The Costs of Road and Rail Freight

The Costs of Road and Rail Freight Neutrality and efficiency in the farm-to-port logistics chain by Access Economics November 2007 RIRDC Publication No 07/185 RIRDC Project No AEC-4A

2007 Rural Industries Research and Development Corporation. All rights reserved. ISBN 1 74151 580 7 ISSN 1440-6845 The Costs of Road and Rail Freight. Neutrality and efficiency in the farm-to-port logistics chain Publication No. 07/185 Project No. AEC-4A The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances. While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication. The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors. The Commonwealth of Australia does not necessarily endorse the views in this publication. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone 02 6271 4165 Researcher Contact Details Access Economics Level 1, 39 Brisbane Avenue Barton ACT 2600 Phone: +61 2 6273 1222 Fax: +61 2 6273 1223 Email: info@accesseconomics.com.au In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6271 4100 Fax: 02 6271 4199 Email: rirdc@rirdc.gov.au Web: http://www.rirdc.gov.au Published in November 2007 ii

Foreword This paper documents the research commissioned by Rural Industries Research and Development Corporation (RIRDC) to develop a methodology for measuring road and rail neutrality and efficiency in the farm-to-port logistics chain. The main output of this project has been the development of a complex, large-scale, Excel spreadsheet model, which applies economic theory to estimate the monetary, market and socioeconomic costs of alternative road-based and rail-based logistics chains. The model enables the user to determine: where various Federal, State and Local government interventions may have (or may potentially) distort decisions away from a socially optimal level; whether these interventions under- or over-recover for externalities; the impact of non-monetary government interventions; and whether any new government charges and interventions across transport modes achieve efficient outcomes and competitive neutrality. The purpose of this project has been to develop a tool for assisting decision making, rather than developing policy recommendations as such. Hence, the focus of this report is on the development of the methodology and model, rather than the outputs. The model has been calibrated based on the general freight rates of four theoretical farm-to-port logistics chains to ensure that the model results align to the real world as much as possible. Finally two case studies have been provided to illustrate how this tool can be used to help guide decision making. This project was funded from RIRDC Core Funds which are provided by the Australian Government. This report, an addition to RIRDC s diverse range of over 1700 research publications, forms part of our Global Competitiveness R&D program, which aims to identify important impediments to the development of a globally competitive Australian agricultural sector and support research that will lead to options and strategies that will remove these impediments. Most of our publications are available for viewing, downloading or purchasing online through our website: downloads at www.rirdc.gov.au/fullreports/index.html purchases at www.rirdc.gov.au/eshop Peter O Brien Managing Director Rural Industries Research and Development Corporation iii

Acknowledgments Access Economics acknowledges with appreciation the comments and expert input provided by: Ian Charmers David Martin David Marchant Chris Althaus Phil Potterton Charlie McWilliam Nicholas Howarth Liesbett Spanjaard Chris Corrigan Jeff Davis Australian Local Government Association Australian Local Government Association Australian Rail Track Corporation Australian Trucking Association Bureau of Transport and Regional Economics GrainCorp National Farmers Federation NSW Department of Infrastructure, Planning and Natural Resources Patrick Corporation Rural Industries Research and Development Corporation iv

Abbreviations ABS ACT AGM ANTS ARA ARTC ATSB BTE BTRE CTLS DALY ESA FSGS GDP GTK GVM ITLS NAASRA NIMPAC NRTC NSW NT NTC NTK PCU PDO QLD RTA RUC SA TAS VIC VLY VSL WA YLD YLL Australian Bureau of Statistics Australian Capital Territory Average Gross Mass Australia s New Taxation System Australian Rail Association Australian Rail Track Corporation Australian Transport Safety Bureau Bureau of Transport Economics (now BTRE) Bureau of Transport and Regional Economics Commodity Taxes less Subsidies Disability Adjusted Life Year Equivalent Standard Axle Load Fuel Sales Grants Scheme Gross Domestic Product Gross Tonne Kilometre Gross Vehicle Mass Other Indirect Taxes Less Subsidies National Association of Australian State Road Authorities (now Austroads) NAASRA Improved Model for Project Assessment and Costing National Road Transport Commission New South Wales Northern Territory National Transport Commission Net Tonne Kilometre Passenger Car Unit Property Damage Only Queensland Road Transport Authority Road User Charges South Australia Tasmania Victoria Value of a Life Year Value of a Statistical Life Western Australia Years of Life Lost due to Disability Years of Life Lost due to premature mortality v

Contents Foreword... iii Acknowledgments... iv Abbreviations... v Executive Summary... viii What the report is about... viii Who is the report targeted at?... viii Background... viii Aims/Objectives... ix Methods used... ix Results/Key findings... x Implications for relevant stakeholders... x Recommendations... x Introduction... 1 Neutrality and Efficiency... 2 Economic theory... 2 Australian Government policy... 2 International Government policy... 4 New Zealand... 4 United Kingdom... 4 European Union... 4 Canada... 4 Project Methodology... 5 Literature Review... 5 Identifying Interventions... 5 Development of the Model... 6 Calibration... 6 Case Studies... 6 Literature Review... 7 Studies Examining the Competitive Neutrality... 7 Key Cost Relationships... 8 Road Accidents... 8 Costs per Road Accident... 8 Accident Risk... 9 Road Maintenance and Road User Charges... 11 Model Structure... 17 Logistics Chains... 17 Types of Costs... 18 Indirect Taxes... 21 Applying the Model... 22 Entering Logistics Chains... 22 Standard Output Options... 22 Scenario Analysis... 25 Non Monetary Restrictions... 25 Model Calibration... 29 vi

Case Studies... 32 Meat Exporter... 32 Costs of Regulations... 33 Grains Exporter... 34 Costs of Regulations... 35 Conclusions... 36 Appendices... 37 Appendix 1: Model documentation and data sources... 37 Allocating Fixed Costs by Distance... 37 Allocating Fixed Costs by Time... 37 Road Operating Costs... 38 Fixed Monetary Costs... 38 Variable Monetary Costs... 40 Labour... 42 Rail Operating Costs... 43 Fixed Monetary Costs... 43 Variable Monetary Costs... 45 Labour... 47 Interchange/Handling Costs (Road/Rail)... 48 Non-Monetary (Market) Costs... 49 Time costs... 49 Whole Chain Service Quality... 50 External Costs... 51 Accident Costs... 51 Environmental Costs... 52 Congestion... 54 Infrastructure Maintenance... 55 Glossary... 58 References... 60 vii

