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PC News - August 2014

Tasmanian shipping and freight - how effective are current arrangements?

The Commission recommended a number of changes to existing subsidy schemes for Tasmanian shipping and freight in a recently released inquiry report.

Famous for its unique landscapes and wilderness, less well known is Tasmania's status as the only jurisdiction to receive federally funded subsidies for freight and passenger services. These longstanding arrangements are designed to partially offset the relatively higher cost of moving freight and passengers across Bass Strait by sea. The Australian Government has outlaid more than $2 billion since the inception of the schemes, and without change a further $2 billion can be expected over the next 15 years. Around $110 million in funding assistance was provided under the Tasmanian Freight Equalisation Scheme (TFES) in 2012-13.

Why examine Tasmania's shipping and freight arrangements?

Shipping accounts for over 99 per cent of all freight to and from Tasmania by volume. Tasmania is serviced by high quality but relatively high cost containerised domestic shipping services and the viability of direct international shipping services is adversely affected by the regulation and cost of coastal shipping.

The relatively small volume of cargo across Bass Strait limits the scope for economies of scale, and the number of competitors that the market can sustain. The efficiency of freight and shipping is further stifled by the Tasmanian Government's pervasive role in shipping, port, road and rail assets and the lack of an integrated freight strategy.

Are subsidies the best form of assistance?

The Australian Government is currently committed to retaining the TFES and the Bass Strait Pass-enger Vehicle Equalisation Scheme (BSPVES). The Commission found that these subsidies fall well short of what is needed to improve Tasmania's competitiveness in the face of its broader economic and social challenges — comparatively lower income growth, higher rates of unemployment, lower labour productivity and social disadvantage.

The TFES is costly, complex and has unintended consequences. It mostly benefits a handful of large recipients. It also, perversely, increases prices for Tasmanian consumers. The objective of the BSPVES is poorly articulated. Irrespective of its intended primary beneficiaries, the scheme provides only diluted support to them. Some of the BSPVES subsidy is inevitably captured by TT-Line as the main (virtually sole) carrier of passenger vehicles across Bass Strait. While the introduction of the BSPVES saw a sharp immediate reduction in real fares paid, most of this reduction was eventually recouped by TT-Line.

In the light of these findings, the Commission made a number of recommendations focused on addressing some of the perverse incentives created by the TFES and reducing complexity to lower the compliance burden on business and administrative costs to government.

On the TFES the Commission found that there was potentially an economic case to extend eligibility to exports (transhipped through Port of Melbourne) whilst lowering the overall rate of assistance — 'broaden the base and lower the rate' — contingent on a direct international containerised shipping service not being commercially available to Tasmanian shippers. As such, a decision on extending the eligibility of the TFES would be premature prior to the Tasmanian Government resolving the possible resumption of a direct international service, for which the economics is impacted by potential coastal shipping reform.

In relation to the BSPVES, the Commission recommended greater scrutiny of TT-Line's competitive neutrality obligations, and greater transparency and clarity around the scheme itself.

Tasmanian shipping and freight — subsidy schemes

  • TFES and BSPVES funding

    Figure A: TFES and BSPVES funding: Tasmanian shipping and freight — subsidy schemes
  • TFES assistance paid by direction, 2011-12

    Figure B: TFES assistance paid by direction, 2011-12: Tasmanian shipping and freight — subsidy schemes
  • TFES assistance paid to the top 100 claimants, 2011-2012

    Figure C: TFES assistance paid to the top 100 claimants, 2011-2012: Tasmanian shipping and freight — subsidy schemes
  • BSPVES — real sea package prices

    Figure D: BSPVES — real sea package prices: Tasmanian shipping and freight — subsidy schemes

Coastal shipping reform

A key finding of the inquiry was that Tasmania was especially vulnerable to regulation that increases the cost of engaging in coastal trade. Most inquiry participants raised concerns about the anticompetitive effects of Australian cabotage regulation and its impacts on the costs of shipping borne by Tasmanian businesses. In view of this, the Commission recommended that the Australian Government proceed with the foreshadowed review of coastal shipping regulation (including cabotage) as a matter of priority.

Tasmanian Shipping and Freight