tph. Maximum discharge rates in

Japan vary between 300 and 2400 tph; several ports are able to discharge 1000 tph or more.

South Korea South Korea has three-medium sized ports: Inchon and Busan, which are capable of handling vessels of up to 50 000 dwt; and Ulsan, which can accommodate vessels up to a maximum of

38 000 dwt. Busan has the highest discharge rate, at

1400 tph. Inchon and Ulsan discharge at 500 and 800 tph respectively. Inchon is currently being upgraded by deepening the berth, which will allow 100 000 dwt vessels to unload.

The Middle East Iraq uses the transhipment facility of Aqaba in Jordan. Iran has two major ports, Bandar Abbas and Bandar Khomeini, which can handle vessels of up to 35 000 dwt and 40 000 dwt

respectively and unload at around 225 tph. Port developments are under way but these have been severely disrupted by the war.

The United Arab Emirates' grain discharging facilities at Abu Dhabi and Fujairah have vessel capacities of up to 60 000 dwt and 30 000 dwt respectively. Port Rashid in Dubai

can discharge vessels of up to 55 000 dwt. Fujairah is a floating transhipment terminal and is capable of unloading at 1000 tph; Abu Dhabi is capable of unloading at 240 tph. Another transhipment facility is under construction at Jebel Ali in Dubai, which will be able to cater for vessels up to

120 000 dwt. This terminal is intended to serve as a

distribution centre for the entire Persian Gulf area.

Saudi Arabia has two operational grain terminals. The first, at Jeddah, is capable of handling vessels of up to

80 000 dwt, with a discharge rate of 400 tph, and is the most developed port in the Middle East. The second is at Dammam and is capable of unloading vessels of up to 75 000 dwt at a rate of 480 tph. A third terminal is under construction at Gizan.

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South East Asia There are four main grain unloading ports in Indonesia. The most important of these ports is the port of Tanjong Priok in

Jakarta, which is able to handle vessels of up to about 45 000 dwt.

The port of Jurong in Singapore is able to cater for grain vessels of up to 50 000 dwt.

Malaysia has a number of grain importing ports, most of which are limited to vessels of less than 35 000 dwt. The port of Bintulu is the deepest, and is able to handle grain vessels of up to 70 000 dwt.

The European Community The main grain discharge facilities in the European Community are Rotterdam, Hamburg, Antwerp and Ghent. Rotterdam is the world's largest grain discharge port. The three largest

terminals can discharge vessels of up to 100 000 to 200 000 dwt at a rate of 2400 to 3500 tph. Hamburg is the next

largest port and is capable of unloading vessels up to 80 000 dwt at 1400 tph. The ports of Antwerp and Ghent are capable of unloading vessels of up to 75 000 and 65 000 dwt at rates of up to 2000 and 1300 tph respectively.

Only a few of the major grain importing nations currently have port facilities able to handle vessels up to Panamax size. It appears that of the major grain importing nations, Japan is the best placed in terms of being able to

accommodate the very large vessels in excess of 80 000 dwt.

Significant changes are likely to occur over future years, with port upgradings planned or under way at ports in the Soviet Union, Egypt, South Korea and the Middle East to allow grain vessels of Panamax size and above to be accommodated. The possibility also exists for greater use of transhipment

facilities in major grain importing nations.

2.2.3 Characteristics of grain exporting ports

The main grain exporting ports other than those in Australia are in the United States, Canada, Argentina and the European Community.

United States Grain from the United States is exported from four main regions. These are the east coast (Atlantic), the west coast (Pacific), the gulf region (including the Mississippi River),

and the Great Lakes region. Approximately 70 per cent of export grain flows from the gulf region, 15 per cent from the west coast, and a total of 15 per cent from the Atlantic and Great Lakes regions.

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Ports in the gulf region and on the east coast cater for vessels of 60 000 dwt or less due to the restrictions of the Panama canal. Ports in the Great Lakes are further

restricted by the St Lawrence Seaway, where locks restrict vessels to about 28 000 dwt.

The west coast ports are, on average, much larger. In terms of size of vessel able to be accommodated, the largest ports are Long Beach (80 000 dwt), Kalama (110 000 dwt), Tacoma (150 000 dwt) and Seattle (300 000 dwt).

