The case for a National Freight and Supply Chain Strategy

Australian Logistics Council Forum 2017

8 March 2017, Melbourne

Good morning ladies and gentlemen. It is a pleasure to be with you here in Melbourne for the Australian Logistics Council’s 2017 Forum.

I would like to thank ALC Chairman Ian Murray and CEO Michael Kilgariff for the opportunity to speak today on the need for a National Freight and Supply Chain Strategy – something which Infrastructure Australia considers to be fundamentally important to our national infrastructure reform agenda.

For those who aren’t familiar with what we do, Infrastructure Australia provides independent research and advice to governments and the community on the projects and reforms Australia needs to fill today’s infrastructure gaps and meet the challenges of the future.

We are responsible for strategically auditing Australia's nationally significant infrastructure and developing 15-year rolling Infrastructure Plans that specify national and state level priorities.

15-year Australian Infrastructure Plan

A key recommendation in the Australian Infrastructure Plan, which we released just over 12 months ago, is that a National Freight and Supply Chain Strategy should be developed to guide investment and reform.  

The Plan acknowledges that Australia’s economic competitiveness is closely linked to the quality of our national supply chain infrastructure – the ports, railways, roads and airports that link Australian goods and services to domestic and overseas markets.

And of course equally as important as the infrastructure itself are the ‘systems and human’ elements of the supply chain – the strategies and people in place to make it all work.

However, as the Plan points out, in the coming years we are facing a number of challenges, including population growth, increased demand from our trading partners in Asia and technological changes.

We will see substantial growth in the national freight task over coming decades, with the total domestic land freight task projected to grow by 80 per cent between 2011 and 2031.

Faced with these growth challenges, our national supply chains and infrastructure need to evolve to support our economic productivity, and we need to get the planning and reform settings right.

I will explain how we achieve this in a moment, but first I would like to briefly discuss some of the challenges we are facing.

Population growth in Australia’s capital cities

As I just mentioned, we have significant population growth on the horizon. Australia’s population will grow to more than 30 million people by 2031, with the population of Australia’s four largest cities – Sydney, Melbourne, Brisbane and Perth – increasing by close to 50 per cent.

The smaller capital cities – Adelaide, Canberra, Hobart and Darwin are also projected to grow in total by 26 per cent. And the number of people living in Australia’s regional areas is projected to grow, from around 5.6 million in 2011 to 6.8 million in 2031 –  an increase of around 22 per cent.

This population growth will be beneficial to the Australian economy – it will provide a larger domestic market for businesses and increase the size of the labour force. But it means we also need to plan for a significant rise in demand for infrastructure services.

If we don’t adequately plan for this shift in demand, Australia could be faced with increasing bottlenecks and delays on our roads – meaning our goods will take longer to reach ports and markets and the quality of many infrastructure services Australians rely on will decline.

This congestion will have economic consequences. Without investment and reform to increase capacity and better manage demand, the annual cost of congestion in our capital cities could exceed $53 billion by 2031, up from $13.7 billion in 2011.

 

Growing demand from our trading partners

In addition to our projected population increase, another important factor affecting our freight and supply chains is continued growth in the booming economies of China and South-East Asia.

At present, six of Australia's top 10 largest export markets are in Asia – Japan, the Republic of Korea, Singapore, Malaysia, Thailand and China.

Already 75% of our goods exports, minerals, resources and agricultural products, are going to Asian countries.

Projections by the OECD suggest that Asia’s share of the global middle class will grow from around 35% in 2015 to 80% by 2050. These increasingly wealthy consumers will want high quality products, including fresh produce, as quickly and as cheaply as possible. 

Our proximity to the region, combined with our reputation for high quality exports therefore has the potential to be a strong driver of economic growth for Australia.

However, Australia is losing market share in some of these markets. Our share in agricultural markets, especially into Asia, is falling. Research by the Australian Farm Institute found that over the period 1996-2014, food imports by countries in Central and South Asia, Africa and the Middle East grew at more than 14% per annum. Yet our agricultural exports over the same period grew by only 5.2% per annum. In short, we are losing market share.

Efforts to maintain or grow our market share will need action on many fronts. However, it is indisputable that more efficient agricultural supply chains are required to keep Australia cost competitive.

Another factor impacting our freight and supply chain planning is technology. Australia’s freight networks are already being impacted by the advent of big data, open data and digital technologies, and we must also prepare for the impact of new developments such as automation, distributed production, 3D printing and drones, amongst others.

Not to mention the impact that online and mobile shopping has had on how Australian businesses manage their supply chains, since inventory availability and shipping times greatly influence purchasing decisions.

With global players such as Amazon entering the Australian market, it is likely that we will see further acceleration in the growth of online shopping. This could impact our domestic freight task in a number of ways.  

For example, there is the question of how further growth in online shopping would affect small goods vehicle movements. Would we see fewer, more predictable car movements replaced by less predictable but more efficient white van movements? Or would it generate a net increase or net reduction in movements?

