Towards Efficient Transport

FOREWORD

For a nation so reliant upon transportation to move goods and people around this vast continent, efficiency and price sensitivity is fundamental.

Government regulations affecting transportation have evolved over a number of years and in many instances were designed to achieve objectives different to what is required today.

Richard Wood notes that regulation gives rise to costs and I don't think anyone can deny that fact.  The two airline policy, for example, has subsidised inefficiency, encouraged feather-bedding, allowed higher than justified wages in certain segments of the airline industry (demonstrably with disastrous flow-on effects on general wage rates), created a docile aviation bureaucracy, prevented competition and conspired against the consumer to an increasing degree during the past 33 years.

It is a policy which is politically motivated and producer-oriented.  Consumer needs have been a minor and almost non-existant consideration.

Contrast the highly-regulated airline industry with the interstate road passenger industry and the difference becomes very apparent.  The long-distance coach industry is competitive and efficient.  Entry is unrestricted, resulting in coaches being the cheapest form of transport between capital cities, and passenger numbers have grown rapidly in recent years.

Further, Mr Wood makes the point that the two airline policy regulates profits by imposing average cost pricing rules on the industry.  The incentive to improve technical efficiency is weak.

He points out that the two airline policy has caused the technical efficiency of Australian airlines to drop well below that which is achieved in the United States.  He goes on to point out that through organisational changes brought about by competition in the Australian aviation industry, costs could be reduced by as much as 35%.

Coastal shipping is another regulated industry that is protected from foreign competition and its efficiency can be measured through the fact that it costs 44% more to transport a tonne of steel from Port Kembla to Fremantle than from Fremantle to Japan.  One must ask the question why coastal shipping is entitled to protection not extended to, for example, manufacturers who have to compete against a wide range of imports.

Whether it be road, sea, rail or air, Mr Wood challenges the appropriateness of regulation.  He emphasises that when de-regulation occurs, prices tend to drop and the industry becomes more efficient.

Mr Wood challenges us to ask the question:  can Australia continue to afford the luxury of this highly-regulated system that does conspire against the consumer and does little to provide real benefits for a country that is very dependent upon an efficient transportation system?

R.G. Ansett

CHAPTER 1:  DOMESTIC TRANSPORT

Scale and distance are recurrent themes in Australian history.  The vastness of the country, the length of the arteries between the capital cities and the immensity of the surrounding oceans impress even a generation accustomed to jet travel.  Not surprisingly, transport has played a vital role in the country's development, enabling personal travel for business and pleasure as well as carrying the international trade on which Australia's prosperity has been built.  Given the distances involved, the efficiency of the various modes of transport are important determinants of the country's competitiveness.  The central concern of this paper is therefore with the efficiency of domestic and international transport.  Above all, it attempts to answer the question:  in what ways might the efficiency of the Australian transport system be improved?

IMPORTANCE OF VARIOUS MODES

Up-to-date estimates of the contribution to Gross Domestic Product of each mode of transport are not available, but in 1974-75 road transport represented 54% of the total transport contribution to GDP, water transport 17%, air transport 15% and rail and other transport 14%.  "Transport and storage" now account for about 4.5% of gross domestic product and employ about 5.5% of the labour force.

The Bureau of Transport Economics (BTE) has suggested that the approximate 1979-80 modal split in the domestic non-urban passenger market as measured by passenger journeys was:  private car 83%, air 8%, bus 3%, rail 4% and other transport 2%.  The modal split for freight transport is shown in Table 1.  Road freight predominates in terms of tonnage consigned, and coastal shipping in terms of tonne-kilometres performed.  This discrepancy arises as a result of the longer average journey for sea freight.  There has been rapid growth in the domestic air freight market in recent years, but the amount carried remains small compared with other modes.

TABLE 1:  DOMESTIC FREIGHT TASK:  AUSTRALIAN, 1970-71 to 1979-80

Year	Road	Rail		Sea	Air	Total
		Gov't	Non-gov't
TONNES CONSIGNED (millions)
1970-71	723	79.4	72.6	39.9	0.1	915.0
1971-72	na	79.9	78.7	44.4	0.1	na
1972-73	na	83.8	94.6	43.3	0.1	na
1973-74	na	87.3	115.1	46.3	0.1	na
1974-75	na	94.8	127.8	46.4	0.1	na
1975-76	756	96.0	116.7	47.5	0.1	1016.3
1976-77	na	99.8	123.6	47.2	0.1	na
1978-79	913	111.1	114.1	47.4	0.1	1185.7
1979-80	na	120.4	123.2	48.0	0.1	na
TONNES-KILOMETRES ('000 millions)
1970-71	27	25.2	13.8	72.0	0.1	138.1
1971-72	na	25.4	16.6	78.0	0.1	na
1972-73	na	26.6	20.0	85.0	0.1	na
1973-74	na	28.3	26.5	92.0	0.1	na
1974-75	na	29.8	30.2	97.0	0.1	na
1975-76	37	30.8	26.3	101.0	0.1	195.2
1976-77	na	32.0	27.3	na	0.1	na
1977-78	na	31.8	28.4	na	0.1	na
1978-79	48	32.1	25.6	101.2	0.1	207.0
1979-80	na	na	27.8	na	0.1	na

na = not available.

Source:  Bureau of Transport Economics, Transport Outlook Conference 1981.

COST STRUCTURES

It is frequently alleged that competition between the various transport modes is "unfair" in the sense that the modes receive different levels of subsidy.  Road hauliers allege that rail freight rates are kept artificially low with the result that railway systems incur substantial deficits, whilst rail administrators complain that heavy road vehicles pay insufficient road-user charges to cover the damage they cause to the road surface.  The relevant question is surely:  do differences in levels of cost recovery across the modes distort the pattern of resource allocation and give rise to a sub-optimal pattern of resource use?  If such distortion occurs, is it intentional and has it any economic or political rationale?

Three principles of cost recovery are widely accepted within the transport industry:

1. prices should not fall below the marginal cost of providing a service, and should equal those costs unless (ii) or (iii) apply;
2. when capacity is inadequate, prices should be increased until demand and capacity match (for example, if peak capacity is incapable of meeting demand, peak fares or rates should be raised until there is no shortage of space);
3. if (i) and (ii) do not yield enough revenue to meet the costs of operation, price discrimination should be employed, higher prices being charged to those least deterred by them.

Market forces will only lead to an efficient allocation of resources if the prices charged for goods and services reflect their true (social) cost.  In other words, where modes of transport are close substitutes, the prices charged for their services should bear the same relationship to their marginal costs.  Unless principles (ii) or (iii) hold, price should ideally equal marginal cost.  Provided that the price shippers pay covers all costs incurred in operating the service, including social costs, competition should lead to an optimal allocation of resources.  An important corollary is that where subsidy is granted it should not distort the relationship between marginal cost and price.

But do the prices charged by the various modes reflect the "true cost" of providing services?  Shaw has noted that in the late 1970s annual expenditure on Australian roads exceeded by 30% the yield from fuel taxes, vehicle registration fees and drivers' licences. ⁽¹⁾  Cost recovery is clearly inadequate.  Moreover, within the road sector, cost recovery is uneven between classes of users.  Engineering research has shown that damage to road surfaces rises sharply with axle loading.  Whereas cars and light commercial vehicles cause little wear the cost of damage arising from heavy vehicles considerably exceeds the charges they pay.

Present road pricing arrangements do not enhance economic efficiency.  As the BTE has noted, the system of road-user charges which prevailed during the early 1970s raised revenue effectively although it did little to promote economic efficiency. ⁽²⁾  But at least the States were attempting to overcome deficiencies in road pricing.  However, the 1979 "Razorback" protest by truckies led to the abandonment of road maintenance charges.  The failure to introduce a substitute charge means that current road pricing practices are less likely to promote economic efficiency:  an economically efficient road pricing scheme requires a charge on road-users which will inter alia vary according to the wear caused to the road surface.

Currently, the major sources of revenue derived from road-users are:

• taxes on motor fuels.  These include excise on motor spirit and diesel fuel (Commonwealth), as well as the Australian Bicentennial Road Development levy (Commonwealth) and petroleum franchise licence fees (most States);
• taxes on the ownership and operations of motor vehicles (States).  These include vehicle registration fees and taxes, driver licence fees and limited road transport taxes;
• sales taxes and customs duties (Commonwealth).  Including sales taxes on motor vehicles, tyres and parts;  and customs duties on motor vehicles and parts;
• stamp duties on the transfer of vehicle ownership (States).

The recent Report of the National Road Freight Industry Inquiry argues that the present system of road-user charges has grown up in an ad hoc manner and lacks integration and consistency. ⁽³⁾  The Report notes that although there is a "very strong case" for the introduction of vehicle-km charges, there remain vivid memories of the previous road maintenance charges.  Accordingly, the Inquiry suggests that governments should not seek to implement a vehicle-km charge at this stage.  Rather, they should first seek to implement a range of desirable measures including the adoption of a pay-as-you-go principle for road funding, and the extension of vehicle registration fees to all commercial vehicles.  The yield from such fees should be paid into a trust fund explicitly devoted to road expenditure (The Inquiry's recommendations are summarised in the Appendix.).

The size of the government railway systems' deficits suggests massive under-recovery of costs.  The operating deficits of the State and Commonwealth railway systems escalated dramatically in the early 1970s:  total published deficits increasing from $100 million in 1970-71 to $600 million in 1976-77 and $1,180 million in 1982-83.  Although the rate of increase in real operating deficits declined in the late 1970s, there has been no appreciable "wind-back" in their level.  We should also note that published figures understate the true deficit.  The railway systems have received part of their capital as a "gift" from government and have consistently underprovided for depreciation.

