In 2015, CBH and Grain Producers Australia (GPA) called for greater transparency, access and regulation to encourage investment in Australia’s aging rail infrastructure.
Throughout the year, CBH and West Australian rail network operator, Brookfield Rail, were in negotiations to finalize a long-term rail access agreement under the West Australian Rail Access Code. Coupled with these negotiations was CBH’s call for a harmonized national approach to rail infrastructure.
Driving this discussion is the need to find efficiencies and costs savings in the grain supply chain that will retain Australia’s competitiveness. This is particularly the case where its freight advantage into Asia, Africa and the Middle East has hit head winds with record-low sea freight rates intensifying the battle for market share with the Canadians, Americans and the Black Sea.
In Western Australia, the discussions and investment to improve efficiency are particularly important due to its reliance on the export market. Not surprisingly, they are the most vocal in calling for improvement to the rail network, national regulation harmonization and reduction in rail monopolies.
Export-driven Western Australia produces, on average, 40% of the national crop.
Western Australians want rail investment and an open and transparent access system to harmonize and encourage long-term private and government investment. Stakeholders such as CBH and grower groups point to the rail infrastructure, rail monopoly and regulation as inhibitors and call for change.
Western Australia has a rugged landscape and is the country’s largest state by landmass, making rail the most efficient way to transport grain from up-country to port. Brookfield Rail, which is based in Canada, is the state’s sole rail network operator with 3,400 miles of track, 1,491 of which is dedicated to grain. Out of all commodities serviced on the network, grain accounts for 6%.
Paul Larsen, Brookfield Rail’s CEO, said the company has invested A$2 billion to increase freight volumes and delivered, upgraded and modernized railway that supports Western Australia’s economic growth. This investment included a number of re-sleepering and re-railing work such as the Midwest Rail Upgrade Project, Leonora, Eastern Goldfields Railway and the Esperance Line as well as upgrades to the fiber optic cable data and open channel radio network on the Esperance line.
“Brookfield’s investment has resulted in a 113% increase in tonnes transported on our network since privatization, from around 35 million tonnes per annum to 75 million tonnes,” Larsen said.
Railing against monopoly
Despite this investment, industry players such as CBH and GPA believe more could be done to improve the track, and argue that Brookfield uses its monopoly to increase the access fee disproportionately.
CBH General Manager of Operations David Capper said despite government investment, Western Australian grain growers had not seen any increase to the state of the rail network, and there was a lack of information about how maintenance is performed.
“Commencing in September 2010 and running over three years, the federal and state government invested A$165 million in re-sleepering maintenance on the Tier 1 and 2 section lines,” he said.
Further, CBH said the Western Australian rail access fee is four times the national average, and when combined with the poor state of the network, encouraged grower deliveries at port and a shift to road transport.
“We expect 20 to 30 percent of the crop will be delivered directly to port by the grower, 6 to 8 million tonnes railed, with the remainder transported by road. The impact will be supply chain bottlenecks and higher freight rates, which hurt growers,” said Capper.
Capper said adding to the problem was the closure of 435 miles of line and the lack of certainty around access. The impact has increased freight rates by 20%, he said.
Grain grower Brad Millsteed sees this firsthand from his farm in Western Australia. He and other growers in the district are very aware that to capture a premium price for their grain, it had to be exported in the first half of the year. Rail, he said, was key in meeting this timeframe.
“There’s a rail line 31 miles to the east of us that is in dire need of repair. Freight capacity on the line is half of what it could be,” he said.
Millsteed said it is frustrating to see grain hitting a bottleneck because the rail network is not able to handle the volume of grain.
“The silos and ports can handle the grain volumes at harvest, but we can’t get it to the port quick enough because the rail lines just can’t handle it,” said Millsteed.
Delivering to silos located on a state maintained line, Millsteed said he was fortunate to have an efficient system and network in which to deliver. Despite this efficiency, the cost of freight is still quite high. Millsteed said the 50% access fee Brookfield charges CBH to run trains on their lines is a critical part of that expense.
“The Watheroo to Kwinana freight rate is A$20, and half of that goes to Brookfield to simply access the line,” said Millsteed.
No government subsidy
Brookfield Rail acknowledges government funding had been received in the past, naming the A$165 million, re-sleepering of 786 miles of Tier 1 and Tier 2 lines as part of the “Grain Freight Rail Network Re-sleepering Project.” Currently, they do not receive any government subsidy, which makes a state-by-state fee comparison inaccurate.
“We think it is important to recognize that Brookfield Rail currently receives no funds from government to subsidize the movement of grain, unlike other states across Australia,” Larsen said.
He went on to say the rail access charge represents 2% of the total grain revenue on a per-tonne basis. This figure is based on the below rail cost component, when assuming a A$300 per-tonne grain price and an average 200-km journey from up-country to port.
Cost aside, Brookfield Rail also noted the grain freight rail task is extremely complex, with the access fee contributing to the cost of operating and maintaining the network.