ABS data shows that between 2006 and 2014, the number of light commercial vehicles grew by 35% - almost twice the rate of passenger vehicles (19.1%) and rigid trucks (20.785). This happened for a reason, and it speaks to the importance of urban supply chains in a growing services economy.

We’re not alone in this. These are global trends. I noted on a recent visit to London just how much of an impact the growth in white delivery vans is having on that city.

Newly revised Infrastructure Priority List

By any measure then, we are at a particularly critical moment for our freight and supply chain planning. For our part, Infrastructure Australia has advanced a number of major infrastructure projects in the past year that will offer substantial benefits for the national freight sector.

As many of you in the room today would know, one of our key responsibilities is to assess business cases for nationally-significant infrastructure proposals to determine whether they have strategic merit and clear economic benefits.

Recent projects approved by the independent Infrastructure Australia Board and currently on the Infrastructure Priority List, which we have just recently released an updated version of, include the Western Sydney Airport and Inland Rail.

These are transformational infrastructure projects, with substantial strategic benefit in addressing the challenges of our growing national freight task.

But in the future, we would like to see a national strategy to guide these sorts of investments to ensure that the planning and delivery of new infrastructure is working in Australia’s best interest. The challenges I’ve just described are national challenges, but currently Australia does not have a cohesive national strategy in place to guide investment decisions – let alone drive reform.

National Freight and Supply Chain Strategy

Currently, ownership, operation and oversight of Australia’s freight networks is fragmented across governments and private providers. Freight planning is being undertaken by all levels of government. But it is usually not well-integrated with other land-use, transport and strategic planning frameworks.

Many of these strategies lack a wider national and international, freight and supply market perspective. And they tend to have a short to medium term focus.

Key issues, such as freight movements within cities, are not addressed as well as they could be, particularly in light of the significant population growth I have just described. 

Building something in the order of 3 million new dwellings in our capital cities over the next 15 years will itself generate a large amount of freight and construction-related traffic.

In addition, most of these strategies address infrastructure and individual modes rather than focusing on the supply chains that are necessary for the freight sector to support Australia’s economic development.

And finally, these strategies have not kept pace with developments since they were initially formulated, both in terms of policy changes and the availability of new analytics tools which allow for a more detailed and sophisticated examination of supply chains.

That is why, as I mentioned earlier, in the Australian Infrastructure Plan, we recommended that a National Freight and Supply Chain Strategy should be developed to guide investment and reform. We were therefore very pleased that when the Australian Government delivered its formal response to the Australian Infrastructure Plan late last year, it committed to develop a National Freight and Supply Chain Strategy.

Strategic benefits of a national strategy

There are broad strategic benefits to be gained through a long-term National Freight and Supply Chain Strategy. Given that many of the freight challenges we face are nationally-significant, for example – responding to increasing demand from our trade partners in Asia – the responses to these challenges need to be considered nationally.

A national strategy would also improve project development, as it would strengthen the ability of governments and Infrastructure Australia to assess the strategic context for investment proposals. This would support better project selection and improve outcomes for infrastructure users.

Developing a national Strategy provides an opportunity to build on the planning work already underway at federal, state and territory levels, as well as the previous National Land Freight Strategy and National Ports Strategy.

It would also help advance the other key reform commitment to come out of the Government’s response to the Australian Infrastructure Plan – which is to conduct a study on the benefits of moving towards a fairer and more sustainable user-pays system of funding our roads.

Progressing road market reform

A major overhaul of the way we fund our road networks is one of Australia’s most pressing opportunities for infrastructure reform – but it requires the strategic context provided by a National Freight and Supply Chain Strategy.

The link between usage and charging in our current system of road funding is very weak. What we pay is only loosely related to what we use and how our use of vehicles impacts other users, and this is particularly true of heavy vehicles.

Because heavy and light road users do not receive price signals to minimise their impact on other users and the broader network – we now have a road network which is chronically congested for portions of the day, but with excess capacity across most of the 24-hour cycle.

Today fuel excise raises less than half of what Australian governments of all levels spend on roads, and this fall in revenue will accelerate over coming decades as we shift towards more fuel efficient vehicles and alternate fuels. This means we will be collecting less from users while the costs to build and maintain the roads continue to grow.

Given the freight challenge I have just outlined, we need to take action now to ensure we a have a secure, sustainable source of revenue to fund the building and maintenance of our roads.

That’s why the Plan recommends moving to direct user charging for all vehicles within 10 years, and introducing direct heavy vehicle charging within the next five years. 

This reform must include the removal of all existing registration and usage charges and the introduction of supporting regulatory and investment frameworks – including a cohesive, national freight and supply chain strategy.

How should the strategy be developed?

Having canvassed the key arguments for the development of National Freight and Supply Chain Strategy, I would like to spend the remainder of my presentation this morning explaining how we believe such a strategy should be developed to best support Australia’s economic growth.

