14 Bradman Tues 1400 1530 LUKE FRASER
What I wanted to do briefly was talk about-- and the title really gives it away-- about the function
of price in freight infrastructure. In the last few years, particularly in the last five years, we've
seen growing agricultural awareness of the freight infrastructure. [INAUDIBLE] did some good
work recently on the grain freight being about 30% of the input cost of grain production. Very
large amount of it on your balance sheet that you don't have a lot of control over.
Where it's trending is that if you're looking at agriculture infrastructure, unlike mining
infrastructure and freight infrastructure, generally speaking, a lot of places around the country, if
you're a miner, you can largely [INAUDIBLE] that can get in and build its own infrastructure or
upgrade its own infrastructure. Rail, port, some whole roads. If you're dealing with agriculture,
you're almost certainly dealing with publicly-owned infrastructure.
I wanted to talk in that context because that's important. The government now, and some of the
industry groups, are starting to do work around supply chains and looking at how things work in
freight. What are the costs. Might argue from a market perspective, but most of the growers
know the cost because it's in the FOB price.
What we're interested in, and what from a market perspective, growers are interested in, and
investors in infrastructure, is lowering that price. So projects and investments that actually lower
the price to the grower make you more competitive overseas. We can have free trade
agreements-- which by the way, the people who are doing them with us will do it with their other
supplies as well-- bit of a zero sum game. If we don't maintain that freight productivity and
competitive advantage in price, you'll find people lapping you.
I'm optimistic in saying there are major gains available. We'll talk about a couple of them. But I
guess the message from today, if there's anything, is that we have to understand that we're in a
largely public sector-dominated piece of infrastructure. With roads, rail, to some extent, ports to
a lesser extent. Although ports really, for their efficiency, rely on the upstream road and rout
solutions. So with the situation in Australia, where on average your ports are doing about 3.5%
return on equity. Rail ports are probably doing around 9.5%. We better get that upstream ride if
we're going to add value to those investments.
So very quickly we'll just go for one example, which is probably the most significant single piece
of infrastructure certainly for grain freight, for freight generally on the East Coast of Australia,
which is a main line, heavy rail solution up and down the East Coast. Currently on the East Coast
of Australia about 80% market share of freight is on tracks.
So this is some work GrainCorp did last year. Little bit dense as a graph, but really what it's
saying is the orange line is what it costs to move grain on rail in New South Wales at the
moment, through a lot of very old branch lines, down to a lot of different little ports. Hunkety
plunkety.
And the bottom line, the grey line, is representative of what Canada's heavy gauge main line rail
produces as a price for their growers to move. So about $20 difference. The remarkable thing
about that is that most of the Canadian grain grows out in the prairies, which are on average
probably about 1,000 kilometres longer distance away from their ports than most of the grain that
gets grown in Australia. So they're much further away, but they're much more connected in price
sense for what they're trying to do.
Now a little bit of simple numbers around that. Rather than $20 a tonne, I'm using $16 here to
conjure with, because we really can't get today to the axle weights and the heavy rail gauge of
Canada very easily. We could get probably, probably I'd argue with $16 per tonne increase with
main line East Coast rail.
If you take 30 million tonnes, which is how much went out of the ports between South Australia
and Brisbane a year or two back. That's looking about a saving about $208 million a year to the
grower. If you invested that, with the miracle of compound interest, you'd be somewhere up near
$3 billion over ten years.
So if you just bear that in mind, you'd be aware at the moment that the current government,
which slightly is more sane than the previous government, which was looking at passenger rail
all up and down the East Coast, has looked at providing this idea of an inland rail linking
Brisbane with the northern reaches of the New South Wales standard gauge rail network.
The problem you've got is this. At the moment, the government's allocation to the inland rail
build is about $75 million a year for the next few years, the budget. That's for planning and
preparatory works. There is no identified white knight financier of that rail build.
It's very difficult to get any clear estimate from the government on when that's going to be built.
Now, if it's going to take 10 years or more to build, you're looking just for the growers. And bear
in mind, the growers on a main line class one rail network are very small fish. But nevertheless,
you're looking as a growing community, around nearly $3 billion opportunity cost. Probably
fairly more than that, if you add in the reduced maintenance on roads, and probably the
efficiencies of scale, you'll get at some of the ports.
So what that's drawing you to in price is it's a financing issue, time value of money, and in a
public asset, who's allowed to invest. These are really the key things hopefully, we can get across
to the farming sector. It's not always the government that's going to solve these solutions. And
we need to work around how we bring productive marketing investment into the equation.
To give you an alternative very quickly, Kenya, as of last year, concluded a deal to build a
similar length of rail between its port-- Bluewater Port at Port Mombasa back to Nairobi, the
capital-- nearly 500 Ks. That's part of a very ambitious network which links most of East Africa.
Slightly higher axle weights than we would build it here. In Australia the main rail network is a
government-owned corporation-- the Australian Rail Track Corporation. Double stacked.