Cost recovery rates vary widely across railway traffics.  For example, the 1980 Lonie Inquiry into Victoria's transport system estimated that VicRail's passenger train operations recovered 52% of their long-run avoidable costs:  long-haul passenger trains achieving a far higher rate of cost recovery (75.9%) than either medium-haul passenger trains (57.9%) or VicRail's suburban services (49%).  However, the 1984-85 Report of Victoria's State Transport Authority estimates a cost recovery rate of only 29% for its country passenger services, compared to a 74% recovery rate for freight traffic. ^(3A)

By comparison with the "subsidies" enjoyed by other modes, those granted to coastal shipping appear limited.  Infrastructure costs are substantially recovered from the shipping industry.  Coastal shipping has of course received some aid.  ANL's Tasmanian and Darwin services have received explicit subsidies.  The shipbuilding industry has historically been subsidised.  On the other hand, ANL has not received tax and rate rebates comparable with those given to the railways.  We should, however, note that the limited evidence available suggests that coastal liner trades are characterised by relatively inelastic demand. ⁽⁴⁾  If this is the case, a shift in relative prices in favour of coastal shipping would lead only to a very limited increase in cargo carried.

A necessary condition for more efficient resource allocation in domestic transport is that prices reflect the "true cost" of providing services.  While there are very real problems in measuring costs and establishing "fair" prices, the potential gains suggest that this is one of the most important areas for improved coordination and resource allocation.  The Interstate Commission would appear the most obvious body to study the problem and, hopefully, recommend specific measures likely to lead to more efficient resource allocation.

THE REGULATION OF DOMESTIC TRANSPORT

Government influences the size and nature of the transport sector in significant ways.  In particular, government payments to the transport sector help to determine the level of service offered, whilst direct and indirect government intervention influences the nature of transport markets.

Payments by government to the transport sector include:

• subsidised infrastructure.  Direct subsidies for private construction of transport infrastructure, notably cargo handling facilities and airports;
• provision of subsidised government services (e.g. air navigation services for general aviation and road construction and maintenance for the road haulage industry);
• subsidised rural fuel;
• subsidised road construction (e.g. the construction of "black top" roads in the North-west of Western Australia created the preconditions for an expansion of road freight operations to and from the Pilbara and the Kimberlies).
• subsidies to operators (e.g. payments to ANL for the operation of the Empress of Australia and the grant to the Tasmanian Government for her replacement);
• subsidies to users (e.g. Tasmanian Freight Equalisation Scheme);
• provision of "cheap" capital (e.g. equity capital for TAA, Qantas and ANL);

Direct and indirect government intervention includes:

• direct government regulation (e.g. Two Airline Policy, inter national aviation agreements, regulation of coastal shipping);
• state government regulation of intrastate transport.  Historically, most state governments regulated intrastate road freight through various forms of licencing.  Such regulations were designed to protect the State-owned railway systems.  In the 1970's and 1980's such regulation is being abandoned, leading to more competitive intrastate transport systems.
• government involvement in the market (e.g. TAA, Qantas, ANR, ANL);
• indirect government involvement (e.g. import restrictions on ships and planes);
• government control of infrastructure (e.g. control of the right to land at airports).

In common with other sectors of the Australian economy, transport is highly regulated.  Until recently, regulation was viewed as the outcome of attempts by government to remedy perceived problems or inequities.  For example, it has been argued that the Two Airline Policy was evolved to counter fears that a competitive airline industry would prove unstable:  that in the absence of regulation the industry would be characterised by destructive competition, leading eventually to a single monopoly airline.  Regulation was also seen as a means of preventing the government-owned airline, TAA, from competing unfairly against Ansett, a concern that appears the mirror-image of fears in the 1980s.  Network considerations also played a role.  Under the then-accepted "total service" concept, profitable trunk routes were expected to subsidise "thin" rural routes.  Competition on trunk routes, it was argued, would seriously jeopardise the carriers' ability to provide high-quality services to "bush" communities.  Finally, economic regulation was considered necessary for financial strength and that in turn was associated with safety.

Regulation seeking to limit road-rail competition dates from the inter-war years, when the growth of road freight and bus traffic threatened the financial viability of the state railway systems.  The legislative response was to create licencing boards, such as Victoria's Transport Regulation Board, charged with the responsibility of protecting the railway networks.  Regrettably, the protected railways were not given the right incentives to encourage them to concentrate on the tasks to which they were naturally best suited.

Most types of regulatory control are found in the Australian transport sector.  Typically, regulation is enforced through:

• controls over entry;
• controls over quantity and/or quality of output;
• controls over price;  and
• controls over rate of return.

Few transport markets are characterised by freedom of entry.  Under the Two Airline Policy, services between designated trunk ports are (almost exclusively) provided by Ansett and TAA.  Qantas is the sole Australian airline permitted to operate international airline passenger services. ⁽⁵⁾  The Navigation Acts effectively bar vessels other than those manned by Australian crews from operating in coastal trades.  Urban passenger transport operators require licences.  The most obvious exceptions to this general prohibition on entry are interstate road haulage and interstate road passenger services.

The transport sector is also subject to both quantitative and qualitative control over output.  The number of seats offered on international air routes, other than those linking Australia to the United States, is limited by inter-governmental agreements.  The rationalisation provisions of the Airlines Agreement Act limit the capacity of aircraft operated by Ansett and TAA.  Historically, the states have regulated road haulage through the issue of restricted licences.  Producers of some commodities have had their freedom to choose between the modes restricted:  in New South Wales, State government policy favours the transport of coal by rail.  Qualitative controls are equally common.  Domestic airlines are subject to a wide variety of quality controls, most notably stringent safety regulations.  Overall load factors are controlled through the rationalisation provisions of the Airlines Agreement Act.  The relatively unregulated long-distance road freight industry is nevertheless subject to load limits and driver hour limitations.  Onerous conditions regarding the crewing of vessels and crew working conditions have been imposed on coastal shipowners.

Price control has commonly applied.  International air fares were subject to detailed control until the early 1980s, when intense competition from overseas carriers led to Qantas being given the freedom to set its fares.  Domestic airline fares are scrutinised by the Independent Air Fares Committee.  State railway systems have historically been under legislative pressure to limit the extent of their fare and freight rate increases.  In urban transport, bus and taxi fares are subject to control.

Regulation can give rise to a variety of effects.  First, it may affect prices and redistribute income.  Prices will generally be higher under regulation than in a more competitive environment (if they were not, entry controls would be unnecessary).  Under the Two Airline Policy, restrictions on entry create the opportunity for monopoly pricing and monopoly profit, although the potential gains are limited (but probably not eliminated) by price surveillance.  We should note that the beneficiary may not be the regulated industry but the labour employed by that industry:  seamen rather than coastal shipowners benefit from the Navigation Acts, and airline employees share with management and owners the benefits of the Two Airline Policy.  In so far as prices are higher under regulation than they would be under a more competitive regime, consumers are the losers.

Second, regulation may affect an industry's efficiency.  Economic efficiency requires both technical efficiency (minimisation of cost of production for any given quality and quantity of service) and allocative efficiency (service of the right quality or qualities provided in the right quantity and the right price).  Regulation may have the effect of making production inefficient, in the sense that costs may be above the minimum possible level for any given level of output. ⁽⁶⁾  This is especially true where entry is restricted and there is little scope for lower cost operators to replace high cost incumbents.  In the domestic airline industry there is some evidence that costs are higher than they would be if there were no competition. ⁽⁷⁾  Regulation operates to protect Qantas from overseas competition, allowing that airline's costs to be higher than they might be under open competition.  Protection of the railways allows scope for cost levels to creep up.  The measurement of such losses is difficult, partly because we are unsure of the level of prices that might prevail in the absence of regulation and partly because costs may be higher because labour may be sharing the rents derived from regulation (see above).

Third, regulation confers stability on an industry.  Entry controls shelter existing operators from potential competitors.  Price controls prevent rate wars.  Relatively stable profit levels are assured.  The introduction of the Two Airline Policy stabilised Australian domestic aviation, previously characterised by volatile profit performance, and ensured the survival of its two beneficiaries.

Fourth, regulation may discourage innovative solutions to industry problems.  Restrictive and inflexible regulation may make it impossible for entrepreneurs outside the industry to offer alternatives to existing services.  The Two Airline Policy discourages attempts to gain economies from the joint scheduling of domestic and overseas air services.  Service type and quality on almost all trunk routes is limited to that provided by the two airlines.  Potential entrants are precluded from offering different types of service (eg. overnight air coach, "no-frills" services, and services between capital city pairs presently poorly served by Ansett and TAA, notably Adelaide-Perth, Adelaide-Brisbane, Perth-Canberra, etc.).

The high costs of regulation suggest that transport should be subject to regular review.  In particular, as is indicated below, we should seek to understand the gains possible through deregulation.

EFFICIENCY OF DOMESTIC INTERSTATE TRANSPORT

Road

There is widespread agreement that the road freight transport industry is highly efficient.  Australian interstate road transport was effectively deregulated by the 1954-55 Hughes and Vale decisions, ⁽⁸⁾ in which the Privy Council held that interstate transport could not be regulated by the states since such regulation, and the state charges levied on interstate freight movements for regulatory purposes, violated Section 92 of the Constitution.  A decade later Joy found the deleterious effects on road hauliers had been transitional while the long-term effects on the industry and the public were almost wholly beneficial. ⁽⁹⁾  A more recent study has confirmed the beneficial effects of deregulation:

The Australian deregulation experience ... shows that under free-entry conditions and unregulated minimum rates excessive competition does not prevail, except transitionally and when total demand temporarily falls off cyclically, and does not drive the returns of carriers to such low levels that facilities and services become inadequate, or services of poor quality.  Rather, the Australian experience indicates that both truck and rail services improve under competition;  that there is no continuing shortage of capacity in either industry to carry the traffic;  and that the rural areas and markets do not lose the services and competitive rates that their traffic demands justify;  and, very significantly, that under free competitive conditions the road and rail modes develop integrated operations and services, with the long line hauls moving efficiently by rail in carload or trainload quantities and the short hauls, gathering and distribution movements and terminal operations being conducted efficiently by truck. ⁽¹⁰⁾

The long-term effect of deregulation has been to create a relatively stable and lasting pattern of operation and market structure.  The industry is characterised by a relatively small number of large nationwide multi-modal freight forwarders, a somewhat larger number of regional road hauliers and a host of owner-drivers who contract to the larger firms.  There has been some tendency towards concentration among freight forwarders and this may require antitrust action.  Clearly, it is important to encourage entry in order to preserve competition.  The fortunes of owner-operators have fluctuated, with relatively large numbers of bankruptcies being reported in periods of recession such as the early 1980s.  The evidence suggests that owner-drivers earn rather less than unionised drivers working for freight forwarders.  As Nelson has noted, owner-drivers' greater independence may wholly or partially compensate for lower earnings.  Competition between owner-drivers has not driven rates to levels that appear unattractive to potential entrants.  The recent report of the National Road Freight Industry Inquiry, which addresses questions of over-supply and financial viability as well as land transport pricing, concludes that economic regulation should not be imposed on the industry.  However, the Report recommends the introduction and/or tightening of legislation designed to ensure safety and the observance of industry standards.