Canada Canada ships approximately 60 per cent of its total export grain tonnage from the Great Lakes area, 35 per cent from the Pacific ports (west coast) and the remainder from the Atlantic Ocean and Hudson Bay.

Ports in the Great Lakes region are limited in ship capacity by the locks of the St Lawrence Seaway. The largest port in this area is Thunder Bay, with 15 terminals which can load vessels of up to 28 000 dwt. Vessels capable of transiting

the Welland Canal (limited to about 28 000 dwt) move grain to various export destinations in Europe. In addition, vessels generally domiciled within the Great Lakes system (known as 'Lakers') take grain to the St Lawrence Seaway where it is transhipped onto ocean-going export vessels.

The west coast ports of Prince Rupert and Vancouver can fully load vessels to 65 000 and 100 000 dwt respectively. The newly constructed Ridly Island terminal at Prince Rupert is capable of loading at 4000 tph.

The St Lawrence Seaway ports are limited to loading vessels of up to 45 000 dwt, with the exception of Quebec City and Port Cartier which can handle vessels of 100 000 dwt.

Out-loading rates at terminals vary from 750 to 4000 tph, with the average being 1758 tph (which is high by world standards). By comparison, the Australian average is 900 tph.

Argentina Argentina has three main export ports capable of loading vessels up to around 50 000 dwt. The smaller ports of Buenos Aires and San Lorenzo have slow output rates of 500 and 180

tph respectively. The major port of Bahia Blanca is

currently capable of loading vessels up to 50 000 dwt, with a maximum loading rate of 2000 tph. This port is being

upgraded to allow for loading of Panamax vessels.

There is also a terminal planned for Punta Medanos which will be capable of loading vessels up to 100 000 dwt.

A number of smaller ports are situated on the Parana-Plate river system which restricts access to vessels of around 18 to 20 000 dwt. A transhipment terminal, located at the river

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mouth, is supplied by large barges and is used to top up vessels partially loaded at the river terminals.

The European Community The main grain exporting ports for the European Community are in France, the United Kingdom and Spain. The French port of Rouen is capable of loading vessels of up to 60 000 dwt.

Ports in the United Kingdom are able to load vessels up to 50 000 dwt, with the majority restricted to 35 000 dwt. The average maximum loading rate is 800 tph. The Spanish port of Barcelona can accommodate vessels of up to 40 000 dwt and

load at a rate of 400 tph.

2.2.4 Trends in shipping

The predominant trend in shipping in recent years has been the move to larger vessels, with increases in length, beam and height.

The percentage of larger vessels engaged in global grain shipments has increased significantly since 1970. In recent years, however, the size distribution has remained more stable as can be seen from Table 2.5.

TABLE 2.5 DISTRIBUTION OF GRAIN TRADING VESSELS, BY SIZE, 1970 AND 1980-85

(percentage of seaborne grain trade)

Ship size ('000 dwt) 1970 1980 1981 1982 1983 1984 1985

Under 40 89 50 44 44 42 42 36

40-60 10 22 21 21 19 21 24

60-80 1 18 22 22 26 29 33

80-100 - 2 2 2 2 2 2

Over 100 8 11 11 11 6 5

Source: Fearnleys 1985.

Although the Panamax vessel group is gaining popularity, ' handysize' vessels (35 000 to 45 000 dwt) are likely to continue to be used for the transport of grain into the 1990s, largely because of the recent construction of a large number of these vessels (100 were constructed by the Japanese Sanko group in 1984-85).

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2.2.5 Technological developments

Technological developments that enable operating economies have resulted in improvements in port operations and vessel efficiency. Some of the main technological developments are outlined below. A more detailed discussion is provided in Appendix A.

Vessels Technological developments have enabled savings in fuel, manning and maintenance costs to be made. Fuel costs have decreased because of more efficient propulsion systems,

better utilisation of waste heat, better hull coatings, new hull shapes, new propeller designs, weather routing/satellite navigation, and the use of sails and coal firing.

Manning costs have been reduced by the use of larger vessels, increased automation, improvements in equipment design and plant reliability, and structural and technological changes to facilitate small all-purpose crews.