Executive Summary What the report is about This paper documents the research commissioned by Rural Industries Research and Development Corporation (RIRDC) to develop a methodology for measuring road and rail neutrality and efficiency in the farm-to-port logistics chain. The main output of this report has been the development of a complex, large-scale, Excel spreadsheet model which applies economic theory to estimate the monetary, market and socio-economic costs of alternative road-based and rail-based logistics chains. The model enables the user to determine: where various Federal, State and Local government interventions may have (or may potentially) distort decisions away from a socially optimal level whether these interventions under- or over-recover for externalities the impact of non-monetary government interventions whether any new government charges and interventions across transport modes achieve efficient outcomes and competitive neutrality. The model examines the entire logistics chain rather than just focusing on the private cost of hauling goods via road or rail, including the non-monetary private costs (such as time) and the externality costs (such as infrastructure wear, congestions, accident and environmental costs). The model is very flexible in terms of allowing both road and rail to be involved to varying degrees, allowing the user to examine logistics chains at varying levels of detail, and update parameters as new cost estimates become available. Who is the report targeted at? The purpose of this project has been to develop a tool for assisting decision-making, rather than developing policy recommendations as such. Hence, the focus of this report is on the development of the methodology and model, rather than the outputs. The model has been calibrated based on the general freight rates of four theoretical farm-to-port logistics chains to ensure that the model results align to the real world as much as possible. Two case studies have been provided to illustrate how this tool can be used to help guide decision-making. Background This project is a response to concerns raised by the Project Steering Group (PSG) during a previous RIRDC-sponsored project Evaluating Logistics Chain Technology: Australian Farmgat- to-port. During that project, PSG members noted several situations where a decision was taken about one link in the logistics chain (based on narrow criteria) without considering the upstream and downstream impacts of that decision on the entire logistics chain. In the past there has been considerable research into comparing road and rail transport, including relative costs, funding and emissions. However, the logistics of delivering goods from farmgate to port involves a broader range of activities than just hauling goods via road or rail (albeit they form a significant part of the logistics chain). Other activities in the logistics chain include procurement, packaging, consolidation, storage, handling, intermodal transfers, empty container repositioning, backloading, and inventory management. In a supply chain sense road and rail are also often both involved to vary degrees, so in modern logistics chains, road and rail are often not mutually exclusive modal choices. Consequently, comparing only the road haul and rail haul components of these competing logistics chains only tells part of the story. Furthermore, much of the previous research comparing road with rail has been dominated by the domestic freight movement task (between capital cities), rather than viii

having a focus on the specific issues facing the transport of rural exports. Finally, most previous research paid little (or ad hoc) attention to other non-monetary regulations such as speed and mass limits, travel times and travel route restrictions. Aims/Objectives This project aims to make a holistic comparison of road-based and rail-based rural export logistics chains, with respect to the taxation, funding, subsidies and regulation of these activities by all levels of government Federal, State and Local. Underlying this is the question of whether any distortions in taxation, funding, subsidies and regulations are resulting in an allocation of resources that does not achieve an efficient allocation of resources and hence may be inconsistent with maximising the overall living standards of Australians. The model is specifically set up to enable the user to determine: where various Federal, State and Local Government interventions may have (or may potentially) distort decisions away from a socially optimal level whether these interventions under- or over-recover for externalities the impact of non-monetary government interventions (such as such as speed and mass limits, travel times and travel route restrictions) whether any new government charges and interventions across transport modes achieve efficient outcomes and competitive neutrality. Methods used The project comprised five components. 1. Literature review The initial phase of the literature review identified both domestic and international studies that attempted to examine the competitive neutrality between the road and rail logistics chains as a whole. The aim of this process was to identify the potential estimation methodologies that could be used in this study and to ensure that all relevant costs were taken into account. The second phase of the literature review identified papers that either focused on specific sections of the road or rail logistics chain, or on complex, inter-relating cost models. The final phase of the literature review identified data sources that, when combines with the methodologies identified and the models developed, would estimate logistic chain costs in the Australian case. 2. Identification of interventions The next phase of the methodology identified any Federal, State and Local government and private sector interventions in the logistics chain. The next step used ABS input-output data to quantify indirect taxes and subsidies on inputs to the logistics sector, which indirectly influence price. 3. Development of the model The models and cost data were combined into a user-friendly Excel model that estimates the private monetary and non-monetary costs and the social costs of transporting a good from the farmgate to port. 4. Calibration of the model Dawson s Consulting provided current market freight rates for the transportation of four agricultural products (wheat, rice, beef and oranges) from a rural centre to a nearby port by either road or rail. 5. Development of case studies In order to provide an example of the application of the model, case studies of the typical road-based and rail-based logistic chains for exported grains and meat were developed. ix

Results/Key findings The model was applied to two case studies: one examined a road-based logistics chain for meat exports and the other examined a rail-based logistics chain for grain exports. In the first case study it was found that while there is generally close to full-cost recovery for road wear, there is significant under-recovery of externality costs. In the second case study it was found that there is full-cost recovery for both infrastructure use and externality costs. In both cases access to infrastructure and the availability of services was a significant issue that influenced the choice of transport mode. In particular, in the second case study access to timely rail services sometimes forced the exporter to utilise road transport on an ad hoc basis, thus imposing high costs to the exporter and reducing Australia s international competitiveness, and imposing additional externalities on society that would have been fully cost-recovered had rail been used. Implications for relevant stakeholders Competitive neutrality is only a necessary but not sufficient condition for ensuring optimal outcomes for society it ensures road and rail are on an equal footing, but if both were priced below (or above) their true social cost, it is unlikely to be an efficient outcome. Competitive neutrality is a relative comparison if an imbalance existed (say road was underpriced relative to rail), it says nothing about whether society is made better off by making the price of road transport higher, or making the price of rail lower. The efficiency test provides the absolute benchmark to answer this question. A situation that achieves competitive neutrality and efficiency is therefore necessary and sufficient for ensuring an optimal allocation of resources. Various government reports have raised concerns regarding the lack of competitive neutrality between road and rail and made several recommendations to the Commonwealth Government. The Federal Government s response has been to focus on neutrality issues, without necessarily grappling with efficiency. Attempts to measure these differences and the impacts on competitive neutrality have tended to be partial (focusing on access charges, taxes and excise), without taking into account the full gamut of costs to society from each mode of transport. The Federal Government has since established the National Transport Commission, jointly with State and Territory Governments, which encompasses road, rail and intermodal operations. The Commission has prepared a First National Transport Regulatory Reform Work Programme which flagged a number of possible changes in regulations over the next three years, including: continued detailed examination of Heavy Vehicles Charges introduction of performance-based standards flexible driving hours and fatigue management regimes use of vehicle tracking technology to reduce regulation enforcement costs. Recommendations The purpose of this project has been to develop a tool for assisting decision-making, rather than developing policy recommendations as such. The aim of this project was to develop the methodology and model, rather than the task of populating the model with data. In order to develop, test and calibrate the model and software, realistic parameter values are required, nevertheless further refinement of the data is required when evaluating specific corridors or freight tasks. The model is set up so that the user can readily fine-tune the data and parameters in the model to specific corridors. x