“The network moves multiple grain products, volatile volumes, 100-plus origins and four different destinations spread across 65 percent of the network,” Larsen said.
Capper said the ongoing issues around rail access and freight rates are causing more grain to move by road, an outcome that is not good for the grower or the community.
“Seeking access under the Western Australia Railway Access Code is a slow and uncertain process. We believe it could be more efficient and transparent,” he said.
In Western Australia, a customer has two options when seeking to access the rail network: either direct with the operator or access through the Western Australia Railway Access Code. CBH has sought to access the network through the Western Australia Railway Access Code, something that has not previously been done.
CBH has said the process is slow and laborious. However, Brookfield Rail says the Western Australian Access regime is being tested for the first time.
“CBH is the first rail customer to seek access under the regime in the 14 years it has been in existence, which means much of the regime is being tested for the first time. This, combined with the complexity of the rail task, has led to an 18-month long process of information exchange, public consultation, determination of pricing bookends, clarification on terms, and most recently a 90-day negotiation period,” Larsen said.
“Despite all efforts over the 90-day negotiation period, CBH did not sign an agreement to secure long-term access to the freight rail network. Through public statements, CBH has indicated it will progress to the arbitration process under the regime, which will deliver a set of terms and conditions for CBH’s use of the railway that will be binding on Brookfield Rail. CBH is yet to initiate this process.”
Brookfield Rail has successfully negotiated all other access agreements on a commercial basis directly with the customer or above-rail operator.
CBH advocates harmonization
Coupled with the rail access code, CBH has also advocated for harmonized national rail regulation to remove unneeded bureaucracy and to encourage rail investment.
“There is a lack of an effective regulatory framework from an access and pricing perspective. It’s a vague and delayed process that is quite costly to undertake today, and that makes it almost impossible for government and us to invest in the network with any certainty when there are no controls on how a track operator can seek a return on their investment in what is really a long-term asset,” he said.
“We need to have a sensible conversation around access to rail infrastructure. We shouldn’t need to deal with two to three regulatory bodies to move grain across the country on rail.”
Pointing to the national rail safety regulations recently introduced, Capper said it could be used as the model for national access regulation.
Joining the call for national regulation of rail infrastructure is Grain Producers Australia (GPA), a national advocate for broadacre, grain, pulse and oilseed producers.
GPA President Andrew Weidmann released a statement in October calling for appropriate regulation to ensure open access and to prevent business from taking advantage of infrastructure monopolies.
“Australian Competition and Consumer Commission (ACCC) chairman Rod Sims is already on the public record highlighting the ACCC’s concerns about the future of monopoly infrastructure assets and the need for tougher regulation before assets are privatized to ensure access is open and users are not hit with monopoly rents. It is a sentiment endorsed by GPA.”
In the statement, Weidmann also addressed Brookfield’s proposed A$8.9 billion acquisition of Asciano’s rail network and train operations in two of Australia’s eight states. “Without appropriate regulation and a national structure for management of access to key infrastructure like rail, we are forced into being a price taker with little negotiating power, so the Brookfield proposal for Asciano should be accompanied by the Australian government defining a far better regulatory regime,” Weidemann said.
Driving a sense of urgency in the debate, the Brookfield proposal would increase its rail footprint to include Pacific National that operates bulk grain transport in eastern Australia.
Weidmann said without appropriate regulation, growers would be forced into accepting the price without room for negotiation.
“Grain growers in Western Australia have highlighted the way their rail asset has been allowed to decline through insufficient maintenance expenditure, all while they are forced to pay more in charges to use the network.
“The regulatory environment is clearly inadequate. The grain industry is losing value and this appalling situation can only reduce public support for foreign investment, at a time when Australia needs to encourage investment and grow economic activity,” Weidemann said.
In late 2015, CBH and Brookfield Rail signed a 12-month interim rail access agreement to give certainty to grain growers and other industry stakeholders for the 2016 season. It would be fair to say both parties want to achieve a long-term agreement and are working toward this goal.
“The next step in finalizing a long-term access agreement is the commencement of arbitration under the auspices of the Economic Regulatory Authority, which Brookfield Rail is looking forward to commencing as soon possible,” Larsen said.
“The key objective for Brookfield Rail is to provide certainty for CBH, and by extension its farmers, through the provision of a safe and reliable rail network throughout regional WA, and that is what we remain committed to.”
The ACCC announced on Nov. 26 that it would not approve Brookfield Rail’s proposed undertakings, which raises doubt about whether its takeover bid will be approved. The government competition regulator stated Brookfield did not adequately address its concerns with the combination of its existing rail and port assets with Asciano.
Brookfield Rail is Western Australia’s sole rail network operator with 3,400 miles of track, 1,491 of which is dedicated to grain. Out of all commodities serviced on the network, grain accounts for 6%. Photo courtesy of CBH.