Maintenance costs have been contained by all of the above developments as well as better hold coatings, cathodic protection, longer intervals between maintenance docking and new hatch cover designs and pumping systems.

In recent years, self-unloading vessels have, in certain cases, become more popular. These vessels offer several advantages over conventional bulk carriers. The main advantages are high speed discharge (2000 to 3000 tph) and the absence of the requirement for a conventional berth, resulting in significant savings in shipping charges.

Ports The main port developments are concerned with either increasing total throughput volumes or overcoming port constraints. Port terminal out-loading rates have been improved by either better utilisation of existing facilities or the replacement of old technology with new designs.

Transhipment facilities are able to berth, rapidly discharge and store grain from large vessels. These facilities are of particular use in overcoming major port constraints, such as draught limitations.

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3. AUSTRALIAN PORTS AND SHIPPING

3.1 General port description

There are currently 18 operative grain ports in Australia. 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 there are grain ports 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 is not regarded as an operative grain port since total shipments only amounted to 17 691 tonnes in 1985-86. 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 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), Port Lincoln, Kwinana and Portland - are able to fully load Panamax-size vessels (55 000 to 80 000 dwt). A number of other ports are able to accommodate Panamax-size vessels but they are unable to be fully loaded and are

'topped up' at a deeper port; such ports are Geelong, Port Giles, Wallaroo and Albany. The capacity of each port and maximum out-loading rates are shown in Table 3.1.

The capacity of each port to out-load grain onto vessels varies considerably. In terms of technical capacity, out-loading rates of up to 5000 tph are specified but in practice rates may fall well short of this for a number of reasons, including unproductive time during vessels coming onto and off the berth, and current operating practices during loading. Ship loading is rarely continuous and a double or extended single shift is the norm.

3.2 Charter arrangements

3.2.1 Wheat

The Australian Wheat Board (AWB) has a standard contract (Australian Wheat Charter 1983, known as AUSTWHEAT) for the carriage of wheat between Australia and overseas buyers. The contract is an agreement between the AWB and the ship owner/operator, which covers specific items (for example,

loading rates) at both loading and discharge ports as well as general shipping items (such as war risks, bunkering and collision clauses). Variations are often made to the Charter in negotiating a sale. The major clauses of interest to the Commission relate to specified loading rates, demurrage rates and notice of arrival.

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TABLE 3.1 PORT CAPACITIES AND MAXIMUM OUT-LOAD RATES®

________________ Vessel size Maximum

Port Partly loaded Fully loaded out-load

rate

_________________________________ ( dwt) _______________ (tph)

Pinkenba 1 50 000 35 000 1 200

Pinkenba 2 50 000 35 000 1 000

Fisherman Islands 60 000 60 000 2 400

Mackay 35 000 35 000 300

Gladstone 50 000 50 000 1 600

Newcastle 55 000 55 000 3 400

Sydney 55 000 55 000 2 000

Port Kembla 120 000 120 000 5 000

Geelong 60 000 35 000 1 600

Portland 60 000 55 000 1 000

Port Adelaide 45 000 40 000 1 450

Ardrossan 50 000 30 000 1 200

Port Giles 55 000 45 000 800

Wallaroo 65 000 30 000 700

Port Pirie 45 000 25 000 800

Port Lincoln 90 000 90 000 3 800

Thevenard 35 000 25 000 600

Albany 60 000 50 000 1 600

Geraldton 40 000 20 000 800

Esperance 45 000 30 000 600

Kwinana 80 000 70 000 5 000

Note: Port capacity is rounded to nearest 5000 dwt.

Source: Hetherington Wesfarmers Shipping Agency 1987; WACBH, personal communication, 12 February 1988; SACBH, personal communication, 11 February 1988.

Clause 12 of the agreement stipulates the loading times for different cargo sizes (see Table 3.2). The number of days allowed excludes Saturdays, Sundays, holidays and days when bad weather prevents loading.

If it takes longer than allowed to load a ship, the AWB must pay the ship owners demurrage at the rate determined when the contract was signed. Conversely, if loading is completed in less time than allowed the owners must pay a despatch fee to the AWB. The despatch fee, however, is set at only half the demurrage fee. In the case of two-port loading, the loading time is equal to the actual time spent at each port and does not include the time taken to travel between the ports.