Interstate road passenger transport was similarly deregulated by the Hughes and Vale decisions.  The long-distance express coach industry is competitive and efficient.  Entry is unrestricted.  Coaches are, the cheapest form of transport between capital cities and passenger numbers have grown rapidly in recent years.

Rail

The high level of rail deficits is in part a legacy of the past.  Historically, the railways were required to fulfil a social as well as a commercial role.  As a quid pro quo for undertaking unremunerative services, State governments protected their railways through regulation.  The protected railway systems expended much energy carrying short-haul traffic;  commodities, unsuited to rail transport, whose carriage would not have been attractive in a more competitive environment.  A far-flung branch line structure was retained despite losses.  Following Hughes and Vale and moves to deregulate intrastate transport, existing traffic patterns could not be sustained.  The railways had to discover their "true" role.  This search has been hampered by pressure groups and vested interests.  The railway systems still perform a social role, a fact that accounts for part of the large deficit incured by most state systems.  The systems have yet to adjust fully to a deregulated environment.

The railway systems must improve their technical efficiency.  The need for this is recognised by the management of all systems.  The problem lies not so much in line haul (although overmanning of trains continues), nor in the relatively expensive marshalling and shunting, as in terminal operations.  Terminal operations account for 75-80% of railway costs. ⁽¹¹⁾  Here the problems centre on poor organisation and inefficient work practices.

In comparison with other modes of transport, the railway systems are highly labour-intensive.  Moreover, if the experience of Australian National Railways is typical, the railways actually became more labour-intensive during the 1970s [Table 2].  While labour costs as a proportion of total expenditure were declining in road, sea and air transport, the proportion of ANR's expenditure outlaid in labour increased sharply.

TABLE 2:  LABOUR COSTS AS A PROPORTION OF TOTAL EXPENDITURE FOR SELECTED
TRANSPORT ENTERPRISES:  AUSTRALIA, 1974-75, 1978-79 and 1979-80 (per cent).

Group	1974-75	1978-79	1979-80
ANL	20.0	13.2	12.9
ANR	60.6	70.4	68.7
QANTAS	40.0	34.3	30.3
TAA	46.0	41.8	39.6
ATI	37.9	34.3	32.5
TNT	28.1	24.5	22.3

Source:  1974-75 and 1979-80 Annual Reports for transport enterprises shown.
Transport Outlook Conference 1981, Bureau of Transport Economics.

If economic efficiency is to be enhanced substantial changes are required in pricing.  Several studies have demonstrated uneconomic pricing practices by State railway systems. ⁽¹²⁾  In particular the railways have been criticised for failing to adopt costing procedures which identify the "incremental" or "avoidable" costs associated with specific traffics.  Knowledge of such costs would indicate the minimum prices which should be charged.  If the railways were then given the freedom to charge commercial rates for those traffics which would be least affected by higher prices, they should be able to recover their costs in a manner consistent with economic efficiency.  Where the level or type of traffic on a particular line cannot recover all costs, traffic should continue to be carried providing that it can sustain the avoidable costs of operation.  In the long run the need for further investment may force consideration of closure. ⁽¹³⁾

The difficulties of implementing such an economically rational pricing policy should not be underestimated.  In seeking to charge commercial rates for the various traffics the railways would undoubtedly incur the wrath of various industry groups.  We should also note that the question of railway pricing cannot be divorced from the modal split issue and the need to maintain similar price/marginal cost ratios between the competing modes for efficiency reasons.

Domestic Aviation

Whereas in a competitive industry the profit motive usually ensures technical efficiency, the Two Airline Policy regulates profits by imposing average-cost pricing rules on the industry.  Within this framework, the only way for the airlines to capture the available monopoly rents is by raising their costs.  The incentive to improve technical efficiency is weak.

Not surprisingly, empirical studies suggest that, thanks to the Two Airline Policy, the technical efficiency of Australian airlines is below that achieved in the US. ⁽¹⁴⁾  Forsyth and Hocking show that labour productivity (air crew, cabin crew and ground staff) is noticeably lower than in the US.  As a result Australian airlines incurred higher costs per available tonne-kilometre than their US counterparts, although they get at least as much use out of each aircraft.  Mackay takes explicit account of the special operating conditions in Australia, using a regression model to estimate the underlying cost functions facing Ansett and TAA.  He estimates that appropriate changes in the organisation of the domestic air industry might reduce unit costs by as much as 35%. ⁽¹⁵⁾  Both Forsyth and Hocking and Mackay attribute the poor technical performance to the regulatory environment.

The Two Airline Policy has also been characterised by allocative inefficiency.  Under the present regime, there is no price competition between Ansett and TAA.  The cost-based pricing formula adopted by the Independent Air Fares Committee is common to all routes using the same type of aircraft, irrespective of route characteristics. ⁽¹⁶⁾  As a result there is a tendency towards cross-subsidisation between routes.  The fundamental problem is that prices are not permitted to reflect the opportunity cost of servicing the various routes.  If they did, prices per kilometre would vary between routes, reflecting the variations in cost levels associated with different routes.  In addition, greater use of peak load pricing would be valuable.

Australian air fares appear high by US standards.  Forsyth and Hocking conclude:

Australian [fares] are at least 10%, but probably no more than 55%, higher than US levels, in spite of the higher load factor.  Thus Australian fares are considerably higher than they would be if US efficiency levels were achieved with Australian load factors. ⁽¹⁷⁾

Forsyth and Hocking note that the gap between the fare levels in Australia and the US has widened since 1960, while the real level of Australian air fares has fallen very little.  The range of fares and conditions offered in the US is very much wider.  Although the range of fares offered in Australia was widened in the late 1970s, consumers' choice remains very restricted compared to the fare types available under the deregulated system in the US.

Ports and Terminals

There is widespread agreement that the efficiency of Australian ports and terminals is considerably below that potentially achievable.  Transport users pay dearly for this inefficiency.  Some 75%-80% of rail costs are incurred in terminal operations. ⁽¹⁸⁾  More than half of the door-to-door cost of transporting Australia's international trade arises from shore-based operations. ⁽¹⁹⁾

The cost of getting cargo across Australian wharves is clearly high by world standards.  A University of New South Wales study undertaken on behalf of the Australian Wool Corporation showed that 47% of the total door-to-door cost of shipping Australian wool to Europe was absorbed by "landside" ⁽²⁰⁾ costs in Australia and a further 15% by landside costs in Europe.  Cargo handling costs are a major component of Australian landside costs.  Labour costs in the stevedoring industry are high:  the industry works to a basic 35-hour week, high penalty rates apply to overtime and weekend shift work and "loadings" inflate the wages bill.

Employers have historically been concerned by the cost of industrial disputation.  In 1978-79, Department of Transport statistics suggest, 400,000 man-hours were lost as a result of industrial disputes involving waterside workers, a figure equivalent to 3.6% of the hours worked.  We should however note the level of industrial disputes fell substantially in the early 1980s:  in 1982 only 51,000 manhours were lost (equivalent to 0.6% of hours worked).

The cost of getting cargo across Australian wharves is clearly greater than it need be, as a result of inefficiencies stemming from the lack of coordination between terminal operators and road hauliers.  In particular, road hauliers complain of excessive vehicle delays at container terminals and depots and terminal operators are concerned about the poor utilisation of the afternoon shift.  To an outsider the problem appears to stem from the different hours worked by container terminal operators and road hauliers as well as from the constraints regarding delivery times facing road hauliers.

Terminal charges are also higher than they might otherwise be because terminal operators face little competition.  As the Australian Shippers' Council has noted, the industry is characterised by a significant degree of vertical integration, with major shipping companies owning the terminals serving the trades in which they operate.  Inquiries into the stevedoring industry have linked this ownership pattern with economic performance.  The Prices Justification Tribunal's 1977 inquiry into Seatainer Terminals Limited, then owned jointly by Overseas Containers Australia Limited and Bulkships Limited, noted the increasing labour intensity of the company's operations "although the very aim of the container concept was to eliminate handling and thereby reduce the labour component". ⁽²¹⁾  The PJT noted that Seatainers' desire to minimise ship delay strengthened the union's bargaining position, but thought it "... inescapable that the increased wages cost agreed to by it have led, in a large measure, to the escalation of terminal charges". ⁽²²⁾  The lack of competition allowed Seatainer to set rates so as to offset anticipated cost increases and falling turnover. ⁽²³⁾

More recently the Australian Shippers' Council investigated the published accounts of the Glebe Island Terminal Group.  According to the ASC, Glebe Island Terminals then had four shareholders:  Farrell Lines;  Liner Services Pty Ltd (Australia);  Patrick Operations Pty Ltd (Australia);  and Columbus Line GmBH.  The investigation shows that Glebe Island Terminals Pty Ltd earned a rate of return on capital employed, a return on total assets and a return on sales "materially in excess of six prominent public corporations selected for comparison". ⁽²⁴⁾  Shareholders of the Glebe Island Terminal Group received an annual return on their investment ranging between 44% and 120% in the years 1975 to 1979.

In short, despite low productivity and in some periods falling custom the operations of terminals appear very profitable.

