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Australia – Getting Tasmania’s Freight Industry Ship Shape.

17 March, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Shipping, Maritime & Aviation

 

Productivity Commission releases draft report on Tasmanian shipping reform.

 
What You Need To Know

 

  • The Productivity Commission has released its draft report on Tasmania’s shipping costs and the competitiveness of Tasmania’s freight industry.
  • The draft report examines the competitiveness of Tasmania’s shipping and freight services and assesses the effectiveness of Tasmania’s freight and passenger subsidy schemes, the alignment of their objectives and outcomes, and their relationship to broader Tasmanian transport and economic issues.
  • The draft report provides that Tasmania faces broad economic and social challenges, and greater emphasis should be put on policy reforms which have national and Tasmanian benefits and that directly enhance the competitiveness and productivity of the Tasmanian economy.

 
What You Need To Do

 

  • Interested parties should review the draft report and, if appropriate, provide any submissions to the Productivity Commission.
  • Interested parties should also monitor the submission of the final report by the Productivity Commission to the Commonwealth Government which is expected to happen later this month.

 
On 24 January 2014, the Productivity Commission released its draft report (Draft Report) on its inquiry into the current arrangements for supporting freight and passenger services between mainland Australia and Tasmania (Inquiry). The full Draft Report can be found here.

 
Context

 
The Draft Report explains that there are various interconnected drivers that influence the performance of Tasmania’s economy. Key amongst these are geography (ie physical distance from markets, small dispersed population and small producers) but also relevant is the policy environment within which Tasmanian businesses operate. Notably, Tasmania currently accounts for less than 2% of Australia’s gross domestic product.

 
The Draft Report indicates that this has led to Tasmania receiving substantial support through many Commonwealth Government policy measures, however despite this support, continues to lag other states in most economic indicators and unemployment.

 
We have summarised below some of the particularly notable areas in the Draft Report.

 
The Productivity Commission notes throughout the Draft Report the short timeframes it has had to analyse the relevant issues and that the Productivity Commission has, in some areas, had insufficient information to inform a recommendation.

 
Subsidies

 
Status Quo

 
As mentioned above, the Commonwealth has supported Tasmania through a number of measures, including through the provision of subsidies.

 

The current subsidies that are in place to alleviate transport costs to Tasmania include the:

 

  • Tasmanian Freight Equalisation Scheme (TFES) – the TFES subsidises the shipment of eligible Tasmanian-produced goods to the mainland so that the costs of eligible cargo shipped from Tasmania to mainland Australia is approximate to the costs of similar goods moved by road or rail across equivalent distances;
  • the Tasmanian Wheat Freight Scheme (TWFS) – the TWFS was originally introduced to ensure domestic price parity for wheat as an ingredient of bread (the last payment under the TWFS was in 2009); and
  • the Bass Strait Passenger Vehicle Equalisation Scheme (BSPVES) – under the BSPVES, a rebate is provided for accompanied vehicles transported across Bass Strait to reduce the net fare when sharing a standard cabin to a similar cost as that would notionally be incurred if driving an equivalent distance on a mainland Australian highway.

 
Looking Forward

 
The Productivity Commission found that the way that the current Tasmanian subsidies have been designed and administered is not consistent with their objective of being ‘equalisation’ measures, and that “a genuine equalisation measure would entail a significant widening of the scope, scale and cost of the current arrangements”. With this in mind, the Draft Report recommends that the TWFS’ purpose is now redundant and should be terminated. However, as the Commonwealth Government intends to retain the TFES and BSPVES, the Draft Report canvasses possible improvements to these schemes.

 
Ultimately, the Productivity Commission considers that the Australian Government should change the focus from freight subsidy schemes to policy reforms which have national and Tasmanian benefits and enhance competition and productivity of the Tasmanian economy.

 
Shipping & Freight

 
The Productivity Commission concludes that the current low levels of efficiency in Tasmanian shipping and freight is driven by a lack of competition, scale and capital. This is exacerbated by the reality that a key feature of Tasmania’s economy is the pervasive involvement of the Commonwealth Government in many aspects of the Tasmanian economy. This is particularly evident in the freight industry where the Tasmanian Government owns and operates major freight infrastructure assets.

 
Competition

 

The Draft Report finds that Tasmania’s economic infrastructure has limited competition between transport service providers. This has resulted in current shipping industry participants providing high quality but also high cost services whereas the shippers contacted by the Productivity Commission advised that they seek a lower cost service. Additionally, the Productivity Commission notes that there are no indications that there will be any new entrants to this market as the barriers to entry are high due to stable freight rates and high fixed costs for new entrants.

 
Coastal Shipping Regulation

 
The Draft Report also finds that the direct impact of regulatory reform through increased prices is likely to have a greater effect on Tasmania compared to other Australian jurisdictions. In light of this, the Productivity Commission recommends that coastal shipping regulation be reviewed as soon as possible with the objective of identifying opportunities to increase the competitiveness of Australia’s coastal shipping, particularly in Tasmania.

 
On this point, the Productivity Commission finds that the regulatory impact statement for the coastal trading reforms in 2012 which identified a net benefit to Australia, appears to have been flawed, with some industry participants calling for an immediate review and change. It is noted in the Draft Report that the basis for such a review depends on who is commenting. For example, the Maritime Union of Australia made submissions in support of a decrease in the scope of the Minister’s discretion to grant temporary licences to make it harder to obtain a temporary licence. This then requiring greater mandatory use of Australian flagged, and therefore


Australian crewed, vessel. Regardless, the Productivity Commission recommends that a review of coastal shipping regulation be undertaken as soon as possible.

 
Investment

 
The Draft Report also finds that Tasmania’s economic performance is affected by its limited ability to attract private capital which is exacerbated by constraints on public sector budgets. Most freight-related assets in Tasmania are owned by the State Government, but for a range of reasons, none are earning a sustainable rate of return. This severely limits new investment and future prospects.

 

An example provided in the Draft Report is TasPorts, a state owned enterprise responsible for the management of 12 Tasmanian ports. It is reported that TasPorts has higher costs relative to other Australian ports but is not generating a commercial rate of return on its assets. The Productivity Commission considers that this is indicative that TasPorts may not be charging users the full cost of the services provided, and that the current approach of state wide uniformity has the effect of masking pricing signals as well as limiting the potential for competition between Tasmanian ports. To this end, the Productivity Commission recommends that a clear port strategy for Tasmania be urgently implemented.

 
At a high level, the Productivity Commission has identified in the Draft Report that Tasmania suffers from a lack of an integrated freight strategy across all components of its supply chain. This results in an increased risk of inefficiencies in decision making for road and rail corridors, port connectivity and dedicated infrastructure. The Productivity Commission therefore supports the development of an integrated freight strategy for Tasmania addressing the issues of productivity and effective capital allocation. The Productivity Commission suggests that the Commonwealth and Tasmanian Governments jointly conduct a stocktake of existing initiatives with a view to having a report finalised by the end of 2015.

 
Next Steps

 
Interested parties should review the Draft Report and, as relevant, provide any submissions to the Productivity Commission. This can be done online here.

 
Interested parties should also watch this space as the Productivity Commission is expected to submit a final report to the Commonwealth Government later this month.

 

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For further information, please contact:

 

Paul Newman, Partner, Ashurst
paul.newman@ashurst.com


Shane Bosma, Ashurst
shane.bosma@ashurst.com


David Morgans, Ashurst
david.morgans@ashurst.com


Yun Ho, Ashurst
yun.ho@ashurst.com

 

Homegrown Shipping, Maritime & Aviation Law Firms in Australia

 

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