Vessels travelling 'in ballast' to Australia will have been given advance notice by the AWB of whether loading will occur in the eastern States or Western Australia. The ship must give the AWB 96 hours' (4 days') prior notice of arrival in

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the relevant area, after which the AWB has 48 hours to

nominate the actual port of loading. For vessels that carry a cargo to Australia, the agreement stipulates that the AWB be given three days' notice of the expected departure from the final discharging port (failure to do so means three days are added to the loading time), even when the discharging

port is the same as the wheat loading port. AWB directions as to port of loading for such vessels are to be given upon receipt of the three days' notice. The requirement for notice of arrival is designed to assist the AWB in allocating ship movements between ports and States.

TABLE 3.2 DAYS ALLOWED TO LOAD VESSELS UNDER THE AUSTRALIAN WHEAT CHARTER

Mean cargo (tonnes)

Days allowed

Less than 5 000 Not stated

5 001 - 8 000 6

8 001 - 15 000 7

15 001 - 25 000 8

25 001 - 40 000 9

40 001 - 60 000 10

More than 60 000 11

Source : Australian Wheat Charter.

The following items are also in the agreement:

. the need for vessels to pass the customary survey of the Commonwealth Government Marine Surveyor;

. the right of the AWB to operate continuous loading if overtime differentials are negotiated;

. sharing the costs of overtime equally between the AWB and ship owner/operator if the port authority directs loading during overtime hours;

. the AWB has the option of ordering the vessel to shift loading berths at the owner's expense on one occasion at each loading port. Where berth movements are ordered by the port authority all costs are for the owner's

account.

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3.2.2. Other grains

Barley Most barley shipments are made under the AUSBAR 1986 charter party agreement, format and terms, which provide for an average loading rate of 1500 tonnes per weather working day

(Saturdays, Sundays and holidays excluded). In general, shipments are limited to vessels of between 30 000 and 35 000 dwt.

In the case of shipments from South Australia and Victoria, the Australian Barley Board has vessels consigned to it as agents and is entitled to appoint the stevedores. The

loading and trimming costs are borne by the ship owner.

Sorghum The central and southern Queensland sorghum exporters do not prescribe charter terms, but shipments are mostly fixed on

either AUSTWHEAT or AUSBAR charter terms.

Buyer preference in Japan and Taiwan is for shipment sizes ranging between 25 000 and 40 000 tonnes, usually with two ports of discharge, which is in turn determined by blending requirements (with imported United States maize) of the poultry/livestock feed industry.

New South Wales sorghum is shipped out of either Newcastle or Brisbane.

3.3 Ship scheduling and the 'fair share' rule

Historically, the AWB's shipping allocation program has been based on the 'fair share' principle. This principle endeavoured to allocate export shipping to States on the basis of the export availability of wheat from that State as

a proportion of Australia's total export availability. The rationale behind the principle was equitable treatment of the States.

At times it has been necessary to override the fair share principle due to, for example, serious stoppages of grain throughput caused by industrial activity. In recent years the AWB has moved away from the fair share principle due to

the increased complexity of its task. During the inquiry the AWB said that it was of the view that the principle should be abandoned.

The current ship scheduling arrangements for wheat are formulated by the AWB in close co-operation with the bulk handling agencies. The process begins with the AWB

submitting a plan to the bulk handling agencies specifying the expected monthly shipments from each State. The bulk handling agencies modify this plan to take into account the

requirement for other grain shipments and an agreed monthly throughput target is determined. The AWB provides estimates

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by grain classification of the shipping program for the forthcoming three-month period. This information is of some assistance in forward planning, although it is generally not accurate enough to enable out-turn programs to be organised more than a few of weeks in advance. Detailed shipping information is normally supplied fourteen days in advance of the ship arriving, although, on occasions, there have been unanticipated ship arrivals. In these cases the bulk handling agencies concerned are usually given the choice of either declining to accept the ship or special demurrage terms.