The problems faced in any attempt to reduce the costs of Australian cargo handling are complex and many-faceted.  Simplistic anti-union or anti-employer attitudes are clearly counter-productive.  Despite the opportunities to correct past mistakes given by the change in cargo handling methods brought about by containerisation, the system remains flawed.  The recent appointment of an industry task-force to inquire into shore-based shipping costs is therefore to be welcomed.  However, no one with an appreciation of the troubled history of stevedoring would underestimate the difficulties of implementing change.

POTENTIAL GAINS FROM DEREGULATION

During the past decade the benefits and costs of regulation have been subject to close scrutiny.  The public interest theory of regulation, which held that government regulates an industry in order to improve its economic performance, has been replaced by a new theory of regulation that:  emphasises the gains available to the regulated industry (employers and employees alike);  suggests that, far from being reluctant to be regulated, industries may actually seek regulation;  and argues that government may be willing to provide regulation as a quid pro quo for electoral support.

The recognition that regulation gives rise to costs as well as to benefits coincided with new insights into the nature of competition within deregulated transport markets.  Recent developments in economic theory, especially the theory of contestable markets, suggest that some if not all transport markets may operate more efficiently when they are left unregulated, always providing it is easy for enterprises to enter or leave the market.  The critical question is whether deregulation will create a contestable market, defined as one in which all firms have equal access to customers and to the same technological options, and in which entry incurs no sunk cost (in other words it must be possible for firms leaving the market to recover their capital investment:  e.g. for a coach firm, this would require a market in used coaches). ⁽²⁵⁾  A market that is perfectly contestable is completely vulnerable to competitive entry.  The behaviour of firms within the industry must therefore take account of the possibility of entry.  Firms must behave as if the industry were competitive.  In the limiting case of perfect contestability a market will possess all four of the following features:

• all excess (monopoly) profits are completely precluded;
• inefficiency and waste are ruled out;
• no product or group of products of such a firm can be sold at a price which is below either its incremental or marginal cost;
• any product which is sold by two or more firms must have a price which is exactly equal to the marginal cost of the item.

Thus, perfectly contestable markets possess four attributes which include virtually all the benefits of perfect competition:  no excess profits, no inefficiency in production, no cross subsidy and (except in the case of monopoly supply of a product) ideal pricing in the sense of efficiency in resource allocation.  In practice industries will differ in the degree to which they approximate contestable markets.

The potential benefits of deregulating transport markets may be illustrated by coastal shipping and domestic aviation.

Coastal Shipping

Deregulation of coastal shipping could lead to the employment of vessels with markedly lower cost structures than those currently operating.  Under the Navigation Act the coastal trades are reserved for ships on the Australian register or ships conforming to Australian conditions of pay, manning levels and accommodation.  Since few foreign vessels meet these standards the effect is to reserve the coastal trades for Australian flag vessels. ⁽²⁶⁾

The cost of reserving the coastal trade for Australian flag vessels has been highlighted by two studies of the steel industry.  A 1979 IAC inquiry estimated that BHP's coastal shipping costs were $20-25 million greater than they would have been if the company had been free to use flag-of-convenience vessels. ⁽²⁷⁾  More recently, the Chief Economist of John Lysaght (Aust) Ltd, John Barber, noted that the cost of transporting a tonne of steel from Port Kembla to Fremantle was 44% higher than the cost of shipping steel from Japan to Fremantle. ⁽²⁸⁾  The cost of protection of the coastal trade has also been examined by Ross McLean. ⁽²⁹⁾

These studies have led some commentators to argue:

There are clearly substantial -- if so far unquantified -- benefits to be gained by the users of coastal shipping if the government could be persuaded to deregulate coastal shipping, to open up coastal trades to foreign flag vessels on an unrestricted basis, or at least to adopt a less restrictive stance.  The more competitive environment created as vessels with lower cost structures than those currently employed entered coastal trades would stimulate coastal shipping and enhance the competitiveness of Australian industry. ⁽³⁰⁾

This argument has been criticised by Paul Amos who notes that while the "open seas" option undoubtedly would lead to savings for users of coastal shipping, the option is only of academic interest:

For overseas manned and operated vessels to operate on a permanent basis on the coast would be a precedent which exists in no other primary, manufacturing, or service industry in Australia. ⁽³¹⁾

Is Amos correct?  Australia does after all allow the import of a wide range of commodities from the developing countries, the existence of such import competition acting as a discipline on the market. ⁽³²⁾  Contrast the position of the manufacturing sector, subject to import competition, with the total protection afforded to coastal shipping (single voyage permits are granted only when there is no suitable local vessel available).  If we accept the analogy with manufacturing the coastal trades might be opened up to limited foreign competition.  The effect would hopefully be to stimulate competitiveness and hence greater efficiency.  Competition might be encouraged by allowing overseas shipowners to share in the future growth of coastal shipping.  More specifically, a quota system might be introduced under which a specified proportion of trade growth would be open for overseas as well as domestic shipowners.

Domestic Aviation

Airline services on routes linking designated trunk ports ⁽³³⁾ are provided almost exclusively by two airlines -- Ansett and TAA -- under the umbrella of legislation commonly referred to as the Two Airline Policy.  In June 1981 a revised Airlines Agreement Act came into force as one plank of a legislative package which also included the Independent Air Fares Committee Act and the Australian National Airlines Repeal Act.  Under the Airlines Agreement Act 1981 the continuation of the Two Airline Policy for five years was guaranteed.  After that period three years notice may be given by any of the parties to the Agreement, although the Commonwealth Government may only give notice with the consent of both the Representatives and the Senate.  The Hawke government recently announced an inquiry into the feasibility of deregulating domestic aviation.

The inquiry will doubtless focus on three policy options:  maintenance of the present Two Airline Policy, total deregulation and partial deregulation.

A continuation of the Two Airline Policy in its present form appears unlikely.  Domestic air freight is already deregulated and the climate of opinion appears to favour some measure of deregulation of the passenger market.  The industry itself anticipates some changes in policy.  Mr F. Ball, General Manager of TAA, recently commented:

Perhaps what is required in Australia is a restructuring of the existing regulatory system which will improve its efficiency and increase its flexibility.  There is certainly merit in giving consideration to the range of possibilities. ⁽³⁴⁾

It is to be hoped that the Inquiry will at least explore the possibility of US-style deregulation.  In this connection we should note that the 1978 US Airline Deregulation Act:

• introduced a phased entry plan with carriers allowed to enter one new market a year until 1981.  Each carrier was allowed to protect one route each year from automatic entry;
• ordered the Civil Aeronautics Board (CAB) to authorise new services "consistent with the public convenience and necessity";
• authorised the CAB to order an airline to continue to provide "essential airline transport service" for a 10-year period and to provide subsidies to cover any losses;
• permitted carriers to lower rates 50% or raise them 5% above the "standard industry fare" without CAB approval;
• terminated the CAB's authority over domestic routes in 1981 and its authority over rates, mergers and acquisitions on 1 January 1983.

Although the verdict on the US deregulation experience is by no means unanimous, and it is perhaps too early to make a final judgement, certain trends are clearly evident.  First, freedom of entry and exit has allowed new entry and route rationalisation.  Many new carriers have, begun operations, increasing competitive pressure on established airlines and ensuring substitute services where necessary.  Carriers have altered service patterns.  "Hub-and-spoke" systems with feeder networks and schedules adjusted for inbound and outbound connections have developed to improve productivity of equipment.

Second, pricing freedom has produced lower fares on denser routes, higher fares on thinner routes.  Average fare rises have been below, but roughly parallel to, the CPI.  Fares in some dense markets have been heavily cut.  Fares on thinner routes have increased.  A much wider range of fares and fare types is offered.  These discount fares have been widely used.  In 1976, 26% of all passengers on long-haul flights were travelling on discount fares;  in 1983, 74% of passengers were benefitting from discount fares. ⁽³⁵⁾

Third, industry profitability was at a low level in the early 1980's.  However, recent research indicates that the drop in profitability was associated with the recession and rising fuel prices rather than deregulation and that the airline industry has actually performed better than average.  Moore has argued "notwithstanding the bankruptcy of Braniff and the poor economic performance of Continental, TWA, and Western, the real value of the trunk airlines, including Pan Am, has remained virtually unchanged from December 1, 1976 to December 1, 1983.  For comparison, the real value of all the stocks on the New York Stock Exchange fell 3% over the same period". ⁽³⁶⁾

Fourth, the effects on labour have been mixed.  The late 1970s witnessed a surge in employment, but this was reversed in the early 1980s.

Moore has summarised the current position:

While capital gained from deregulation, or at least was not hurt, labour did less well.  Employment is down and there is reported to be some erosion of wage rates, although airline labour costs are up some 8.3% in real terms from 1976 to the second quarter of 1983 ... [E]mployment in the industry rose until 1980 and has fallen since. ⁽³⁷⁾

Although US experience with deregulation confirms the airline industry's high degree of contestability, a critical issue is the applicability of the US experience to Australia.  The Australian domestic aviation market is usually characterised as having low density city pairs, an extensive but "thin" route structure, and as being geographically remote from air-frame and aero-engine manufacturers.  Whilst the argument that routes are "thin" is clearly correct when applied to routes linking country centres, trunk routes over the Adelaide-Brisbane range carry sufficient traffic to rank among the major routes in the US.

What are the likely effects were a policy of deregulating Australian domestic aviation to be adopted?  The market is too small to allow the entry of a large number of airlines.  However, it is likely that there would be some new entrants, and these might specialise in "no frills" travel, other entrants might specialise in charter-type operations for holiday travel.  The more heavily trafficked routes (Sydney-Melbourne) would experience increased competition, whilst less heavily patronised routes (Melbourne-Hobart) would be unlikely to be served by more than two airlines.  Country routes might be served by a single carrier, although freedom of entry should guarantee competitive pricing.  These would be a wider range of fare types offered and fares would in general be lower. ⁽³⁸⁾  A recent study of the South Australian air passenger market, deregulated in 1979, has shown that new firms have entered the market, services have increased significantly, and new routes have been developed.  No apparent difference has developed between the structures of fares on multi-firm and on single firm routes. ⁽³⁹⁾  The authors argue that their findings suggest either that sunk costs are very low or non-existent or that "contestability theory is more robust than its critics have so far acknowledged".