So a good solid network. That's a public/private partnership. It's 90% Chinese financed. Began
work in November of last year. Contract was signed. They're already there on the ground. They
put their own work teams. They're going to conclude it by 2017. And there's penalties that apply
in the contract if they don't.
The International Monetary Fund, Christine Lagarde's shop analysed it at putting 1.5% on
Kenyan GDP year on year. Now, you won't get that sort of growth out of an Australian West
Coast mainline, because Kenya's working off a very low base of freight productivity. What that's
telling you is that there are different approaches to doing serious freight infrastructure-commercial freight infrastructure-- if you're prepared to look at productive market models.
That's just a picture of the ultimate East Africa rail network. That is the creation of China. China
has-- you may have heard of the Silk Road policy. The Silk Road policy is essentially helping
people that are supplier nations to China's requirements, helping them to finance the kind of
freight and industry and infrastructure solutions that will result in cheaper products and more
reliable food security, and other security, to China. So they're into East Africa doing that, so that
they can ensure low costs and stable product supply from them into the future.
Question then becomes, well OK. It's largely public-owned and government-owned and
controlled. We really can plan and spend on infrastructure now. And what are we spending on.
It's a very simple graph, my take on it.
If you look at roads across the top owned by government, access controlled by government. If I
want to put a B-double on something instead of a semi-trailer, I have to go and talk to the roads
agency. They might say no, they don't have any extra money to upgrade the road. Financed by
government, very little, except for a few toll roads.
National rail, the rail track we're talking about on the East Coast, also the one that runs over to
Kalgoorlie in the west. Government-owned. Access is actually via the Rail Track Corporation. If
you have a train, you can go on it if you're prepared to pay. But financed by government. So
hence, this issue of when are we going to get our East Coast mainline railway? Well, when the
taxpayer can afford it. Not in the budget at the moment.
Ports are a mix. As you know, some ports have been privatised. And at least you get that
upstream scale on your road and rail operations. You're going to find more and more ports
popping up like mushrooms, because everyone will try and compete with each other. Not very
effective for scale, and mix, and efficiencies.
And sea channels are another issue. And we're seeing it up at Gladstone and a few other places.
We don't maintain our sea channels. We don't maintain competitive shipping channels for
international freight. Tassie, about six, seven years ago, dealt itself out of direct international
trade from shipping. Lots of hullabaloo about that. And now a subsidised carrier coming in with
a small whistle regularly, to try and pick up some trade from Tassie.
It's part of the review I did two or three years ago. We simply asked the companies that were
servicing that route. And they said, well, it's as simple as this. We have vessels that draw 13.5
metres of water, that are the productive vessels for us to send down to Tasmania. Happy to send
them down, but you don't have a port that'll fit them.
So it's simple dredge question. At the time, Tass ports didn't have a dredging strategy. So, just
picking through the issues around what can we invest in. Where can we get productive marketing
investment that's going to lower the cost in your case, for the growers.
Government spending patterns at the moment. I wouldn't hold your breath, for the inland rail-my personal view. That's the Commonwealth and the States and Territories agreement budgeted
for the next five years on highways and freeways and tollways. And also the smaller number you
see underneath it is what's going under the National standard gauge rail network. The large
amount of that money is going into the Hunter Valley coal system and some Sydney upgrades.
So as you can see, we're very, very biassed in our government spending at the moment towards
highways. Highways, you know, economy of 600-700 billion tonne kilometres of freight, like
Australia is, there's room for a productive mainline rail solution there. But not if you're
subsidising road freight, and not if you keep putting more and more money into highways.
Some ways you could I guess get serious about doing some of these things, you could simply
say, look, we'd like to market test someone to come and build a serious, heavy, commercial, East
Coast railway, which would bring much cheaper freight to everyone up and down that line, west
of the divide, across Eastern Australia. Linking most of the containers that are in Australia, in
Sydney and Melbourne.
There are rail builders-- you don't have to go to China. There are very productive, large, multibillion dollar rail operators-- five of them in the US, who having dealt with enviro-infrastructure
Australia, I think it would be fair to say aren't going to take Australia seriously while we have a
government-owned, unfunded rail corporation. And I don't see a really serious intent to invest in
significant freight infrastructure here.
Open up the supply chains, as I said, across that matrix. Try and work through how we can get
productive Superfund investment and other things into that road/rail port supply chain. And one
very important thing if you are going to stay with the model where the government is simply
going to fund everything, and there aren't mechanisms for institutional investors to come in and
fund agriculture. Because a lot of people want to finance agriculture. They don't want to buy a
farm. They want to finance the supply chains, because they think agriculture in Australia is a
good bet. They can't at the moment.
So if we're going to stay with the government model, let's have some of those projects assist for
their price per tonne impact for freight. Because I can tell you now, that from the green paper
that was released, which talked about something around $50 billion worth of infrastructure
projects for agriculture, none of them have been assist on that basis. So your guess is as good as
mine as to how efficient that investment of your money-- of my money-- is going to be. Thank
you.