Firstly, the strategy must be developed through a highly collaborative and consultative process. It should define nationally significant freight corridors and precincts and identify the network constraints and gaps. And it must outline a reform and investment pipeline to address these challenges.

In developing the strategy, essential corridors should be identified and protected for future freight routes and terminals. Infrastructure Australia is currently finalising some important work in this space.

Reforms and investments should be considered to support and enable more efficient freight movements through the network, and create a sustainable source of revenue for the maintenance and renewal of existing infrastructure.

The strategy should also provide clear recommendations to all levels of government, and to industry, on Australia’s investment priorities, including planning and project development work.

State, Territory and Local Governments will need guidance on how they can support the development of the Strategy. This is important to secure jurisdictional ‘buy-in’ and support for joint actions that might be needed.

We also believe the strategy should adopt a long time horizon, and by that I mean 40-50 years.  Although adopting a longer horizon presents some challenges, this is appropriate given the scale of growth in our cities and the long lead in times for large investments associated with freight and supply chain infrastructure.

This brings me to the vital issue of scenario planning.

How should the strategy be developed? – The importance of scenario planning

I have already mentioned some of the major drivers and influences that will impact our freight and supply chain networks over the next 15 years, such as population growth, increasing demand from our trading partners in Asia and technological changes.

But while some trends follow a fairly stable trajectory, things can also change rapidly. Our freight and supply chain networks need to be able to adapt a range of different eventualities, and that means thinking through the possible scenarios to minimise risk and maximise opportunities.

For instance, I think we would all agree that a National Freight and Supply Chain must acknowledge global markets and supply chains and put Australia in a global perspective.

Australia’s exports are mainly inputs to early stages of global supply chains, meaning this analysis needs to be scenario-based and specific to each of the major supply chains.

The strategy must be explicit about the infrastructure and systems that need to be in place to enable the agriculture and other sectors to meet growing demand from the Asian middle class.

However, putting Australia’s freight task in a global perspective also means acknowledging uncertainty in overseas markets.

Beginning with the Brexit vote in the UK, and more recently the Trump Administration’s decision the withdraw from the Transpacific Partnership, the past few months have been a time of unusually high policy uncertainty in global trade. 

It’s a similar story with technology. New technologies have completely transformed how companies manage their supply chains and transformed how the freight sector in ways we wouldn’t have imagined just a few years ago.

Combined with the significant growth we have seen in e-commerce over the past few years, planning to meet shifts in infrastructure demand is more challenging than ever. 

When it comes to our global freight and supply chain planning, this suggests that investments and reforms need to be relevant across a range of different scenarios that may impact future demand. That’s why we strongly recommend introducing a scenario planning dimension to the Inquiry’s work.

Urban freight

The National Freight and Supply Chain Strategy also needs to be attuned to the economic importance of Australia’s cities and take appropriate steps to support growth in the urban freight task.

I have already mentioned the projected population growth and infrastructure demand in all Australian cities. The Australia Infrastructure Audit found that our capital cities contributed $854 billion to our economy in 2011 and are projected to contribute $1,621 billion in 2031.

The majority of economic activity occurs in our major cities – so urban freight will be as important for our future growth as traditional long-distance freight that typically plays such an important role in our current strategies.

The scale of potential growth in freight in some urban areas and along some corridors in cities is such that there will be a greater need to operate freight networks much more intensively in off-peak periods.

This is likely to encounter strong resistance from affected communities, which means that the strategy should also provide some guidance on how industry can establish their ‘licence to operate’ in a changing economy – that is, how operators can strike a balance between meeting community expectations and customer demand.

Transitioning ownership and regulatory environment

The National Freight and Supply Chain Strategy must also acknowledge and respond to a rapidly shifting ownership profile in large scale supply chain infrastructure, particularly in Australia’s ports, but also rail and road infrastructure.

The Strategy needs to consider the implications of these changes. For example, does it present a planning challenge or an opportunity? And what is the optimal economic regulation model for ports?

The Australian Infrastructure Plan suggested that given the symmetries in function between ports and airports, we should be looking to borrow from the good parts of the airport regulatory and planning model.

Concluding remarks

In summary, there is a clear need for a long-term National Freight and Supply Chain Strategy to guide infrastructure investment and reform. And given the challenges I’ve just described, it is clear the stakes are high – so it is important that it is not rushed, and we take the time to get the Strategy right.

The strategy needs to support growth in the urban freight task, and better equip our freight and supply chain networks to respond to a range of different scenarios that may impact future demand.

We also hope to see a focus on regulatory and policy reform and further action to introduce mass-distance-location heavy vehicle charging, as recommended in the Plan.

The challenges facing our freight and supply chain networks are immense. However, if we can develop a Strategy that supports a long-term strategic approach to infrastructure investment and advances the reforms that can deliver the best outcomes for both industry and the community –  Australia will have the opportunity to prosper for generations to come.

Thank you.