Even if full deregulation is rejected, the possibility of partial deregulation remains.  The legislation underlying the Two Airline Policy is unduly restrictive:  regulation has encouraged technical and allocative inefficiency.  There may be gains if the system can be freed-up.

Allocative efficiency might be improved by modifying the present relatively inflexible pricing policy.  The Independent Air Fares Committee is required to set fares according to a cost-based formula.  A more flexible fare structure might take demand as well as cost into account.  There is little price competition:  core fares are set, and promotional fares are defined in terms of a fixed proportion of the core fare.  Moreover, the range of promotional fares on offer is very limited and their scope tightly controlled.  For example, standby fares are a fixed 80% of core fare.  Greater flexibility in pricing could improve aircraft load factors and enhance allocative efficiency.

Technical efficiency might be enhanced by allowing regional operators greater access to trunk routes.  It is not clear that Ansett and TAA possess the appropriate equipment for all the routes they serve.  Traffic rights on "thin" routes (Adelaide-Canberra, Adelaide-Perth) might be granted to regional operators with smaller aircraft (F27/F28).  Under current legislation regional operators may offer indirect services between trunk ports under Section 6(1)(c) of the Airlines Agreement Act.  There is a case for encouraging a greater element of competition by applying 6(1)(c) conditions in a less onerous way.  Similarly, regional operators might be encouraged to offer "no frills" or "specialised" services between trunk ports.

CHAPTER 2:  OVERSEAS TRANSPORT

RELATIVE IMPORTANCE OF SEA AND AIR

From the beginning of European settlement shipping has been a vital lifeline for the island continent of Australia.  Geographically isolated from the major industrial nations, and more especially from the United Kingdom and Europe with whom her economy has until the past twenty years been so closely linked, Australia is peculiarly dependent on overseas shipping.

Shipping remains the dominant carrier of Australia's international trade.  The modal split between sea and air, whether expressed in value or volume terms, overwhelmingly favours sea.  Whilst some 4% of Australian exports by value are consigned by air, less than one-fifth of 1% of the volume of exports is air freighted.  We should also note the imbalance of export and import cargoes.  Australia's exports of minerals and agricultural products far exceed in volume her imports.  In consequence, vessels must necessarily sail in ballast to Australia.

The diverse physical and commercial characteristics of commodities transported by sea have led to the evolution of specialist ship types and thereby to a multiplicity of institutional forms within the shipping industry.  It is sufficient for our purposes to note that seaborne trade may be divided into bulk dry, bulk liquid and general cargoes.  Bulk dry cargo, formerly handled by the general purpose tramp which "plied for hire" and was typically employed carrying grain and ore cargoes under voyage or time charter, is now carried almost exclusively by specialist bulk carriers.  Bulk liquid cargoes are carried by tankers.  General cargo is carried on liner services utilising conventional cargo liners, cellular container or roll-on roll-off vessels.  The hallmarks of a liner service are regularity of sailings and diversity of cargo.

The incidence of sea transport costs varies widely across commodities.  Using a commonly adopted yardstick -- the ratio of sea freight charges to c.i.f. ⁽⁴⁰⁾ price -- the incidence varies from less than 5% to more than 70%.  Agricultural exports provide a case in point.  Looking first at commodities normally carried by specialised bulk carriers, the freight incidence on wheat is typically of the order of 11%-16% of c.i.f. price.  The incidence on coarse grains such as barley and maize fluctuates between 11% and 18%, while that on oats and sorghum typically lies in the region 11.5%-19%.  Similarly, the freight incidence on agricultural commodities typically sent by liner also vary widely.  The incidence of freight rates on Australian meat exports is typically of the order of 10%-12%, on dairy products slightly in excess of 9%, whilst the incidence on fruit is frequently more than 50%.

Since transport costs typically vary with distance, freight incidence tends to be lower on short-haul than on long-haul trades:  freight incidence is lower to East and South-East Asia than to Europe.

In influencing the types of products that are internationally traded, transport costs are somewhat analogous to tariffs.  Recent research suggests that, for a wide range of commodities, transport costs constitute a greater obstacle to trade than most-favoured-nation (MFN) tariffs.  Sampson and Yeats' study of Australia-United States trade suggests that the average ad valorem incidence of transport charges is more than double the level of US MFN tariffs. ⁽⁴¹⁾  The authors conclude that international transport costs pose a considerably greater barrier to Australian exports than tariffs, and that measures aimed at lowering transport costs may have a greater potential for expansion than efforts to get other nations to lower their lower import duties.

REGULATION OF INTERNATIONAL TRANSPORT

Liner Shipping

Regulation of the international shipping industry began with moves by owners in the 1880s to form shipping conferences.  From the outset such conferences sought to "stabilise" trades by limiting entry, restricting output and maintaining prices.  Self-regulation remains important with conferences still seeking to regulate trades through a combination of controls over entry, output and price.  Control over entry is sought through "closed" conferences, the term implying that entrants may join the conference only if a majority of existing members favour their entry.  Most conferences attempt to control the level of output by allocating sailings and/or by allotting shares of the available cargo to member lines.  Prices are maintained by the publication of a common tariff.  Revenue pooling agreements are designed to lessen the incentive to "chisel".

Conference practices have been influenced by Australian legislation.  Shipping conferences are excluded from the general provisions of the Trade Practices Act.  Part X of the Act gives conferences engaged in outward trades the right to close their membership and use dual-rate contracts, subject to the safeguards that they negotiate with "designated" shipper bodies and have due regard to the "adequacy, economy and efficiency" of their services.  The shipping provisions of the 1966 Act reflect the then government's view that closed conferences operating rationalised services are in the best interest of Australia as a trading nation.

The shipping industry and the environment within which it operates have changed dramatically since the early 1970s.  Worldwide recession caused a slump in second-hand ship values, encouraging some operators to expand their liner fleets.  Fleet growth at a time of static or declining cargo volume intensified competition.  The liner shipping industry has also gone through a period of structural change with the introduction of containerisation and the grouping of hitherto independent lines into consortia.  There has also been a considerable expansion of state-owned shipping, including that of the communist bloc.  It is hardly surprising that Australian liner shipping policy, developed during the 1960s, has come under criticism from shipper and shipowner alike.

In what ways might Australia modify its liner shipping policy?  Three interrelated issues are worthy of comment:  the options open to Australia relating to the regulation of liner shipping;  current attempts to introduce unilateral, bilateral and multilateral cargo sharing policies;  and the role of Australian flag shipping in the carriage of Australian overseas trade.

Should the Australian Government change its policy regarding the regulation of liner shipping?  In particular, is it possible to ensure that the current competitive climate is maintained?  There appear to be three broad policy options open to Australia.  The first option is that of maintaining the status quo:  allowing the industry to regulate itself and relying on a combination of shipper power and competition to maintain freight rates at competitive levels.  A second option is that of encouraging competition by legislating to allow "open" but not "closed" conferences.  A third, more radical option, is the maintenance of a substantially more competitive environment by means of legislation to ban conferences and/or outlaw such conference practices as loyalty rebates.

Maintaining the status quo means the continuation of an essentially "hands-off" policy, allowing liner operators to form "closed" conferences subject to the condition that their services be operated efficiently and that they enter into negotiations with designated shipper groups.  The policy objective may be thought of as that of encouraging the maximum utilisation of the physical plant (ships and terminals) committed to a particular trade with a view to obtaining economies of scale and utilisation.  An efficiency case for the closed rationalised conference has recently been argued by Sletmo and Williams. ⁽⁴²⁾  In the case of liner shipping, the welfare loss from "allocative inefficiency", that is the loss arising from market imperfections, is very small.  According to Sletmo and Williams the greatest room for improvement is in "X-efficiency", that is technical operating efficiency as measured by vessel utilisation.  The way to improve X-efficiency, they argue, is to allow closed rationalised conferences.  We should note that such conferences would possess considerable market power.  It is not clear that shipper bodies would prove effective countervailers in the absence of competition from non-conference lines.

A second option would be to encourage a somewhat greater degree of competition either by legislating to replace "closed" by "open" conferences or by encouraging outside lines to enter trades.  However, the option suffers from the drawback that open conferences typically result in low load factors, low profits and rising freight rates.  United States shipping policy, which until recently favoured open conferences, has now moved towards the closed conference solution.

The third option is to move directly to create a more competitive environment through legislation to ban conferences and/or to outlaw such conference practices as the dual rate system.  Ironically, since in the absence of government regulation liner operators will seek to regulate themselves (i.e. form conferences), the preservation of a more competitive environment requires government regulation.  Whilst this option is the least likely in the sense that there are valid objections to "trust-busting" in shipping, and in any case a government intending to move in this direction would encounter intense lobbying from industry pressure groups, it is worth exploring the nature of a conference-free world if only to comprehend the advantages and disadvantages of the industry's present institutional structure.  In the absence of conferences ships would continue to be placed on berth frequently, although sailings would probably not be on so regular a basis as at present.  Freight rates would be less stable and there is the possibility -- though not in my judgement the probability -- of severe temporary fluctuations in the level of rates.  These fluctuations would, however, take place about a mean that would be lower than that of conference rates.

The theory of contestable markets suggests that what is needed is to improve the contestability of Australia's overseas liner trades.  There is general agreement that today's liner trades are highly contestable, although opinions differ as to whether this contestability is a structural feature of liner shipping or merely the product of the current recession in shipping markets.  There can be no doubt that owners are today under greater competitive pressure than at any time since the 1930s.  Faced with competition not only from lines such as ABC but also from national lines, including Eastern Bloc operators, conferences have shown considerable flexibility in adjusting tonnage to the demands of trades.  But is the current situation, so favourable to shippers, likely to last?  Competitive pressure from outsiders seems likely to continue as long as there is a surplus of liner tonnage.  The surplus depends on the rate of growth of world seaborne liner trade and the net addition to liner fleets.  Few commentators see a significant change in the competitive climate in the next two years.  The shipper case for an amendment to Part X of the Trade Practices Act rests on the belief that a competitive environment may be encouraged by legislation.