Changes in vessel arrivals, irrespective of whether these changes are unexpected arrivals or delays, will potentially cause significant difficulties for all scheduling strategies, but particularly for a 'just in time' country-to-port grain scheduling strategy. Unexpected arrivals will probably require additional movement of grain from country storages to port (unless suitable grain is already in storage at port), thereby delaying ship loading and raising the possibility of demurrage. On the other hand, unexpected shipping delays will mean that the grain that has been assembled in port storage for a particular ship will not be able to be loaded as quickly as originally anticipated. These occurrences may not present significant difficulties where there is a considerable store of grain at port, or close to the port. However, if port storage is limited the terminal will be holding grain for the delayed shipment and will not be available in the meantime to assemble cargoes for other immediate shipments.

3.4 Two-port loading

Two-port loadings occur if an individual port is unable to load a vessel fully due to port characteristics or if insufficient cargo is available at the nominated port. The major reason for two-port loading is insufficient water depth.

Two-port loading frequently occurs in South Australia, Western Australia and Victoria. It is generally not required in New South Wales and Queensland. In Western Australia, Kwinana is used for topping up vessels from ports with

limited depth such as Geraldton and Esperance. Port Lincoln in South Australia is mainly used for topping up as it has the greatest vessel capacity of the South Australian ports but limited access to grain in its own port catchment area.

Table 3.3 provides information on the incidence of two-port loading of wheat. It is evident that most two-port loading occurs in South Australia and Western Australia. Significant two-port loading does not necessarily reflect on the efficiency of a port. For example, 73 per cent of Port Lincoln's shipments involved another port, but Port Lincoln is able to handle large vessels and this high proportion reflects its role as the top-up port.

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TABLE 3.3 SHIPMENTS REQUIRING TWO-PORT LOADING, 1985-86

Port

NO. Of ments another

ship­ using port

Total

shipments Percentage

Geraldton 27 46 59

Kwinana 35 136 26

Esperance 8 21 38

Bunbury 1 1 100

Albany 12 43 28

Wallaroo 13 17 76

Thevenard 5 10 50

Port Pirie 31 37 84

Port Lincoln 32 44 73

Ardrossan - 2 -

Adelaide 15 33 45

Port Giles 1 1 100

Portland 21 55 38

Geelong 23 94 24

Sydney - 94 -

Newcastle 2 79 2

Mackay - 1 -

Gladstone 2 25 8

Brisbane (including Fisherman Islands) 7 74 9

Note: Figures apply for the period (July 1985 to November 1986)

Source: AWB, personal communication, 1987.

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4. AUSTRALIAN PORT SERVICE AND SEA TRANSPORT COSTS

This chapter discusses the charges currently applying to port services and the prices paid for sea transport from various Australian ports to a range of export destinations. The emphasis on charges rather than costs of port services is necessary because of the lack of detailed cost information. In the case of sea transport charges, the prices paid by growers can be expected to approximate costs since these are usually borne in the first instance by buyers and ultimately reflected in the f.o.b. price obtained for Australian grain. The sea transport cost estimates in Section 4.5 are based on information provided to the Commission by Australian Shipping Consultants Pty Ltd.

4.1 Port services

4.1.1 Port disbursements

Port disbursements are paid by the ship operator and include Commonwealth light dues (including a pollution levy), survey fees, conservancy dues, berthage and tonnage rates, pilotage, port improvement dues, towage, mooring costs, and the cost of gangway watchmen. The charges are levied by the Commonwealth

and State governments, port authorities, and private contractors. The level of charges normally varies with ship size and between States. The Commission has estimated port disbursement charges at grain ports for vessels of 31 400 and 61 500 dwt and these are presented in Tables 4.1 and 4.2 respectively. The charge per tonne for a 31 400 dwt vessel varies from $0.84 at Kwinana to $1.44 at Geraldton, with an average of $1.05. Similarly, charges per tonne for a 61 500 dwt vessel vary from $0.66 at Kwinana to $0.85 at Newcastle and Sydney, with an average $0.78.

4.1.2 Wharfage

Wharfage charges are paid by the shipper (usually the marketing board) and vary significantly between States (see Table 4.3). In New South Wales and South Australia the

charges are levied by the Maritime Services Board and the Department of Marine and Harbors respectively; in Queensland, Victoria and Western Australia, wharfage charges are levied by the individual port authorities. Both the Maritime Services Board and the South Australian Department of Marine and Harbors elect to pool their costs and levy an average charge across all ports. Table 4.3 indicates that shipping

from Brisbane incurs the highest wharfage charge. Charges in New South Wales are the next highest; Western Australian ports have the lowest wharfage charges.

