All aboard

Thursday, 01 December 2016

Alexandra Cain photo
Alexandra Cain

    With the inland railway infrastructure project building momentum, Alexandra Cain explains why now is the time for those involved to start drawing up strategic plans.

    Further unlocking the agricultural and mining potential of Australia’s inland is a perennial commercial theme. One of the modern incarnations is the long-touted inland railway between Melbourne and Brisbane.

    A project of this size could well be the equivalent of the Snowy Mountains Hydro-electric Scheme that generated so much economic growth for Australia last century. It is also the infrastructure dream that seeks to deliver on Australia’s potential to become Asia’s food bowl. Inland rail could optimise the export of agricultural products like rice, wheat and sugar through major ports. With free trade agreements (FTAs) between Australia and China, Japan and Korea in place, focus has again turned to the viability of this project.

    It is understood Macquarie Group has been appointed to conduct market testingwhich will assess private sector interest in financing, construction and ultimately utilisation of the project. This is a positive sign for the future of this project. It also represents a solid platform from which directors of businesses that could be involved in delivering the project, as well as directors of businesses in inland Australia, could develop strategies to capitilise on inland rail.

    Project specs

    An inland rail line between Melbourne and Brisbane is a complex, 1,700 kilometre railway system that will allow freight to be transported between these two major port cities in less than 24 hours. Completely bypassing Sydney, the network will link existing rail systems and connect southeast Queensland with Perth and Adelaide. New lines are also proposed, with some of the most challenging work between Toowoomba and Brisbane. The project would require a substantial investment over 10 years and crosses multiple jurisdictions.

    Michael Kilgariff GAICD, CEO of the Australian Logistics Council, points to a recent report published by the National Transport Commission titled, Who Moves What Where, as evidence of the pressing need for the inland railway.

    “Over the next 20 years, freight will grow by about 90 per cent. Given there is going to be more freight moved around the country, it’s important we ensure it’s moved efficiently and safely. We believe an inland rail link of this size and scale will add significantly to the efficiency of the Australian freight system,” he says.

    As the 2015 Melbourne–Brisbane Inland Rail Report published by Infrastructure Australia notes, the proposal is for inland rail to be an open access, vertically separated railway. The report argues the rail track operator wouldn’t operate the trains and the Australian Competition and Consumer Commission (ACCC) would set parameters for train operators to access the tracks.

    The Australian Rail Track Corporation (ARTC), a government business that manages an 8,500-kilometre network of railways across five states, is conducting the initial scoping for the project. The ARTC has received an initial $300 million in funding and, at the 2015/2016 May federal budget, a further $594 million for activities relating to land acquisition and other costs.

    In 2015, the government postponed privatising ARTC so it could complete the review into how inland rail could be funded and built.

    The 2015 Melbourne–Brisbane Inland Rail Report notes the delivery model has been developed with ARTC as the delivery agent. But it also acknowledges that, while delivery of the project through ARTC is a viable option, it isn’t the only option. One alternative may be a dedicated delivery authority. The report states that, “regardless of who delivers inland rail, integration with the existing interstate network operated by ARTC is considered essential to deliver the service expected by rail users. For this reason, the Implementation Group considers that there is strong merit in inland rail being operated as part of the ARTC network as an integrated interoperable asset.” The National Transport Commission manages the Implementation Group.

    ARTC program director, Simon Thomas, has a team of 85 full-time staff managing the design and planning application process. His goal is to start construction in 18 months.

    “A lot of construction-ready activities are happening at the moment. We’re going through a design and planning application for the 13 sections of the project. We’ve finished the concept design for all aspects of the route. There’s a huge amount of community consultation going on now the route is more defined. We’re about to release design and planning application tenders to engineering companies for the next two years of work,” he says.

    Some of the 13 sections are massive and give a sense of the project’s immense magnitude. For instance, in Queensland, 400 kilometres of new railway will be built including a 6.4 kilometre tunnel through the Toowoomba Ranges, so a huge amount of engineering is required.

    Work currently being carried out is centred on this aspect of the project, including engineering and planning applications, environmental approvals, site surveys and geotechnical investigation.

    Thomas says ARTC was chosen to deliver and scope this initial work to help minimise the need to build new railways and use more than 1,000 kilometres of existing track that’s being upgraded.

    “We did a study in 2010 that considered hundreds of different route options and what we have now is the best base case we came up with. We’re looking at a very innovative signalling system ARTC is developing in parallel. We’ll be using state of the art construction techniques and methodologies and looking for innovative design and constructing solutions. ARTC has a clear remit to work on that and that’s what we’re concentrating on.”

    A group called National Trunk Railway (NTR) has developed an alternative proposal. In a note provided to Company Director, NTR chair Martin Albrecht AC FAICD said, “the ARTC route [is] well short of what is required for a modern 21st century railway. NTR on the other hand has been designed to be 21st century by adopting technical and operational standards ahead of those of today.”

    Kilgariff says if an independent or private consortium can put forward a proposal that stacks up, the council would support it. “There’s a significant amount of money that will be required to build inland rail. The current proposal seeks to upgrade existing infrastructure and we think that overall that’s a realistic option,” he says.