International Regulation of Shipping

The past decade has seen a substantial increase in the scale of government intervention in shipping markets.  Whilst state intervention in shipping is not new, the global scale on which it is currently being applied is unprecedented.  The maritime aspirations of many developing countries, symbolised by UNCTAD's Code of Conduct for Liner Conferences, have led to the growth of national fleets.  The motivations for fleet development are complex.  National fleets are often seen as a means of conserving scarce foreign exchange, although a broader set of factors, including employment creation, industrial diversification and primitive jingoism, play their role.  Fleet expansion has been encouraged by cargo reservation as well as by the granting of taxation concessions and other fiscal incentives.  Underlying the spread of cargo reservation has been the belief in the rights of the cargo generator:  the philosophy that countries that export or import a commodity are, by that fact alone, entitled to a significant or even an exclusive share of its transport.  While cargo reservation may take many forms it is convenient for our purpose to distinguish between multilateral, bilateral and unilateral policies.

The best known of the multilateral cargo sharing schemes is UNCTAD's Convention of a Code of Conduct for Liner Conferences which was declared to have come into force in October 1983.  The aim of the Code is to increase the developing countries' share in world shipping and improve their balance of payments through substituting domestically-owned shipping services for imports.  The Code proposes to achieve these aims in two ways.  First, by reserving cargo for national flag operators, a provision that is commonly, if somewhat inaccurately, referred to as the 40:40:20 formula.  Second, by regulating liner trades through new institutional arrangements for rate formation.  With the exception of Singapore, all the ASEAN countries have signalled their intention of adopting the code.

Bilateral shipping agreements are normally negotiated by governments, often as a clause in a bilateral trade agreement.  Several ASEAN countries have participated a bilateral shipping agreements.  The Indonesian National Shipowners' Association has bilateral agreements with trade groups in Japan, Taiwan and South Korea.  Bilateral agreements are also in force in trade between Indonesia-Taiwan and Indonesia-Singapore.

By definition, unilateral cargo reservation takes place without the consent of the state at the other end of the trade route.  Most unilateral decrees place cargo under direct government control.  A common stance is to reserve 100% of government and statutory corporation cargoes and 50% of other cargoes for domestic vessels.  At least two ASEAN countries -- the Philippines and Indonesia -- are pursuing unilateral cargo reservation policies in certain trades.  For example, Philippine Presidential Decree No. 1466 (1981) requires all government cargo, including that generated by government-owned or government-controlled corporations, to be carried in Philippine flag vessels.

The immediate impact of cargo reservation on Australian trades will admittedly be limited.  Under EEC/OECD agreements, UNCTAD's cargo formula will not apply to intra OECD trade.  But the Code may well become a focal point of discussion between Australian and Asian countries aspiring to develop their merchant fleets.

The potential danger in the spread of cargo reservation is the loss in efficiency which may follow from the employment of smaller and less sophisticated vessels and/or the conversion of a multilateral trade into several bilateral trades.  It is clear, for example, from Zerby's analysis of the potential effects of the UNCTAD Code, that rigid adherence to the Code would require substantially increased shipping tonnage. ⁽⁴³⁾  One possibility is that UNCTAD's 40:40:20 may be applied on a regional rather than a national basis.  Efficiency losses might be minimised in this manner.  We appear to be in some danger of shipping following the path of international aviation:  in a few years we may be talking of the fourth, fifth and sixth "freedoms" of the seas just as we now talk of the six "freedoms" in international aviation.

Some 3% of export and import cargoes are carried in Australian vessels.  Such limited participation in overseas shipping has led to pleas for more favourable treatment for domestic shipowners.  These pleas received concrete support with the government's acceptance of the recommendations of the 1982 Crawford Inquiry into the Revitalisation of Australian Shipping.  Crawford recommended that owners should be allowed to depreciate vessels over 5 years at 20% per annum, that the 2% import duty on trading vessels should be abolished and that the investment allowance then available only to vessels engaged in coastal trading should be extended to all Australian vessels.  Crawford tied these benefits to vessels having approved (i.e. lower than the current norm) manning scales.

If the expansion of the Australian fleet is based on commercial criteria it is to be welcomed.  There is however concern that unions may insist on the employment of Australian vessels on other than a commercial basis.  ACTU policy favours the adoption of UNCTAD's 40:40:20 code and unions have recently called for the implementation of bilateral shipping agreements.  The Minister for Transport's announcement reserving Australian government cargoes for ANL quickens the fear.

The rationale underlying Australian liner shipping policy was questioned by shippers, shipowners and maritime unions in the early 1980s.  Shipper groups, recognising that their favourable bargaining situation stemmed from outsider competition rather than their membership of the Australian Shippers' Council, wanted to amend Australian legislation in a way that would institutionalise the competitive pressures.  Conference shipowners wished to minimise "irksome" restrictions, especially those preventing them from competing on a fair basis with non-conference lines.  Maritime unions, wishing to see an expansion of the Australian flag fleet, wanted Australia to adopt UNCTAD's 40:40:20 approach.

Responding to criticism of Australia's liner shipping policy, the Minister for Transport appointed a "Task Force" to review Australia's liner shipping legislation.  The report of this task force, issued in February 1986, recognises the intensity of the competitive pressures operating in liner markets.  The task force argues that regulation should be directed to providing pro-competitive safeguards governing the operation of collusive agreements between shipowners or shippers, that predatory or discriminatory practices should be prohibited, and that government should be given powers to intervene to correct distortions of the market.  The task force recommends that the revised regulatory arrangements be embodied in a seperate Shipping Act (rather than in Part X of the Trade Practices Act as at present).  The task force sees a valuable role for Australian flag shipping, providing that it is commercially competitive, and proposes that the Government continue policies aimed at ensuring that Australian shipowners are not disadvantaged in comparison with shipowners of Australia's major trading partners.  However, the task force does not recommend accession to the UNCTAD Code of Conduct for Liner Shipping.  As foreshadowed when the Inquiry was announced, the Minister has said that no action will be taken until there has been public discussion of the proposals and discussions with interested parties.  It is as yet too early to judge whether the proposals are likely to win widespread acceptance.

International Aviation

In contrast to international shipping, international aviation has long been subject to inter-governmental regulation.  Under Article 6 of the Chicago Convention of 1945 contracting states accepted the principle that each state has complete and exclusive sovereignty over the air space above its territory.  Since commercial airlines must overfly each other's territory, the result was the creation of a set of rights, or "freedoms", relating to passenger and cargo carriage.  Whilst the Chicago Convention achieved agreement regarding technical regulation of civil aviation, multilateral agreement regarding economic regulation proved unattainable.  Thereafter the setting of routes, fares, frequencies and hence market shares was left to bilateral agreements.

Australian legislation relating to international air traffic, embodied in the Air Navigation Act, is based on the Chicago Convention.  Section 12 of the Act specifies that all international airlines landing in Australia must be licenced and that such licences must only be issued to the airlines of countries with which Australia has a bilateral agreement.  In negotiating bilateral agreements, Australia has sought to employ the principle of true origin and destination.  Air services are established only where there is sufficient point to-point traffic having its true origin and destination in the contracting States.

The post World War II regulatory regime has been characterised by control of entry, fares and capacity.  The free entry of new firms has been precluded;  new entrants must be approved by the governments concerned.  Until the 1970s, the International Air Transport Association (IATA) proposed fares for each route which had then to be approved by governments.  There followed a period in which governments, in league with their national carriers, became more directly involved with fare negotiations through bilateral talks.  However, the intensely competitive climate of the early 1980s led some governments to withdraw (wholly or partially) from fare determination.  The Australian Government, for example, has given Qantas greater freedom to set its own fares.  Capacity controls have been a feature of international aviation since World War II.  The majority of Australia's bilateral agreements provide for predetermination of capacity for each carrier.  We should note that whilst the UK and US agreements contain Bermuda capacity clauses which leave capacity-related decisions to carriers' judgement, the associated memorandums of understanding provide considerable scope for governments to influence capacity determination. ⁽⁴⁴⁾

The Six "Freedoms" of the Air Freedom to fly across the territory of a foreign nation without landing. Freedom to land in a foreign country for purely technical (non-traffic) purposes. Freedom to set down in a foreign country traffic coming from the airline's home country. Freedom to pick up in a foreign country traffic destined for the airline's home country. Freedom to carry traffic from a point of origin in one foreign country to a point of destination in another foreign country. Freedom of the airline of an intermediately positioned country to carry passengers between two foreign countries with an intermediate landing in its own territory.

Increased competitive pressures led to a review of Australia's international civil aviation policy in 1977-78 (the ICAP Review).  Government policy in the early 1980s was based on the ICAP recommendations;  the ICAP policy relying heavily on bilateral agreements.  Australia has sought to concentrate on third and fourth freedom traffic, to the exclusion of sixth freedom rights.  The fare structure has sought to fill up aircraft, especially with point-to-point passengers.  Australia has retained its policy of strict capacity controls.

THE EFFICIENCY OF THE INTERNATIONAL TRANSPORT SYSTEM

Liner Shipping

Is liner shipping efficient?  We have argued that economic efficiency requires both technical efficiency (minimisation of cost of production for any given quality and quantity of service) and allocative efficiency (services of the desired quality provided in the right quantity at the right price).

Studies of two of Australia's overseas liner trades have suggested that technical efficiency of liner services may be below optimum.  Gallagher and Meyrick's simulation model of liner shipping services between Australia and the ASEAN countries suggest that the trades were over-tonnaged in 1981-82. ⁽⁴⁵⁾  Gallagher and Meyrick estimate that the system could have been efficiently operated with three fewer vessels, without imposing serious constraint on shippers' choice of vessels.  Averaged across the total cargo task, this over-tonnaging represented an unnecessary resource cost burden of $12 per tonne.