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TABLE 4.1 PORT DISBURSEMENT CHARGES BY PORT FOR A 31 400 DWT VESSEL (dollars)

Item Gladstone Brisbane Newcastle Sydney Geelong Portland Adelaide Ardrossan

Commonwealth light dues 5 470 5 470 5 470 5 470

Survey fees ^ 1 5 0 0 1 500 1 500 1 500

Conservancy 2 716 2 716 3 692 3 692

Berthage/tonnage rate 2 495 1 219 1 272 1 272

Pilotage 2 304 3 596 4 032 4 032

Port improvement dues - - - -

Towage 9 428 10 400 6 004 6 305

Linesmen/launch 235 350 350 350

Mooring/unmooring 1 164 1 500 931 884

Agency 2 000 2 000 2 000 2 000

Miscellaneous 350 450 450 500

Gangway watchmen 895 689 689 826

5 470

1 500 2 868 2 031 3 917

14 650 350 2 440

2 000 350 1 240

5 470 5 470 5 470

1 500 1 500 1 500

2 868 4 650 4 650

3 085 4 500 4 018

1 180 1 832 1 832

7 760 12 264 14 149

350 350 350

960 650 650

2 000 2 000 2 000

350 350 350

1 378 1 929 1 722

Total cost Cost per tonne

28 557 29 890 26 390 26 831

0.99 1.04 0 .9 2 0.93

36 816 1.2 7

26 901 0.93

35 495 1 .2 3 36 691 1 .2 7

Item Wallaroo Port Port

Pirie Lincoln

Commonwealth light dues 5 470 5 470 5 470

Survey fees ^ 1 5 0 0 1 500 1 500

Conservancy 4 650 4 650 4 650

Berthage/tonnage rate 1 6 0 7 1 941 1 607

Pilotage 1 8 3 2 1 832 1 832

Port improvement dues - - -

Towage 5 536 13 248 7 558

Linesmen/launch 350 350 350

Mooring/unmooring 650 650 1 000

Agency 2 000 2 000 2 000

Miscellaneous 350 350 350

Gangway watchmen 689 826 413

Total cost 24 634 32 817 26 730

cost per tonne 0 .8 5 1.14 0.93

a. Grain load of 29 000 tonnes. b. Includes State light dues where applicable.

Thevenard Esperance Albany

5 470 5

1 500 1

4 650 1

3 482 4

1 832 1

- 5

4 400 4

350 650

2 000 2

300

4 272 2

28 906 30

1.00 :

470 5 470

500 1 500

399 1 399

047 6 339

750 1 750

800 3 654

840 4 840

350 350

600 813

000 2 000

300 300

343 1 653

339 30 008

.05 1.04

Kwinana Geraldton

5 470 5 470

1 500 1 500

1 399 1 399

1 386 12 648

1 562 1 750

-

5 075

8 892 7 840

350 350

862 1 200

2 000 2 000

400 350

413 1 998

24 174 41 520

C). 84 1.44

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

TABLE 4.2 PORT DISBURSEMENT CHARGES BY PORT FOR A 6l 500 DWT VESSEL (Dollars)

Item Brisbane Newcastle Sydney Portland Pt.Lincoln Kwinana

Commonwealth light dues 12 045 12 045 12 045 12 045 12 045 12 045

Survey fees ^ 1 500 1 500 1 500 1 500 1 500 1 500

Conservancy 4 526 6 154 6 154 4 780 7 750 2 232

Berthage/tonnage rate 2 988 3 181 3 181 10 532 1 904 2 768

Pilotage 5 993 6 721 6 721 1 654 1 832 1 838

Port improvement dues - - - " - -

Towage 13 000 14 840 14 360 8 520 11 338 13 895

Linesmen/launch 350 350 350 350 350 350

Mooring/unmooring 1 500 1 159 924 960 1 000 862

Agency 2 000 2 000 2 000 2 000 2 000 2 000

Miscellaneous 450 450 500 350 350 400

Gangway watchmen 1 378 1 034 1 654 2 962 895 826

Total cost 45 730 49 434 49 389 45 653 40 964 38 716

Cost per tonne 0.79 0.85 0.85 0.83 0.70 0.66

a. Grain load of 59 000 tonnes except at Portland where it is 55 000 tonnes. b. Includes State light dues where applicable.