Introduction The Rural Industries Research and Development Corporation (RIRDC) sponsored Access Economics (AE) to examine road and rail competitive neutrality and efficiency in the farmgate to port logistics chain. This project is a response to concerns raised by the Project Steering Group (PSG) during a previous RIRDC-sponsored project Evaluating Logistics Chain Technology: Australian Farmgate to Port. During that project, PSG members noted several situations where a decision was taken about one link in the logistics chain (based on narrow criteria) without considering the upstream and downstream impacts of that decision on the entire logistics chain. In the past there has been considerable research into comparing road and rail transport, including relative costs, funding and emissions. However, the logistics of delivering goods from farmgate to port involves a broader range of activities than just hauling goods via road or rail (albeit they form a significant part of the logistics chain). Other activities in the logistics chain include procurement, packaging, consolidation, storage, handling, intermodal transfers, empty container repositioning, backloading, and inventory management. In a supply chain sense road and rail are also often both involved to vary degrees, so in modern logistics chains, road and rail are often not mutually exclusive modal choices. Consequently, comparing only the road haul and rail haul components of these competing logistics chains only tells part of the story. Furthermore, much of the previous research comparing road with rail has been dominated by the domestic freight movement task (between capital cities), rather than having a focus on the specific issues facing the transport of rural exports. Finally, most previous research paid little (or ad hoc) attention to other non-monetary regulations such as speed and mass limits, travel times and travel route restrictions. This project aims to make a holistic comparison of road-based and rail-based rural export logistics chains, with respect to the taxation, funding, subsidies and regulation of these activities by all levels of government Federal, State and Local. Underlying this is the question of whether any distortions in taxation, funding, subsidies and regulations are resulting in an allocation of resources that does not achieve an efficient allocation of resources and hence may be inconsistent with maximising the overall living standards of Australians. The rural export logistics chain is not the planning responsibility of one organisation rather Federal, State & Local governments and the private sector all make decisions impacting on multiple parts of the rural export logistics chain. The incentives driving these decision makers often differ considerably from costs and benefits of these decisions to the rural export logistics chain as a whole. Poor, fragmented and inconsistent decision making, cost shifting, short-term planning, and misdirected resources cause actual prices faced by exporter to diverge from the true economic costs, ultimately resulting in a sub-optimal and inefficient rural exports logistics chain decisions. By providing detailed data on the overall net impact of government interventions on the rural export logistics chain and demonstrating the consequences of these decisions on distorting modal choice, this project aims to increase awareness among decision makers of the implications of their decisions on rural exporters and ultimately reduce the economic resources required to move exports from farmgate to port and increase Australia s global competitiveness. This report details the theory behind a user-friendly model which has been developed to illustrate the economic methodology used to compare the overall efficiency and competitive neutrality between road and rail. Results of the calibration of the model using market freight rates are reported. Finally, two case studies based on meat and grains are used to illustrate some of the uses of the model. 1

Neutrality and Efficiency Economic theory In order to ensure that a user consumes an economically efficient quantity of a service the user should face the full socioeconomic cost of that service. However, in practice there are two factors that often insert a wedge between the cost faced by the user and the true cost to society: 1. Externalities Negative externalities, such as air pollution, greenhouse gases, noise pollution, congestion, infrastructure wear-and-tear, and accidents all impose costs on society. Positive externalities, such as increased labour/goods mobility and technology diffusion, create benefits for society. If users do not bear the costs of negative externalities (or do not accrue the benefits of positive externalities) then they will consume too much (or too little) of the service. 2. Taxes and subsidies Governments can use taxes, subsidies (including infrastructure investment) and regulations to ensure that users bear, and thus take into account, externalities and thus encourage users to consume services at an economically efficient rate. However, if the government inconsistently intervenes across substitutable services then choices about service use will be distorted in favour of one service over another. For example, if the government taxed rail at a rate equivalent to the full cost of air pollution generated by rail but taxed road at a lower rate than the cost of air pollution generated by road then road would be over-utilised relative to rail. Consequently, society would benefit from shifting some of the freight movements from road to rail (i.e. the relative impact of government interventions on road and rail usage is the issue of the most importance). Competitive neutrality exists when each transport mode operates under similar or consistent investment, taxation, charging and regulatory frameworks 1. Competitively neutral conditions ensure that road and rail transport are consumed in relative quantities likely to maximise the net benefit to society. That said, competitive neutrality is only a necessary but not sufficient condition for ensuring optimal outcomes for society it ensures road and rail are on an equal footing, but if both were priced below (or above) their true social cost, it is unlikely to be an efficient outcome. Competitive neutrality is a relative comparison if an imbalance existed (say road was underpriced relative to rail), it says nothing about whether society is made better off by making the price of road transport higher, or making the price of rail lower. The efficiency test provides the absolute benchmark to answer this question. A situation that achieves competitive neutrality and efficiency is therefore necessary and sufficient for ensuring an optimal allocation of resources. Australian Government policy Various government reports have raised concerns regarding the lack of competitive neutrality between road and rail and made several recommendations to the government, including: The Commonwealth develops a more consistent, equitable approach to transport infrastructure charges to ensure competitive neutrality between modes. HoR (August 1998: Recommendation 12, 125) Governments develop an appropriate framework for private and public sector investment that includes efficient taxing and charging regimes and competitive neutrality between government agencies and the private sector. Rail Projects Taskforce (May 1999: ix) 1 www.aph.gov.au/library/pubs/rp/1999-2000/2000rp28.htm 2

The National Road Transport Commission should prepare and recommend to the Ministerial Council for Road Transport for adoption a revised schedule of heavy vehicle charges which ensures that each class of vehicle pays the full cost of its road use. Productivity Commission (August 1999: Recommendation 10.1) In response the Federal Government acknowledged that: The Commonwealth is aware of the potential for taxing and charging regimes to impact significantly on relative competitiveness and market share between modes. The Commonwealth supports a consistent, equitable approach to transport infrastructure charges The Government supports the principle of competitive neutrality between modes of transport. Department of Transport and Regional Services (2004) and Australian Transport Council (July 2003) The Federal Government then went on to explain that: the road and rail sectors have different usage, charging and funding structures. Road sector charges include registration charges, sales taxes, tolls, local government rates, parking charges and fuel excises. Rail charges include accreditation charges, access charges and fuel excises. Different aspects benefit different modes. For example, rail has tax advantages over road, while road has access charge benefits over rail. The above quotes highlight the tendency to focus on neutrality issues, without necessarily grappling with efficiency. Furthermore, attempts to measure these differences and the impacts on competitive neutrality have tended to be partial (focusing on access charges, taxes and excise), without taking into account the full gamut of costs to society from each mode of transport. Since these reports examining competitive neutrality were released the Federal Government has further responded with the release of the AusLink White Paper and established the National Transport Commission, jointly with State and Territory Governments, which encompasses both road, rail and intermodal operations. The Commission has since prepared a First National Transport Regulatory Reform Work Programme which flagged a number of possible changes in regulations over the next three years, including 2 : Continued detailed examination of Heavy Vehicles Charges, including the possible introduction of mass distance charges and incremental pricing Introduction of performance-based standards rather than vehicle weight or dimension standards for regulating the technical performance of vehicles, for example: increased mass limits (i.e. through road-friendly suspension systems), reduction of restrictions on dimensions (i.e. length of b-double and dimensions of refrigerated semi-trailers), and allow multi-use prime-movers (so that prime movers can be used in short combination, b- double, and road train combinations) Flexible driving hours and fatigue management regime Use of vehicle tracking technology to reduce regulation enforcement costs. 2 Department of Transport and Regional Services (2004) and Australian Transport Council (July 2003) 3