The Trans-Tasman trade is among the least efficient of Australia's overseas liner trades.  Freight rates (on a tonne-km basis) have historically been considerably higher than those on comparable Australian coastal or international routes.  The Union Steamship Company of New Zealand (Union Company) has been the dominant operator in the trade.  ANL and Maritime Carriers New Zealand Limited have also participated.  The Australian and New Zealand maritime unions' ban on foreign-crewed vessels has acted as a significant entry barrier, enabling high freight rates to be charged without fear of competitive response.  These high freight rates have not been reflected in high rates of return on funds employed by the major carrier, the Union Company.  Rather, profits may have been absorbed by higher operating costs. ⁽⁴⁶⁾

The BTE has suggested that several factors may have contributed to the escalation of costs.  In part, the high cost level is a reflection of excess capacity operating in the trade:  the Union Company having acquired new and larger vessels in the mid-1970s in expectation of trade growth.  When this growth failed to materialise, load factors declined.  The Union Company's choice of gas turbine rather than diesel engines for its two largest vessels also contributed to high cost levels.  And whilst the manning scales negotiated were reasonable by Australian and New Zealand standards of the time, by the early 1980s these appeared high when compared with overseas and more recently negotiated Australian levels.  The BTE's comments on the Trans-Tasman trade are worth repeating:

The extent to which Union Company is able to pass these "additional costs" on to shippers is conditioned by the elasticity of demand for trans-Tasman shipping and the degree of competition in trans-Tasman shipping.  In a strongly competitive environment, producers have to bear a large part (or the whole) of the cost of poor decisions ...  However, if there are barriers to entry, producers are able to pass on to consumers (in this case shippers) a significantly higher proportion of the costs of poor decisions.  In trans-Tasman shipping, maritime unions ban on foreign-crewed vessels constitutes a significant barrier to entry and enables Union Company to pass on a high proportion of these "additional costs". ⁽⁴⁷⁾

The allocative efficiency of liner shipping services has also been questioned.  Conferences have in the past been accused of offering only one quality of service, a "Rolls-Royce" service, whereas some shippers would prefer a lower quality service at a lower price.  The argument has less validity in today's environment.  Competition from non-conference vessels has led to a range of service types being offered.  The pricing policies of liner conferences have also come under attack.  Conference rates are basically set according to estimates of "what the traffic can bear".  Whilst conferences are sympathetic to "hardship" pleas for lower rates, freight rate structures are relatively inflexible.  Most conferences serving Australia charge the same rate for any given commodity across a wide range of ports.  There are strong efficiency arguments for abandoning this pan-Australian freight rate structure, allowing rates from individual ports to reflect the efficiency of those ports.  We should note that in the past producer groups have favoured the system of rate equalisation.

International Aviation

How efficient are the international airlines serving Australia and, in particular, how efficient is Qantas?

The limited research addressing the problem of the technical and allocative efficiency of international airlines serving Australia suggests some cause for concern.  Estimated rates of return earned through international airline operations do not suggest that the airlines have earned monopoly profits.  Comparisons of rates of return as between four carriers operating out of Australia -- British Airways, Air New Zealand, Singapore Airlines and Qantas -- suggest that Qantas was typically less profitable than its associates in the late 1970s. ⁽⁴⁸⁾

Low profits may of course stem from inefficient operations.  Comparison of the labour/output ratios suggests that British Airways was the least efficient operator with the others approximately equal in efficiency.  Qantas, however, had the highest ratio of wages to revenue, suggesting that in international as in domestic aviation airline employees are capturing part of the economic rents arising from regulation.

As in the case of domestic aviation, allocative efficiency appears to have suffered as a result of regulation.  The 1978 ICAP review implicitly recognised the allocative inefficiency of the then current regulatory regime and explored ways of improving the system.  Forsyth has suggested that the post ICAP fare structure "probably reflects airline costs and passenger preference quite well ...". ⁽⁴⁹⁾  But whilst the ICAP policy must be given some credit for lowering air fare levels and improving air fare structures, it has distorted route patterns and prevented the emergence of an efficient network of services.  Forsyth is particularly critical of Australia's policy of designating only one international carrier, Qantas.  Since Qantas has until the present operated an all Boeing-747 fleet, this has meant that regional routes which require aircraft of 737 or 727 size have been neglected to the detriment of consumers.

CHAPTER 3:  CONCLUSIONS AND RECOMMENDATIONS

In what ways might the efficiency of the Australian transport system be improved?  What gains are possible if improvements in efficiency were attained?

LAND TRANSPORT

Prices charged for the various modes do not at present reflect the real resource cost of providing transport services.  Differences in levels of cost recovery across the modes appear to have distorted the pattern of resource allocation.  Past attempts to correct such distortions have been less than successful.  Whilst there are very real problems in measuring costs and setting prices, the potential gains from efficient resource allocation suggest that the attempt is worthwhile.  The Interstate Commission would appear to be the obvious body to study the problem.

Pricing practices call for special attention.  Railway pricing policies need to be reviewed.  The railway systems must be encouraged to identify incremental or avoidable cost.  Research must be directed towards finding an acceptable charge related to wear-and-tear on road surfaces.

Expenditure on road systems should reflect road usage.  On balance, less should be spent on rural roads, more on urban and arterial roads.  There is a case for free-up Commonwealth road funding to allow states to determine their own priorities.

COASTAL SHIPPING

The protected coastal shipping sector is currently hampered by a high cost structure and lack of competition.  The feasibility of opening coastal trades to lower-cost foreign vessels needs to be examined.  One possible mechanism to achieve greater competition is to allow foreign vessels access, on a quota basis, to future trade growth.

DOMESTIC AVIATION

The Two Airline Policy appears to have been characterised by technical and allocative inefficiency, although the extent of such inefficiencies has not been satisfactorily determined.  The forthcoming review of the Two Airline Policy provides an opportunity to explore the alternatives of full or partial deregulation.  United States experience of airline deregulation should be thoroughly explored and the likely effects of adopting deregulation in Australia canvassed.

Immediate moves to encourage greater technical and allocative efficiency are desirable and feasible.  Technical efficiency might be enhanced by recognising that Ansett and TAA do not have the appropriate equipment for all trunk routes:  equipment possessed by regional carriers (F27s/F28s) may be more appropriate for "thin" trunk routes.  Allocative efficiency might be enhanced by:  adopting more flexible fare structures;  experimenting with new types of service ("no frills", charter flights to holiday destinations);  and allowing greater ministerial flexibility on so-called 6(1)(c) routes such as Sydney-Albury-Melbourne.

PORTS AND TERMINALS

There is widespread agreement that the level of efficiency of Australian ports and terminals is lower than that potentially achievable arid that this lower level of efficiency imposes a high cost on transport users.  The efficiency loss has been variously attributed to industrial disputation, the inefficiency of the interface between sea and land transport and the lack of competition between terminals.  The recently appointed industry task-force to inquire into shore-based shipping costs has the task of deciding on the relative importance of these -- and other -- impediments to efficiency.

INTERNATIONAL SHIPPING

Community discussion of the recent task force report on liner shipping should clearly focus on the extent and desirability of competition in liner shipping markets.  In general, the task force's emphasis on contestability and the need for pro-competitive safeguards is admirable.  The recommendation that Part X of the Trade Practices Act be replaced by a separate Shipping Act calls for close investigation aimed at clarifying the implications of this move.  The rationale underlying pan-Australian freight rates needs to be further explored, as do the task force's recommendations relating to the future of Australian shipping.  The report's rejection of cargo-sharing schemes should be applauded, although continuing pressure to adopt such policies may be anticipated.

INTERNATIONAL AVIATION

Australia's recent international aviation policy has been substantially based on the International Civil Aviation Policy (ICAP) review of 1977-78.  The ICAP policy relies heavily on bilateral agreements about conditions under which air services are to be operated.  Australia has sought to concentrate on third and fourth freedom traffic, and to exclude sixth freedom traffic.  Under ICAP, fares fell and load factors increased.  Australian policy affords Qantas some degree of protection.

The ICAP policy has distorted route patterns -- since airline passengers are constrained in route choice -- and prevented the emergency of an efficient network of services. ⁽⁵⁰⁾  Additionally regulation protecting Qantas has imposed some cost on passengers wishing to fly to nearby destinations not served by 747s.  Findlay has suggested that a preferable way of pursuing public interest goals, if indeed they are the central concern, may be to adopt an "open-skies" policy along with subsidies to guarantee a particular level of services by the national carrier/s. ⁽⁵¹⁾

APPENDIX

NATIONAL ROAD FREIGHT INDUSTRY INQUIRY:
RECOMMENDATIONS REGARDING ROAD COST RECOVERY.

The inquiry recommends that, in the immediate future, governments:

1. Adopt the pay-as-you-go principle for road funding.
2. In each year, determine the total amount of road funds to be raised from road-user charges as being equal to the sum of:
• planned expenditure on national and other arterial roads;
• planned amounts of earmarked contributions from Commonwealth and State governments for expenditure on local roads.
3. Classify as road-user charges appropriate portions of the yields from the prevailing fuel taxes, vehicle registration fees and driver licence fees.
4. Formally hypothecate the yield from the road-user charges to the road expenditure identified above.
5. Continue the ABRD levy and its hypothecation to road expenditure.

Also for implementation in the immediate future, the Inquiry recommends that:

6. Vehicle registration fees be extended to commercial vehicles which are exempt at present, namely:
• trucks operating on interstate licences, and
• certain government and public sector road freight vehicles in commercial operations.
7. Vehicle registration fees for interstate licensed trucks should be established by means of Commonwealth legislation with any necessary administration being conducted by the States as agents for the Commonwealth.
8. The yield from such fees be paid into a trust fund hypothecated to road expenditure and the funds passed over to the States.
9. As at present, trucks with interstate licences not be allowed to engage in intrastate haulage.
10. If vehicle registration fees are applied to interstate licensed trucks before the standardisation of fees across States (see below), then the new fee be set at $1700 for a typical interstate vehicle combination.