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

SUPPORTING PAPER 5

TABLE 4.3 WHARFAGE CHARGES, BY PORT, MAY 1987

Port Wharfage

($/t)

29 OOOt cargo ($)

Charge for 59 OOOt cargo ($)

Gladstone 0.90 26 100 na

Brisbane 2.00a 58 000 118 000

Newcastle 1.78 51 620 105 020

Sydney 1.78 51 620 105 020

Geelong 1.00 29 000 59 000

Portland 1.00 29 000 55 000

Adelaide 1.23 35 670 na

Ardrossan 1.23 35 670 na

Wallaroo 1.23 35 670 na

Port Pirie 1.23 35 670 na

Port Lincoln 1.23 35 670 72 570

Thevenard 1.23 18 450 na

Port Giles 1.23 35 670 na

Esperance 0.80 23 200 na

Albany 0-95 27 550 na

Kwinana o . n d 3 190 6 490

Geraldton 0.80 23 200 na

Average 32 840 86 850

na Not applicable.

a. Includes a $1 per tonne wharfage charge and a $1 per tonne harbour due. b. A 55 000 tonne cargo due to draft restrictions. c. A 15 000 tonne cargo due to draft restrictions. d. Total annual charge of $300 000 - charge per tonne

depends upon annual throughput.

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

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SUPPORTING PAPER 5

4.1.3 Stevedoring

Stevedoring in the Australian grain export industry is dominated by two companies, Patrick Operations Pty Ltd and Conaust (Australia) Pty Ltd. F.G. Strang Pty Ltd has a

limited role principally in the ports in Victoria. A joint venture between Richard Turner and the Waterside Workers Federation, known as Queensland Stevedoring and Marine Pty Ltd, was established in 1987 to overcome the stevedoring monopoly in Mackay. To date, the company has loaded two

ships, one with scrap metal and the other, the Alam Aman, with 26 000 tonnes of wheat. According to the company the operation succeeded in reducing stevedoring charges by around 30 per cent.

Stevedores are responsible for loading a vessel as well as the provision of levelling and trimming equipment, and the charges levied are payable by the ship operator.

The charging basis is quite complicated and involves a number of awards and agreements. For example, manning levels vary between ports depending upon the individual port manning agreement. The Commission has estimated the charges per tonne for stevedoring and these are presented in Table 4.4. In general, Western Australian ports have the lowest stevedoring charges and South Australian ports the highest.

4.2 Sea transport

One of the major costs in the grain distribution system is that incurred for sea transport. The Commission has

estimated sea transport costs from a number of Australian ports to several major destinations and compared these with costs from competing export nations (see Tables 4.5 to 4.10). The costs shown include bunker fuel costs for both the ballast and laden voyages, discharge port expenses, canal transit costs (where applicable), the commission payable to ship brokers, and the daily charter cost. The shipping market has been quite variable over the last ten years and

the daily charter cost has fluctuated significantly. Consequently, the sea transport costs fluctuate and so the Commission has estimated sea transport costs for a low, medium and high market.

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SUPPORTING PAPER 5

TABLE 4.4 ESTIMATED STEVEDORING CHARGES, BY PORT

Port Estimated charge

per tonned ($)

Gladstone 0.66

Brisbane 0.58

Newcastle 0.46

Sydney 0.50

Geelong 0.42

Portland 0.53

Adelaide 0.50

Ardrossan 0.83

Wallaroo 0.82

Port Pirie 0.60

Port Lincoln 0.50

Thevenard 1.20

Port Giles na

Esperance 0.39

Albany 0.50

Kwinana 0.29

Geraldton 0.48

Average 0.58

a. based on normal hours excluding trimming.