International Government policy New Zealand New Zealand recently released a report that investigated surface transport costs and charges associated with road and rail freight transport. The study included estimates for the: costs of capital, infrastructure, congestion, accidents, environmental externalities (including impacts on water and air quality, noise pollution and greenhouse gas effects), and charges such as road user charges, motor vehicle registration and re-licensing, fares and freight tariffs. New Zealand Ministry of Transport (May 2003) As the report is a static snapshot, the next step is to investigate the best methods to address some of the imbalances identified in the report. United Kingdom The United Kingdom s government recently released a white paper that indicates the movement of policy towards a more cost-reflective pricing system that takes into account externalities of road use (such as congestion and air pollution) and enhances rail s appeal as an alternative transport system. UK Department for Transport (2004) European Union The European Union continues to have ongoing issues with the differing transport pricing policies applied by members (such as differing fuel taxation, infrastructure charges, and externalities pricing rates) that consequently distort competition between modes and members. The European Union has subsequently developed a White Paper on transport policy: Canada This kind of reform requires equal treatment for operators and between modes of transport. Whether for airports, ports, roads, railways or waterways, the price for using infrastructure should vary in the same manner according to category of infrastructure used, time of day, distance, size and weight of vehicle, and any other factor that affects congestion and damages the infrastructure or the environment. European Commission (2001) The report, Straight Ahead A Vision for Transportation in Canada, released February 2003, outlines the Canadian transport policy framework which includes consideration of both efficiency criteria and competitive neutrality between transport modes: Government intervention may be necessary, on occasion, to correct for market imperfections, prevent abuse of market power, and address distortions arising from the failure to take into account the full environmental and other costs of transportation activities. Modal neutrality - the level playing field between transport modes - will be sought whenever government intervention is necessary. Transport Canada (February 2003) 4

Project Methodology The project comprised five components: 1. Literature Review 2. Identification of interventions 3. Development of the model 4. Calibration of the model 5. Development of case studies. Literature Review The initial phase of the literature review identified both domestic and international studies that attempted to examine the competitive neutrality between the road and rail logistics chains as a whole. The aim of this process was to identify the potential estimation methodologies that could be used in this study and to ensure that all relevant costs were taken into account. In particular, the literature review considered the landmark papers by the Bureau of Transport Economics Competitive Neutrality between Road and Rail and by the New Zealand Ministry of Transport Investigation into Surface Transport Costs and Charges. The second phase of the literature review identified papers that either focused on specific sections of the road or rail logistics chains, or on complex, inter-relating cost models (including papers quantifying non-monetary interventions). In particular, models for speed/accidents and fuel/road maintenance/mass were developed based on various reports by the ATSB, Austroads, NRTC and the BTE. The final phase of the literature review identified data sources that, when combined with the methodologies identified and the models developed, would estimate logistic chain costs in the Australian case. Many road parameters were based on a project evaluation user manual produced by Austroads Guide to Project Evaluation Part 4: Project Evaluation Data and various rail parameters were obtained from publications by the ARTC, ATC and the ARA. Identifying Interventions The next phase of the methodology identified any Federal, State and Local Government and private sector interventions in the logistics chain. Interventions include any subsidy, funding, excise, rebate, regulation, tax or other non-financial impost (such as access regimes, operating standards or safety standards) which distort transport prices from the true economic cost of provision. Government budget papers and government finance statistics were reviewed to identify the monetary interventions. An annual report by the NSW Treasury Interstate Comparison of Taxes provided a comprehensive list of relevant taxes across all states, while consultation with various RTAs provided additional information. The next step used ABS input-output data to quantify indirect taxes and subsidies on inputs to the logistics sector, which indirectly influence price. 5

Development of the Model The models and cost data were combined into a user-friendly Excel model, which estimates the private monetary and non-monetary costs, and the social costs of transporting a good from the farmgate to port. The model displays the results in both spreadsheet and chart form, and can be used to examine both the economic efficiency and competitive neutrality of a logistics chain. An options page allows the user to change key parameters in order to simulate different scenarios. Because the model was built using an Excel platform, future modification and refinement by users is facilitated, as well as ensuring portability. A brief user manual has also been developed. Calibration Dawson s Consulting provided current market freight rates for the transportation of four agricultural products (wheat, rice, beef and oranges) from a rural centre to a nearby port by either road or rail. For each logistics chain details about the route, truck used, storage and loading/unloading etc for each were entered into the model. The model was found to result in private monetary costs that are close to freight rates currently faced by exporters. Case Studies In order to provide an example of the application of the model, case studies of the typical road-based and rail-based logistic chains for exported grains and meat were developed. This step involved discussions with relevant producers and transport operators about their experiences in logistics costs incurred when exporting. Where possible, the impact of the monetary and non-monetary interventions on costs, and thus modal choice, were estimated and reported. 6

Literature Review An extensive literature review was undertaken in order to identify the cost elements to include in the model, any complex modelling issues previously identified, and the latest in parameter estimates for many of the cost items. Studies Examining the Competitive Neutrality In 1999 the Bureau of Transport Economics conducted a study on the Competitive Neutrality Between Road and Rail which examined the costs of road verses rail pre- and post- Australia s New Tax System (ANTS), and a hypothetical competitively neutral pricing scenario where each mode bears the full costs of their operation including any externalities they impose on society (the latter reflecting an efficiency criteria rather than a relative neutrality criteria). Unfortunately the study focussed on the interstate non-bulk freight sector (primarily freight between capital cities) by road and rail and is thus not directly comparable to this study (which focuses on rural exports). Nevertheless the study estimated that costs faced by rail compared to road were 13.2% lower pre-ants, 5.9% lower post-ants, and 12.8% lower in the competitively neutral pricing scenario. Given that in the study the costs faced by rail were consistently lower than road, why is the market share of rail less than road and why is rail s market share forecast to decline? Many government regulations (not included in the BTE study) also impose non-monetary costs on road and rail transport. For example, speed limits, mass limits, travel time and route restrictions, congestion, availability and reliability of services, inadequate infrastructure, and damage incurred during handling all impose substantial costs on the service user and thus impact on the competitive neutrality of road and rail. Through consultation with stakeholders, the previous report Evaluating Logistics Chain Technology: Australian Farmgate to Port identified five key priorities of logistics: to supply goods promptly, reliably, with no damage, at low cost, through a secure process. Consequently any government regulations that negatively impact on any of the five key priorities will make one transport mode less favourable compared to another. Of course, there may also be offsetting benefits such as reductions in fatalities, which need to be taken into account. The BTRE has partially examined some of these issues in other reports such as Road Speed Limits: Economic effects of allowing more flexibility (2003) and Urban Transport Looking Ahead (1995). The New Zealand Ministry of Transport has also examined the issue of competitive neutrality in the recently released report Surface Transport Costs and Charges Study. The study estimates the marginal cost of freight transport (both in the short run and in the long run) of two export-freight routes: the Gisborne Napier route (adding new freight to the current task) and the Kinleith Tauranga route (transferring a proportion of the current freight task from one mode to another), both of which involved carrying forestry products. The latter is similar to the type of route examined in this report (transporting an agricultural product to a port for export) and involves similar types of marginal costs (the impact of transferring a proportion of the current freight task from one mode to another). The study also estimated the marginal cost of transporting mixed freight on the Auckland Wellington route and the marginal cost of passenger transport. 7

