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Summary of full report
The Costs of Road and Rail Freight —
Neutrality and efficiency in the farm-to-port logistics chainby Access Economics
November 2007
RIRDC Publication No 07/185 RIRDC Project No AEC-4A
The model enables the user to determine:
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 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:
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.
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:
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.
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