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

The cost relativities presented in Tables 4.5 to 4.10 are sensitive to loading delays. In order to demonstrate the effects of an assumed five-day delay at a selected Australian grain port, the following voyage examples have been costed:

. A 29 000 tonne cargo from Brisbane to Yokohama would, with a five-day loading delay, cost an estimated SUS12.22 per tonne, (as compared with $US10.79 per tonne as calculated in Table 4.6 and based upon only ' normal

delays')· This increase of $US1.43 per tonne would result in making Brisbane less competitive by

SUS0.90 per tonne compared to a similar cargo from the north Pacific coast of the United States to Yokohama (whereas in the case of Brisbane having only 'normal

delays', there would be a freight advantage of

SUS0.53 per tonne).

. A 59 000 tonne cargo from Port Lincoln to Aqaba would, with a five-day loading delay, cost an estimated

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SUPPORTING PAPER 5

SUS11.36 per tonne (as compared with $US10.56 per tonne, as calculated in Table 4.9 and based upon only 'normal delays'). The increase of $USO.80 per tonne would result in making Port Lincoln less competitive by SUS0.56 per tonne as compared to a similar cargo from the United States gulf region to Aqaba (whereas in the case of Port Lincoln having only 'normal delays', there would be a freight advantage of SUS0.24 per tonne).

Two-port loading Two-port loading incurs additional port costs and the costs of travelling between the two ports (fuel and time), known as the two-port loading surcharge. As with the freight rate, the two-port loading surcharge is a negotiable item and

fluctuates according to shipping market conditions. In the 'weak' freight market of 1986-87, the surcharge was

approximately $US0.75 ($A1.00-1.20) per tonne which is calculated against the total shipment tonnage (not just the tonnage loaded at the second port).

In a high freight market, the surcharge could be substantial; however, its relative cost as compared to an increased basic freight rate struck for a single loading port is likely to be maintained. The unit cost of two-port loading decreases as vessel size increases and varies according to the amount

loaded at each port and the combination of ports used.

24

TABLE 4.5 COMPARISON OF SELECTED GRAIN SEA TRANSPORT COSTS - LOW MARKET (US$ per tonne for a 29 OOO tonne cargo)

Loading country and port

Discharge country and port

Egypt Iraq Iran Saudi Arabia

Port Said Aqaba Bandar Abbas Dammam Japan Yokohama Pakistan

Karachi

Australia Brisbane Port Lincoln Kwinana Newcastle Port Kembla Geelong Portland Adelaide Port Pirie Wallaroo Albany

US Gulf Mobile

US North Pacific Kalama

Argentina Bahia Blanca

20.09 14.37

18.05 12.32

16.40 10.63

19.71 13.82

19.09 13.20

18.79 12.93

18.65 12.76

18.36 12.6 2

18.67 12.90

18.53 12.75

16.83 11.06

10.33 12.98

15.71 13.26

12.29 14.86

19.24 13.04

17.22 11.02

15.49 9.27

18.73 12.52

18.15 11.65

17.82 11.63

17.66 11.46

17.53 II.32

17.81 11.60

17.66 11.55

15.97 9.76

18.94 15.30

19.31 12.86

19.35 12.93

7-95 12.60

10.10 11.04

8.74 9.31

8.59 12.58

8.21 11.96

9.41 11.57

9.65 11.52

10.22 11.38

10.64 11.66

10.48 11.51

9.32 9.82

18.72 16.65

8.37 13.27

i5.ll 13.89

a. Includes port disbursements at unloading port and commission allowance.

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

TABLE 4.6 COMPARISON OF SELECTED GRAIN SEA TRANSPORT COSTS - MEDIUM MARKET (US$ per tonne for a 29 OOO tonne cargo)

Loading country and port

Discharge country and port

Egypt Iraq Iran Saudi Arabia Japan

Port Said Aqaba Bandar Abbas Dammam Yokohama

Pakistan Karachi

Australia Brisbane Port Lincoln Kwinana Newcastle

Port Kembla Geelong Portland Adelaide Port Pirie Wallaroo Albany

US Gulf Mobile

US North Pacific Kalama

Argentina Bahia Blanca

25.60 19.73

22.82 16.94

20.55 14.64

25.16 19.03

24.35 18.22

23.87 17.58

23.72 17.59

23.33 17-41

23.79 17.86

23.57 17.63

21.19 15.27

14.01 16.87

20.44 17.90

16.75 19.45

26.26 18.08

23.50 15.33

21.14 12.95