Unfortunately the study only focused on the parts of the routes where rail transport could be directly replaced with road transport (or vice versa), rather than the whole logistics chain. For example, the cost of door pick-ups by a truck to the nearest rail station was a rail-based route was combined with other handling costs. These costs are based on an average handling cost and are not applicable to all situations. The study did estimate the costs of a range of externalities associated with freight transport road maintenance, congestion, accident and environmental costs. Interestingly, for the three routes it often found that Road User Charges (RUC) in New Zealand were always greater than the road maintenance costs that it was trying to fully cost recover, and often greater than all the externality costs associated with freight transport (this is in direct contrast to the findings in BTRE). However these results are highly dependent on the route under examination, which re-emphasises that conducting studies about the competitive neutrality between modes across the entire transport system will suffer greatly from averaging problems. Furthermore, making changes to government interventions based on such studies may actually make the problem worse by distorting incentives even more. Key Cost Relationships Road Accidents The literature review identified research linking accidents with vehicle speed, which captures the tradeoffs of increasing speed: increased road accidents and vehicle running costs against reduced travel time and labour costs. Costs per road accident are based on research by the BTE (2000), adjusted to reflect AE approach to the valuation of injury and fatality costs. In the model the user can use either the average accident risk per kilometre travelled model (not dependent on speed) or a more complex accident risk model (dependent on speed and road type). In addition to the external cost of accidents incurred through transportation along a certain route, the model estimates the costs and benefits of speed restrictions. Costs per Road Accident The cost per road accident is largely based on BTE (2000) which estimates the costs to the community of fatal, serious injury, minor injury and property damage only (PDO) crashes. While comprehensive in all other respects, the methodology effectively uses the human capital approach to valuing health and human life, with some adjustment for the loss of quality of life by using data on compensation awarded in the court system. Unfortunately the human capital approach implies that the value to society of preventing an accident is equal to the saving in productivity capacity it ignores the value of leisure and health, and implies that people who do not contribute to GDP are worth less than fulltime workers. The alternative approach is the willingness to pay approach to valuing health and human life. Using evidence of market trade-offs between risk and money, including numerous labour market and other studies (such as installing smoke detectors, wearing seatbelts or bike helmets etc) economists have developed estimates of the value of a statistical life (VSL) 3. After a comprehensive literature review (see Access Economics (2005)), the model uses a conservative estimate of the VSL of $3.7 million (implying the value of a life year (VLY) of $162,561 based on a discount rate of 3.3% over 40 years). 3 A particular life may be regarded as priceless, yet relatively low implicit values may be assigned to life because of the distinction between identified and anonymous (or statistical ) lives. When a value of life estimate is derived, it is not any particular person s life that is valued, but that of an unknown or statistical individual (BTE 2002 p19). 8

Disability Adjusted Life Years (DALYs) 4 measure the amount of human life lost, pain, suffering and premature mortality due to an injury or illness in years lost. This approach was recently developed by the World Health Organisation (WHO), the World Bank and Harvard University and adopted and applied in Australia by the Australian Institute for Health and Welfare (AIHW). The DALYs methodology was used to update the estimates of road accident costs by BTE (2000). DALYs due to road and other transport accidents (from Mathers et al, 1999) were split between fatal, serious injury and minor injury crashes by assuming that the YLD component is incurred only by individuals in serious injury and minor injury crashes and the YLL component is incurred only by individuals in fatal, serious injury and minor injury crashes. The YLL component for fatal crashes was estimated by multiplying the number of deaths by age by the expected life left by age (discounted at 3.3% The remaining YLL component and the YLD component was spit between serious injury and minor injury crashes based on the split estimated by BTE (2000) of total costs associated with medical, long-term care, labour in the workplace, labour in the household, and quality of life. The VLY was multiplied by the total DALYs to estimate the total value of suffering and premature death, lost wages/income, and out-of-pocket personal health costs from road and transport accidents. Based on AIHW (2003), health costs not incurred by the individual (and thus are additional to the value of DALYs) were estimated to be 80% of the total health costs in BTE (2000) (except for PDO crashes in which all of the health costs are additional). Using the GDP deflator, health costs not incurred by the individual and the remaining costs of road and transport accidents estimated in BTE (2000) were then inflated to 2004-05 dollars. It is estimated that the cost of a fatal crash is $4,540,817 per fatality, a serious injury crash is $474,496 per person involved, a minor injury crash is $15,599 per person involved, and a property damage only crash is $7,177 per incident. Accident Risk Average accident risk is estimated by dividing the number of accidents of each type by the total kilometres travelled, based on unpublished ATSB data on the numbers of Rigid and Articulated truck accidents occurring in Australia during 2000 and 2002 (see Table 1). 4 Where 0 represents a year of perfect health and 1 represents death (the converse of a QALY or quality-adjusted life year where 1 represents perfect health) 9

Table 1: Australian road accidents involving rigid and articulated trucks Heavy Rigid Trucks 2000 2002 Accidents per 100 million kms Fatal 119 109 1.70 Serious Injury 543 580 8.33 Minor Injury 1,154 998 10.03 Articulated Trucks Fatal 151 152 2.82 Serious Injury 469 469 8.73 Minor Injury 998 1,233 11.55 All Vehicles Fatal 1,628 1,525 0.85 Serious Injury 17,288 17,114 8.99 Minor Injury 36,788 36,367 9.84 Kilometres Travelled (million) Heavy Rigid 6,415 7,080 Articulated Trucks 5,331 5,425 All Vehicles 192,209 180,702 Source: ATSB Unpublished data, Pers. Communication. ABS (various years) Survey of Motor Vehicle Use Note: Serious and minor accidents are not recorded separately by NSW, these are estimated using an ATSB standard ratio of serious to minor accidents. All other minor accident numbers are estimated based on this ratio. In addition to kilometres travelled, the probability of an accident occurring depends on a range of factors, including the type of road involved, the time of day, weather conditions and speed. Consequently the complex accident risk model was based on a model in the report The Potential Benefits and Costs of Speed Changes on Rural Roads by the ATSB (2003). This model uses adjustment factors for varying accident risk by road type and region drawn from McLean (2001) and a relationship between accident risk and speed from Nilsson (1984). McLean (2001) specified casualty accident risk (the combined risk of fatal, serious and minor accidents) for both rural and urban roads for an average mix of vehicle types and provided adjustment factors by road type (see Table 2). Table 2: Rural road adjustment factors Road Type Accident Risk Single Divided 0.450 Single Undivided 1.000 Multi Divided 0.450 Multi Undivided 0.850 Freeway 0.275 Source: McLean (2001) Casualty accident risk was converted into fatal, serious and minor injury crash risk by estimating the relative proportions of each type of accident in rigid and articulated vehicles using ATSB data. Analysis of the data indicated that truck accidents involve a significantly higher proportion of fatality accidents than average. Based on the ATSB data, it is assumed that rigid truck casualty risk is 10