For the medium term the Inquiry recommends that governments:

11. Adopt a uniform system of vehicle classification for the purpose of levying vehicle registration fees.
12. Standardise vehicle registration fees across the States (in the interests of neutrality).
13. Adjust the vehicle registration fees for interstate licensed trucks to the (uniform) levels then applying in all States.
14. Abolish the permit fees presently levied by some States on out-of-State vehicles seeking intrastate work.

and then

15. Abolish the interstate truck licence.
16. Permit all trucks to engage in both interstate and intrastate haulage.

The Inquiry also recommends that governments:

17. Carry out a very thorough study of attributable and joint costs and the allocation thereof to different vehicle classes, to obtain data which are more precise than those presented in this report.
18. In accordance with the findings of that study, adjust vehicle registration fees and fuel taxes so that attributable costs (allocated to vehicle classes) are recouped partly through registration fees and partly through fuel taxes, and so that allocated joint costs are recouped through fuel taxes.

After the implementation of these recommendations, the Inquiry suggests that governments take a longer view and, as a final stage for the implementation of a vehicle charging system, it recommends that:

19. ATAC establish a revised method for the recovery of road costs, designed to make the charge for an individual truck match more closely the road costs incurred as a result of the actual distance travelled by that particular truck.
20. Implementation of the revised method not be used to increase the total yield from road-user charges.
21. The studies needed to establish the revised method be undertaken by governments in collaboration with industry representatives.

The Inquiry notes that implementation of such a method requires the use of reliable devices capable of measuring the aggregate distance travelled by a truck over a period of weeks and months.

---

ENDNOTES

1.  A.J. Shaw, "Transport finance and cost recovery", in Transport Outlook Conference 1981 Papers and Proceedings, Canberra, Bureau of Transport Economics, 1981, vol 1 p 30.

2.  Bureau of Transport Economics, Transport Outlook Conference 1981 Papers and Proceedings, Canberra, Bureau of Transport Economics, 1981, vol 2 p 326.

3.  Report of National Road Freight Industry Inquiry, Canberra, AGPS 1984.

3A.  Victorian Department Transport, "Victorian Transport Study", 1980.  State Transport Authority (Victoria), Annual Report 1984-85, p40.

4.  P. Stubbs, Australia and the Maritime Industries, Melbourne, Australian Industries Development Association, 1983, p 143.

5.  The prohibition is not absolute.  Note East-West services on the Sydney-Hobart route, and the indirect services from Sydney to Melbourne via Albury, operated under Section 6(1)(c) of the Airlines Agreement Act 1981.

6.  P.J. Forsyth, "The Australian transport industry:  regulation and its alternatives", in P.J. Forsyth et al., Regulation and Deregulation, Sydney, University of NSW Centre of Applied Economic Research, 1982, pp 30-31.

7.  M.G. Kirby, "An economic assessment of Australia's two airline policy", Australian Journal of Management, 4 (2), October 1979;  M.G. Kirby, Domestic airline regulation:  the Australian debate, Sydney, Centre for Independent Studies, 1981;  P.J. Forsyth and R.D. Hocking, Economic efficiency and the regulation of Australian air transport, Monograph M62, Sydney, Committee for the Economic Development of Australia (CEDA), 1980.

8.  Hughes and Vale Pty Ltd v. New South Wales (No.1), (1954) 93.CLR.1;  Hughes and Vale Pty Ltd v. New South Wales (No.2) (1955) 93.CLR.127.

9.  L. Joy, "Unregulated road haulage:  the Australian experience", Oxford Economic Papers, 16 (2), 1964.

10.  C. Nelson, "The economic effects of transport deregulation in Australia", Transportation Journal, Winter 1976.

11.  G. McDonell, "Six Australian transport myths", in Chartered Institute of Transport, Fourth National Transport Symposium, Papers and proceedings, Hobart, 1983.

12.  See e.g. South Western Australia Transport Study, Perth, Coordinator-General of Transport, 1977;  Victorian Transport Study Report, Melbourne, Government Printer, 1980.

13.  See note 2.

14.  P.J. Forsyth and R.D. Hocking, "Economic efficiency and the regulation of Australian air transport", paper presented at Seventh Conference of Economists, Sydney, 1978.

15.  K.R. Mackay, "A comparison of the relative efficiency of the Australian domestic airlines and foreign airlines", Appendix A6.1 in vol 2 of Department of Transport, Domestic air transport policy review, Canberra, AGPS, 1979.

16.  The Independent Air Fares Committee Act 1981 requires the Committee to ensure both that air fares over two or more routes having similar characteristics (including aircraft type) are determined on a consistent basis, and that the level of air fares is related as closely as practicable to the cost of providing the service.  As the Committee has noted, in some situations these requirements can come into conflict and a balance may have to be struck between them.  See IAFC, Cost allocation review:  Air Queensland Ltd, Report and Determination, February 1984.

17.  Op. cit.

18.  McDonell, op. cit. pp 2-3.

19.  P. Morris (Federal Minister for Transport), speech to conference of Australian Shipping Officers" Association, Fremantle, 9 October 1984, Commonwealth Record 9:41 p 2007.

20.  Landside costs include terminal and stevedoring charges, packing and unpacking of containers, costs incurred in moving containers to and from packing and unpacking points, centralisation and decentralisation of cargoes and "feeder service" costs.

21.  Prices Justification Tribunal, Report on Seatainer Terminals Ltd, March 1977.

22.  Ibid p 115.

23.  The PJT report notes that "It seems to us that is is unlikely that, in a truly competitive situation, a company would be able to compensate itself completely for falling turnover by increasing its tariffs.  Yet this is what the Company, in its 'justification formula', shows occurred" (p 117).

24.  Australian Shippers' Council Annual Report, 1980.  The companies selected for comparison were Ansett Transport Industries Ltd, Brambles Industries Ltd, Fleetways (Holdings) Ltd, Mayne Nickless Ltd, P & O Australia Ltd, and Thomas Nationwide Transport Ltd.

25.  W.J. Baumol, J. Panzar and R. Willig, Contestable markets and the theory of industry structure, New York, Harcourt Brace Jovanovich, 1982.

26.  It has however been recognised that there may be times when no licensed vessels are available or when none of the available licensed vessels are suitable for a particular cargo.  The Act provides that in such circumstances unlicensed vessels may be permitted to carry cargo under a single voyage permit.

27.  Industries Assistance Commission, Draft Report on the Steel Industry, 1979.

28.  J. Barber, "The growth potential of the Australian steel industry", in W. Kasper and T. Parry (eds) Growth, trade and structural change in an open Australian economy, Kensington (NSW), University of New South Wales, 1978.

29.  R. McLean, Australian coastal shipping:  the high price of protection, Policy Paper 1, Perth, 1984.

30.  K. Trace and P. Cassidy, "Pressing issues in Australian shipping", AIDA Bulletin, 329, May 1981.

31.  P.F. Amos, Coastal transport in Australia, Sydney, CEDA, 1981, paragraph 5.45.

32.  P. Stubbs, op. cit. (note 8 above).

33.  Section 6(1)(c) of the Airlines Agreement Act 1981 states:  "For the purposes of this agreement a trunk route is a route linking any two trunk route centres.  A trunk route centre shall be any one of the following:  Adelaide, Alice Springs, Brisbane, Cairns, Canberra, Coolangatta, Darwin, Gove, Hobart, Launceston, Mackay, Melbourne, Mount Isa, Perth, Proserpine, Rockhampton, Sydney, Townsville and such other centres as the parties hereto shall agree from time to time."

34.  F. Ball, "Outlook for domestic aviation in Australia", paper presented to Chartered Institute of Transport, Fourth National Transport Symposium, Hobart, 1983.

35.  T.G. Moore, "Airline deregulation", paper given to Centre of Policy Studies, Monash University, May 1984, p 22.

36.  Ibid, p 29.

37.  Ibid, p 32.

38.  Forsyth and Hocking, op. cit. 1980;  Kirby, op. cit. 1981 (note 11 above).

39.  D. Starkie and M. Starrs, "Contestability and sustainability in regional airline markets", Economic Record 60 (170), September 1984;  also D. Starkie, "The Two-Airline Policy and lessons from South Australia", Review, 39 (1), Winter 1985, p 15.

40.  C.i.f. stands for cost, insurance, freight:  i.e. the price includes shipment to destination. (F.o.b. stands for free on board:  i.e. the price includes delivery to the ship.)

41.  G. Sampson and A.J. Yeats, "Tariff and transport barriers facing Australian Exports", Journal of Transport Economics and Policy, 11 (2), 1977, p 145.

42.  G.K. Sletmo and E.W. Williams, Liner conferences in the container age, New York, MacMillan, 1982.

43.  J.A. Zerby, "On the practicality of the UNCTAD 40:40:20:  code of liner conferences", Maritime Policy and Management, 6 (4), 1979.

44.  P. Singh, "The legal framework of Australia's international civil aviation policy", paper presented to workshop on international passenger travel, Bureau of Transport Economics, February 1981.

45.  F.D. Gallagher and S.J. Meyrick, "A simulation model of ASEAN-Australia shipping services", Canberra, ASEAN-Australia Economic Relations Research Project, 1984.

46.  Trans-Tasman shipping, Canberra, Bureau of Transport Economics, 1980;  C.C. Findlay, Trans-Tasman freight and shipping services, Canberra, Australia-New Zealand Businessmen's Council, 1980.

47.  In Trans-Tasman shipping.

48.  C.C. Findlay, "The cost of Australian regulation of international air travel", Australian Journal of Management, 3 (2), October 1978.

49.  P.J. Forsyth, "An economic evaluation of Australian international aviation policy", background paper for Bureau of Transport Economics workshop on International Passenger Transport -- Australia, February 1981.

50.  Ibid.

51.  C.C. Findlay, "International civil aviation policy options", Australian Journal of Management, 6 (2), December 1981.