    Lay of the land

    In September 2016, the federal Department of Finance completed a market testing process to “identify opportunities for private sector involvement” in the inland rail project. It called for industry participants such as rail local and international operators, construction contractors, infrastructure developers and investors and relevant public sector agencies to contact the department. It is understood Macquarie Group is helping the department to manage this process.

    Substantial work has been done on the economic testing of the proposal. The 2015 Melbourne–Brisbane Inland Rail Report economic analysis compared a scenario where there is an inland railway to one where road and rail freight use the existing roads and coastal railway between 2025 and 2075. The analysis estimated costs to deliver of $10 billion over ten years, delivering $22.5 billion worth of direct and indirect benefits over a fifty year period, with a net economic benefit of $13.9 billion.

    The report states, “freight forecasts underpinning the inland rail business case are robust, but are forecasts nonetheless.” As a result the business case tests 30 scenarios that could impact demand. It says the biggest demand risk is a change of government policy that would allow B-triples or super B-doubles road trains on the Hume, Pacific and Newell highways. But other risks such as substantially reduced demand stemming from ongoing flat economic growth should also be considered.

    Successful delivery of the inland rail project will also require substantial co-ordination between a huge range of stakeholders. Michelle Reynolds MAICD is the CEO of Freight Terminals, the developers of InterLinkSQ, a rail, intermodal and industrial facility in Toowoomba. She says getting basic engineering and community issues right is paramount.

    “The biggest risk to inland rail as a whole is delay. We need to take the time to get it right. But we have to get on and do the project because the time is now. If it’s not built or started and the public isn’t brought along on this journey, inland rail won’t happen for another ten years.”

    The benefits of this project are substantial should it go ahead. Says Reynolds: “If you have efficient transport networks – and rail is particularly efficient – you can attract business to regional areas because transport costs form a very big part of the cost base for many industries. Our region is agriculturally-based. So we can look at food processing to value add here, rather than ship it out as a raw product and let someone else take those profits,” she says.

    The benefits that will accrue to each region will depend on the mix of agriculture and other resources in the area. A group of local governments called the Melbourne to Brisbane Inland Rail Alliance is working hard to understand the project and its implications for rural and regional Australia.

    Ken Keith is mayor of the New South Wales town Parkes, which is likely to be one of the main intermodal terminals and a major beneficiary of the inland railway. He’s a huge supporter of the initiative.

    “There may be some business relocation, but we believe an efficient national freight backbone will drive the development of new business,” he says.

    For instance, there is a major opportunity to add value to agricultural pursuits by developing abattoirs, flour mills, oil crushing and processing facilities, as well as grain storage, which are just a few of the options that could be considered.

    Private sector involvement

    Risk analysis is at the heart of this project, and it is yet to be determined what the private sector’s involvement will be. Generally the government wears the risk in the greenfield stages of infrastructure projects before the revenue model is proven. It is clear substantial government underwriting and investment will be required in the inland rail project.

    The government’s ability to borrow funds under the country’s AAA credit rating means it can access cheaper funds to invest in the project compared to the private sector. This is one of the reasons why it makes sense for the public sector to drive the early stages of this project.

    Publicly funded assets tend to transfer into private hands once it’s clear how much money the infrastructure is capable of producing. While that’s the textbook model for infrastructure funding, the sharing of risk and revenue in any infrastructure project is highly nuanced and individual, with variables like the asset type and volume of users determining the right outcome. So until the findings of the market testing process becomes clear, it is too early to tell what form private sector involvement in the asset will take.

    Reynolds says as the majority of the benefits are attributable to governments in terms of road upgrades and new network savings as well as externalities such as business growth in regional Australia, it makes sense for the public sector to drive the project initially. “Concerns such as the environment and emissions are also better managed by the public sector, than profit-driven commercial businesses.”

    But it’s essential for the government to make a firm commitment to the route after adequate consultation and also announce a delivery time frame. This is absolutely critical for investors to have the confidence to invest.

    While minor delays must be expected, it’s critical to keep the project moving, finalise the route, get approvals underway and acquire the land because if this project does not go ahead now it’s not likely to be given serious consideration for many years.

    Current focus

    At the moment work is being done by ARTC to identify land to be acquired. Work is also taking place on achieving planning consents and environmental approvals. This will be a two- to three-year project, given the complexity of the work being carried out. Considerable design work is also taking place.

    Flood risk is another factor given that rail tracks are often built on flood plains and further consultation is taking place in Queensland around this. Given the scale of the land acquisition that will take place to facilitate inland rail, substantial community consultation is required and it should not be assumed this process will be straightforward. Further amendments to the route are more than likely as this process unfolds.

    Thomas’ message to directors of businesses that could be involved in delivering the project, or using the inland railway once it’s built, is to get involved in the project during the design and construction phase.

    “We have a 10-year program that we’re two years into. So in the next five or six years there will be a huge amount of construction. We have an industry participation plan that’s been approved by the Federal Government and I encourage everybody who is interested to be part of the project,” he adds.

    Says Kilgariff: “In terms of strategic planning for businesses, opportunities will open up in places like Parkes and directors should be talking to governments now about the benefits that might flow from the construction of inland rail.”

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