approximately equal to the average rate, and that articulated truck casualty risk is approximately 15% higher than average. Consequently the complex accident risk model varies by vehicle type, region and type of road. The Nilsson (1984) relationship was then used to model the impact of a change to the average speed on a particular road on accident risk. Not all accident costs are externalities. In particular, truck drivers are compensated through wage premiums and workers compensation for their exposure to higher accident risk. In comparison, the additional accident risk truck drivers are adding to other road users is an externality. The average risk calculated by the model estimates the marginal accident risk by each additional articulated and rigid truck kilometre. The proportion of risk that is borne by external parties is based on the proportion of truck accidents where injuries were incurred by external (non-truck) parties (see Table 3). For example, during 2000 to 2003 Victorian fatal truck accidents involved one truck (either a rigid or articulated truck) and one other vehicle (usually a car), on average. In 80% of these accidents, the fatality(ies) occurred only in the other vehicle. Table 3: Selected Victorian truck accident statistics Fatal Serious Minor Injury Injury Average Vehicles per Accident 1.97 2.04 2.12 Average Trucks per Accident 1.06 1.07 1.07 Proportion of accidents in which injuries are received by external parties only 0.80 0.69 0.69 Source: Vicroads (2005) CrashStats Applying the complex accident risk in the model will tend to yield lower estimates of accidents costs than the average risk approach because the complex accident risk measures the risk faced by heavy vehicles on specific lengths of road (i.e. it excludes the risk of accidents in major intersections). Therefore, the complex risk approach is useful when estimating differences in accident costs over different roads and at different speeds during scenario analysis, and when comparing the relative accident costs of two road-based logistic chains. However, the average accident risk approach is recommended when comparing the relative accident costs of road with rail. The model does not adjust costs to remove insurance because it estimates the costs of a road accident directly, rather than indirectly through insurance premiums. However to ensure no double counting occurs, the portion of accident costs borne by transport operators is removed (the model includes insurance paid by transport operators to ensure that the monetary cost accurately reflect the costs faced by the exporter for benchmarking purposes). Road Maintenance and Road User Charges This model compares the total road wear cost to the notional road user contribution through the National Heavy Vehicle Charging system (an annual heavy vehicle registration fee and fuel excise). In addition to estimating the gap between the total economic cost of road wear and the charges faced by the road user (which may result in distortions in transport choices), the model also assists in estimating the costs and benefits of mass limits. 11

National Heavy Vehicle Charges The National Heavy Vehicle Charging system applies to motor vehicles of more than 4.5 tonne Gross Vehicle Mass and is dependent on nominated operating configuration, number of axles and mass rating charge (NSW Treasury 2002-03). The National Heavy Vehicle Charges are calculated such that heavy vehicles share of costs of providing and maintaining roads are recovered. However other costs of road use, such as costs of noise and air pollution, road safety costs and costs of enforcing heavy vehicle regulations are excluded. The National Road Transport Commission explains that The levels of heavy vehicle charges are calculated by allocating expenditure on different types of road works between classes of road users, in proportion to their use of the road system. Different measures of road use are used to allocate different types of expenditure, depending on what drives the need for each type of road work. Once each class of road users share of costs has been determined, the two-part charging system is applied. This comprises a variable charge based on fuel consumption (a notional part of diesel excise) and a fixed annual registration charge. National Road Transport Commission (June 2002) Two problems with this two-part system (a variable charge based on fuel consumption and a fixed annual registration charge) is that highly utilized vehicles and vehicles with good fuel consumption rates pay too little (and are thus subsidized by vehicles that are rarely used and vehicles with poor fuel consumption). The Bureau of Transport and Regional economics also criticises that: charges per truck are not closely related to road wear caused by the truck. It is the axle weight that causes the road wear and not the weight of the truck. This means that a truck with two axles can cause more damage than a much larger truck with more axles. Fuel excise is a poor proxy for a road-wear charge. Although more fuel is used with heavier trucks, fuel consumption per tonne declines and hence excise paid per tonne declines as the weight increases. In contrast, the cost of road wear per tonne rises very steeply with weight per axle. BTRE (2003) In other words, for each truck class (operating configuration and number of axels) charges are based on the average distance travelled and the average gross mass of that truck class. Consequently, any truck travelling longer distances or carrying more than the average is effectively subsidised by identical trucks travelling shorter distances or carrying less than the average. Similar cross-subsidising effects also occur across a range of other variables that determine road pavement damage, such as: Various vehicle characteristics, for example: axle configuration (number and type - i.e. single or tandem), suspension type, and tyre type (e.g. wide-base, dual). Various pavement properties, for example: type and structure (including thickness), temperature, and surface roughness. 12

Road Wear Costs The model contains four estimates of the cost of road maintenance, based on the National Transport Commission s (NTC, formerly NRTC) road cost allocation methodology. The NTC obtain data from all levels of government detailing the amounts and types of road related expenditure that has occurred in recent years and uses this data to forecast future road expenditure. The NTC allocate a proportion of this expenditure to heavy vehicles with each vehicle type being allocated a different amount depending on its characteristics and road usage (for example, larger vehicles that travel several 100,000 kilometers per year such as B-doubles and Road Trains pay higher registration fess than smaller vehicles such as Rigid Trucks which will on average travel less kilometers per year). The NTC aims to ensure that individually and in total heavy vehicles pay (through excise and registration changes) for the road wear that they cause. The model estimates total road wear by applying NTC estimates of the costs per unit of road usage (Kilometers traveled, Average Gross Mass kilometers (AGM), Passenger Car Unit kilometers (PCU) and Equivalent Standard Axle Load kilometers (ESA)) to the road usage occurred throughout the logistics chain. Option 1: Based on the actual allocations used currently by the NTC in setting heavy vehicle registration fees. This option involves the application of NRTC (2000) unit costs, which are indexed to 2004-05 using the annual indexes used by the NTC to adjust vehicle registration charges. The unit costs also include a non-separable component, which is equivalent to the nonattributable component in the more recent determination. This component represents road related costs that are not directly related to road use, i.e. a certain level of road maintenance will be required irrespective of road travel, for example due to weathering. Option 2: Several alternatives to the NTC Allocation procedure were presented in BTE (1999), which made alternative assumptions about the proportions of road expenditure that is a direct result of heavy vehicle travel. BTE (1999) assumed that the NTC underestimate the actual impact of heavy vehicles on road wear, and allocate a larger proportion of road expenditure to heavy vehicles. Following the BTE (1999) approach, avoidable and unavoidable (non-separable) road expenditure is allocated by ESA and PCU kilometers, respectively. Given the NTRC (2000) vehicle usage data, per ESA and PCU unit costs were re-estimated, and then inflated to 2004-05. The model then applies these rates in the same way that the NRTC (2000) unit costs are applied. Options 3 and 4: Based on the recently updated NTC (2005) cost allocation which will form the basis of the next determination on heavy vehicle pricing determination. The updated methodology results in significantly higher maintenance costs being allocated to B-Doubles and Road Trains. As well as containing new unit cost estimates the NTC have also updated their estimation of ESAs, which are now linked to AGM via a set of non-linear equations. This allows estimated road maintenance costs to vary in line with vehicle mass and allows a more accurate comparison of road wear to user charges, and a more realistic consideration of the impact of mass limits. The model provides the option to use either these new ESA equations or the original static estimates. The NTC (2005) unit costs are also specified separately for local and arterial roads. The NTC (2005) unit costs are deflated from 2005-06 prices back to 2004-05.For more information on road maintenance costs used in the model see the appropriate section in the model documentation and data sources section. 13

Fuel Consumption The rate of fuel consumption is a key parameter since under the current heavy vehicle road user charges system fuel excise is the major generator of revenue. The model combines two models to estimate fuel consumption, dependent on vehicle type, speed and mass: Austroads (2005) publishes two fuel consumption models which vary by heavy vehicle type (Rigid/Articulated) and average speed: the Arterial Road Stop Start Model, which estimates fuel consumption per kilometer in stop-start operations where average speeds are less than 60 km/h; and the Freeway Model, which estimates fuel consumption on freeways and high quality arterials where average travel speeds are typically in excess of 60 km/h. These models contain two equations (Rigid/Articulated) that link fuel consumption to average speed. The impact of mass on fuel consumption is estimated using the ABS Survey of Motor Vehicle Use 5, which details average fuel consumption for Rigid and Articulated vehicles of varying AGM. Econometric analysis of the data estimates the relationship between fuel consumption with average mass (both in percentage deviations from average 6 ) for both rigid and articulated trucks. Consequently the model uses the estimated rate of fuel consumption for the average rigid/articulated vehicle at a given speed (estimated via the Austroads equations), adjusted using the gross mass fuel consumption equations. Austroads (2005) Speed-Fuel consumption Equations Rigid Truck: Stop/Start Model: Litres per 100kms = 25.88 + 327.19 / V Freeway Model: Litres per 100kms = 13.99-0.058* V + 0.00169* V Articulated Truck: Stop/Start Model: Litres per 100kms = 78.54 + 787.27 / V Freeway Model: Litres per 100kms = 43.66-0.118* V + 0.00322* V Where V denotes Velocity Mass Fuel Consumption Equations (ABS) Rigid Truck: (Fuel Consumption Average Fuel Consumption)/Average Fuel Consumption =0.04 + 0.40 (Gross Mass Average Gross Mass)/Average Gross Mass Articulated Truck: (Fuel Consumption Average Fuel Consumption)/Average Fuel Consumption =-0.01 + 0.45 (Gross Mass Average Gross Mass)/Average Gross Mass Table 4: Average rigid and articulated vehicles 2 2 Rigid Articulated Weighted Average (Average) Gross Mass (Tonnes) 10.1 36.4 Weighted Average Fuel Consumption (Litres/100 kms) 28.2 51.7 Source: ABS Survey of Motor Vehicle Use data cited in NTC (2005) This methodology makes two assumptions: Austroads (2005) equations are based on the average rigid/articulated vehicle as estimated using the ABS Survey of Motor Vehicle Use data; and there are 5 Contained in NTC (2005). 6 Average fuel consumption and AGM of rigid and articulated vehicles are calculated as weighted averages over all rigid/articulated vehicle types (i.e. the number of particular rigid/articulated vehicles multiplied by the corresponding AGM and average fuel consumption divided by the total number of rigid/articulated vehicles). 14

no interactions between speed and mass. Despite these assumptions the fuel consumption model allows for a more accurate estimation of fuel consumption within the very broad rigid and articulated vehicle categories, i.e. a road train consumes more fuel than a standard 6 Axle semi trailer. The model also allows for a better representation of the relationship between vehicle mass and road user charges/road maintenance. Figure 1, similar to that presented in BTE (1999: 42) represents two possible relationships between vehicle mass and fuel excise/road wear per tonne kilometre that can occur in the model. These relationships highlight some of the deficiencies in the fuel excise based charging scheme: vehicles that operate near or above gross mass limits pay less fuel excise per net tone kilometre than those operating below mass limits; and vehicles that operate at a higher average mass due to successful backloading (travelling laden in both directions as opposed to having one unladen trip to every laden trip) pay significantly less than the road wear they cause. 0.025 0.020 cents/ntk 0.015 0.010 0.005 0.000 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 User Charges Road Wear Payload Mass (Tonnes) Figure 1: User charges versus road maintenance per NTK (no backload) 7 7 Standard 6-axle articulated vehicle, average speed 80 kph, travelling on an arterial road. Road wear estimated using NTC (2005) scenario 2 unit costs and NTC (2005) ESA-AGM equations. Maximum payload mass for this vehicle would be approximately 30 tonnes. 15

0.025 0.020 cents/ntk 0.015 0.010 User Charges Road Wear 0.005 0.000 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 Payload Mass (Tonnes) Figure 2: User Charges versus road maintenance per NTK (backload) 8 8 As above. 16

Model Structure The model estimates the current costs of transport along specified logistics chains. The model is designed to identify any gaps between the interventions and the externalities they are attempting to address, or any inconsistencies in interventions across transport modes. Nevertheless this does not mean that these interventions should be changed by the exact amount identified by the model. The model is not dynamic and thus does not model individual s reactions or behavioural responses to changes in interventions. For example, increasing a transport tax can decrease the quantity of transport consumed. Consequently any changes in taxes required to bring the market to the optimum level of quantity of transport consumed will often be less than that identified in the model dependent on the extent of the reaction. Government interventions should also address two other goals in addition to economic efficiency: Administrative simplicity if an intervention is complex then it is likely that some individuals will not fully understand the intervention and will still not consume transport at the optimum quantity, or even move further away from the optimum quantity. Also if the cost of red tape for implementing/administrating the changed intervention is higher than the benefit of achieving the optimum quantity then changing the intervention will lower society s economic welfare. Equality as individuals would not consume transport unless the benefits to consumption are greater than the costs of consumption, then everyone who consumes transport incur some benefit. The distribution of these benefits across members of society rural versus urban areas, consumers of products etc may be an important consideration for government. Ensuring that the marginal cost of consumption of transport is equal to the marginal benefit does not ensure that the government receives revenue that fully cost recovers the programs that it implements. Consequently any deficit must be funded out of general revenue or any surplus must be spent elsewhere (both of which involve further distortions to the economic efficient consumption of all goods). Finally, just because the optimum level of consumption is achieved through various interventions now does not mean that the optimum level will be maintained over time. Due to outside forces, demand and supply of transport change over time (for example, due to technological change) and thus over time an intervention may become more distortionary and result in higher costs than if the imbalance was not addressed in the first place. For example, the intervention may remove or lower the incentive to invest in research to develop technologies that reduce the environmental impact of transport. Logistics Chains The model is set up to compare two specific logistics chains (or scenarios) one that is road-based and another that is rail-based, although each chain can have elements of the other. For example, a railbased chain may also involve the use of a truck to transport the goods from the farmgate to the nearest rail terminal. Each chain can be made up of up to ten parts. These may represent a whole leg of a logistics chain. For example farm output is typically sent to a processing plant (such as a meatworks, dairy factory or cotton gin), where various degrees of processing are undertaken prior to export (first leg). In some cases, the output of the processing plant is transferred to a packing plant for assembly into full container loads (second leg) prior to delivery to the port terminal (third leg). 17

Warehouse Processing Plant Packing Consolidation Intermodal Exchange Farm Transport Transport Transport Port Sea Figure 3: The Export Logistics Chain Alternatively, each leg may also be separated into a number of separate parts. Separate parts may be specified where travel occurs on different roads, at different speeds (road or rail), crosses state borders, changes rail gauge, or moves between urban or rural areas. For example, the first part may be a truck from a farm involving travel along arterial roads at an average speed of 80km/h, followed by the second part where the truck travels on a freeway at average speed of 90km/h, followed by the last part where the truck travels through urban areas to the port at an average speed of 40km/h. For each part of the logistic chain a range of details need to be specified, including the mode of transport, State/Territory, type of road/rail, average speed, route distance, region (rural/urban), and the type of truck/locomotive 9. Each chain also requires information about backloading and handling and storage between each part. Although the model is designed to estimate costs in a highly disaggregated way to ensure that the results are as accurate as possible, problems with averaging will often exist. Once submitted the model will then estimate a range of cost items for each logistic chain. These cost items are then aggregated to from the total cost estimates of the entire logistic chains. Types of Costs The model distinguishes three types of costs: 1. Private (Monetary) costs these are monetary flows (actual transactions) which are borne by the exporter and can be easily benchmarked in the case studies. For example labour, fuel, vehicle maintenance, insurance, initial purchase of vehicles/rolling stock, handling costs, and a range of government taxes and charges, including fuel excise and vehicle registration. 2. Market (Private Non-Monetary) costs these are the value of non-monetary costs incurred by the exporter, such as travel time and service quality costs. While no transaction is involved, issues such as reliability and travel time are factored into the decisions made by exports, so will impact on modal choice. Total private costs are equal to are monetary costs plus market (private non-monetary) costs incurred by the exporter. 3. External costs these costs are costs incurred by third parties. They can be non-monetary flows, such as air pollution, or monetary flows, such as additional road maintenance costs. These costs are not directly borne by the exporter and can cause a divergence between the costs imposed on society and the decision facing the exporter. Total social costs are equal to total private costs plus external costs. 9 Including information about axels/locomotive horse power, maximum gross vehicle mass/gross wagon load, number of train engines, number of trailers/wagons, trailer axels, typical kilometres travelled per year. 18

Figure 4 illustrates the overall model structure and how each of the components sum to the total social costs of the logistics chain. Social Costs Private Market External Government Time Accidents Non-Government Service Quality Environmental Infrastructure Figure 4: Overall model structure illustrates the various sub-components of private (monetary) costs of the logistics chain. Private Government Non-Government Registration Fees Labour Tariffs Handling Fuel Excise Vehicle Maintenance Pay Roll Tax Fuel Vehicle / Rolling stock Figure 5: Model sub-structure Private (monetary) costs 19

Figure 6 illustrates the various sub-components of market (private non-monetary) costs of the logistics chain. Private (Market) Time Service Quality Travel Time Reliability Handling Time Frequency Storage Time Convenience Flexibility Figure 6: Model sub-structure Private (market) costs illustrates the various sub-components of external costs of the logistics chain. External Accidents Environmental Infrastructure Congestion Climate Change Maintenance Noise Pollution Management Air Pollution Water Pollution Figure 7: Model sub-structure External costs 20

The model contains a wide array of data, equations and assumptions based on an extensive research of transport cost literature. A detailed description of each cost item and related research/data sources are contained in Appendix 1. The model estimates costs for each individual part of a specified logistic chain (whole legs of the logistics chains or separate parts of each leg e.g. where travel occurs on different roads, at different speeds, crosses state borders, changes rail gauge, or moves between urban or rural areas). Unless otherwise specified, the model will estimate costs based on full round trips involving both laden and unladen 10 travel (using the details of the laden route as specified by the user, the model estimates the cost of an identical unladen logistic chain). These laden and unladen logistic chains costs are aggregated to form total logistic chain cost estimates. Indirect Taxes The model explicitly estimates direct taxes and charges such as federal fuel excise and vehicle registration fees, as well as a range of state taxes including for example pay roll tax. The model also estimates the indirect taxes associated with the production of the inputs used by each logistic chain. For each logistic chain those costs which involve the purchase of domestically produced inputs (e.g. fuel, road/rail equipment, maintenance and servicing, insurance etc. are allocated to appropriate industries categories.using a year 2000 Australian Input-Output table CTLS (Commodity taxes less subsidies) and ITLS (other indirect taxes less subsidies) average tax rates are calculated, the purchased inputs are multiplied by these tax rates to gain an estimate of the total indirect taxes paid by each transport mode. 10 Unladen travel occurs when transporting an empty container to the exporter to be filled by the agricultural product. 21

Applying the Model For more information on using the model please refer to the user manual. The following sections outline the basic input and output options available in the model. Entering Logistics Chains Users can change key model parameters on the Options sheet, such as the price of fuel and the valuation of externality costs. For information on the available parameter options refer to the data sources appendix. Logistic chains are specified part by part on the Logistic Chain sheet. For each part, variables such as the transport mode, the speed, distance, type of vehicle, mass of freight and loading/unloading details, are specified. Figure 8: Entering logistics chains into the model Standard Output Options Once submitted the model calculates costs part by part, which are then aggregated to form an estimate of the total logistic chain cost. Users are first presented with a summary for each logistic chain, including the total distance and trip time. 22

Figure 9: Logistic chains summary information Graphical representations of the total private, market and social costs of each logistics chain are available in the model (see Figure 9): Government fixed costs includes vehicle registration fees, Other fixed costs includes vehicle capital or depreciation costs as well as insurance and other administration/marketing/overhead costs, Government variable costs includes fuel excise, Other variable costs includes non-excise fuel cost and other vehicle running costs, Labour costs includes truck and train driver wages, interchange costs include loading and unloading costs, Market costs includes time and service quality considerations, and Net external costs include infrastructure costs, environmental and accident costs net of user charges. Figure 9 is an example chart that compares the total costs of typical road and rail-based logistics chains. The chart shows that fuel and running costs are relatively higher for road than for rail, while market costs are higher for rail due to rail terminal handling costs. 23