They’re atrocious…my husband’s a driver…he works on a percentage ratio. He’s quite happy with his company, he has no trouble with driving after his time’s up or anything…he works on a percentage so we get an idea of what they get paid and the pallet rate is absolutely atrocious. It’s got to be lifted and then half the problems are going to be helped. Truck companies aren’t going to have to push their drivers as hard if they are making enough money per load. I think its $30 a pallet of groceries from Brisbane to Port Macquarie, once you take out your truck payment, your fuel, your tyres, it doesn’t add up (wife of truck driver
working for small fleet, Northern NSW).
The Inquiry received a number of submissions and other evidence suggesting that freight rates were either too low or being squeezed (in relation to margins) to the point where they were conducive to unsafe practices in relation to driving hours/number of trips, speeding, drug use and vehicle maintenance.
Pressure on freight rates is a long-term feature of the industry. A study undertaken by the Bureau of Transport and Communications Economics in 1988 indicated there had been a 33% reduction in real freight rates pertaining to the Sydney/Melbourne route in the decade from 1978 (cited in Hensher and Battellino, 1990:545). Of course, freight rates must be evaluated
not only in relation to direct costs (fuel, labour etc) but also with regard to increased truck load capacity and efficiency, improvements in roads and the like (Hensher and Battellino 1990:545).
The Inquiry was fortunate that detailed research had been undertaken in this area by Mr Dean Croke, now employed by the insurer MMI/Allianz Australia but formerly involved in a family trucking company and having undertaken work for the ATA. In 1998 Mr Croke had prepared a report on the economic viability of the road transport industry and both this report and updated information submitted to the House of Representatives Standing Committee on Communications, Transport and the Arts Inquiry into Fatigue in Transportation were made available to this Inquiry. In addition to providing his submission and report to this (ie the MAA) Inquiry, Mr Croke attended a hearing of the Inquiry in Canberra to give further evidence on these issues. It should be noted that the Report of the House of Representatives Standing Committee Inquiry placed some reliance on the evidence of Mr Croke. Further, his report was well known to a number of parties to this Inquiry and at no point was the veracity of his analysis questioned.
In his written submission Croke noted that an array of factors affected the viability of businesses in road transport, including some within the control of the business (internal issues) as well as others outside its control (external factors). Internal factors included:
Operations
• Lengthy loading and unloading times affecting utilisation and driver fatigue. • Drivers failing to record actual loading and unloading time in logbooks. • Insufficient fatigue management and scheduling practices in place.
Financial
• Owners not adjusting business strategies to cope with low inflation.
• High levels of gearing creating a comfort zone in the early years of equipment life cycles where running costs are lowest, which increase substantially with age.
• Return on capital employed not adequately factored into current rates. • Investment in safety not adequately factored into current rates.
• Many operators (large and small) not having a good understanding of their operating costs and contributing to the industries rate problem through unsustainable rate setting
strategies.
• Owner-Driver and Owner-Operator salaries grossly under-estimated in fixed costs. • Unrealistic return on investment expectations by major freight forwarders and industry
customers creating downward pressure on sub-contract rates.
• Lack of financial reporting through real time profit & loss reports and strategic planning within small business in road transport.
• Duplication of carriers liability insurance imposed on sub contractors (up to 2.5% of agreed rate) by prime contractors.
Technological
• Industry’s willingness to pass on the majority of gains to customers (without productivity gains) resulting from such factors as increased vehicle capacity, improved technology, and increased access for higher capacity vehicles.
Management
• Small business unwillingness to adequately budget for marketing costs and accountancy fees.
• Industry’s lack of knowledge of the OH&S Act and reported unsafe work practices and work environments resulting in a disproportionate number of injuries and deaths. • The increasing trend towards self regulation through accreditation schemes and the
attachment of regulatory benefits as a reward for effort principle.
• Competitive pressures from an oversupply of vehicles causing downward movement in rates.
• Industry’s failure to market itself effectively to overcome the “derived demand” syndrome (demand for transport is derived from external transactions).
• Sales and Marketing strategies of major companies where the focus is on quantity of revenue, rather than quality creating a price driven market.
External issues, on the other hand, included
Government
• Inadequate spending on road infrastructure to meet the growing demands of road transport.
• Inconsistent application of road transport law and regulations to both conventional operators and Government business enterprises.
• Inconsistent state government legislation and lack of national uniformity.
Regulation
• National Road Transport Commission (NRTC) proposed legislation on increased mass limits for heavy vehicles.
• Impending legislation from the NRTC to address Operator and Customer Due Diligence and Duty of Care in the workplace.
• Inconsistent transport regulations between states.
• Ineffective management of driving hours under current regulations.
Customers
• Industry customer’s lack of understanding on the freight task performed by operators and willingness to take advantage of an over supplied market to drive down rates.
Business Costs
• Excessive levels of indirect taxation on operators, for example, diesel fuel excise. • Operator costs continually rising disproportionately to revenue (freight rates).
• Industry based initiatives to improve safety and fatigue management, which impose a short-term cost to operators but deliver a longer-term benefit.
• Reform of the Australian Taxation system and impending implications of a GST on industry.
Competition
• Increasing competition from other transport modes such as sea (high-speed and traditional coastal shipping) and rail.
• Preferential treatment for those operators who have made the effort to obtain accreditation and adopt minimum standards (written submission, Dean Croke, pages 5-6).
Croke argued this was not an exhaustive list and that a number of the listed factors interacted to affect overall viability (this Report has already noted evidence of how several factors may interact to affect safety such as the link between loading/unloading delays, self-scheduling and longer hours of work). Rejecting the financial/accounting methods upon which the industry has relied on in the past (see above) Croke based his assessment of viability on a value-added approach which looked at the relationship between the cost of capital and return on the assets used in the business. Under this approach, a business is regarded as viable when its Return on Net Operating Assets (RONA) is equal to, or greater than that business’s Weighted Average Cost of Capital (WACC). These are calculated from the financial statements of a business, and from other market related statistical data from sources such as the Australian Stock Exchange.
In terms of the transport industry, Croke argued that most operators are acutely aware of the consequences of not meeting debt commitments (a recall on their loan, often causing the failure of the business. At the same time, Croke argued that most operators were unaware of the consequences of their business not generating a reasonable return on equity funds (including vehicle replacement costs). In these situations, the over medium and long-term the real value of equity could fall to the point where banks refuse further finance because the
business has become too highly geared, with bankruptcy a likely outcome. In the course of the Inquiry a number of witnesses described events that were entirely consistent with this scenario of a transport business where returns were so low in relation to commitments that it progressively exhausted its initial capital/equity base leading to bankruptcy and/or exit from the industry.
Relying on analysis prepared by Rick Copping (from accounting firm Pannell Kerr Forster) of 23,000 transport companies from the Australian Bureau of Statistics 1998 Business Performance Survey, Croke used value-adding performance to assess the viability of road transport operators. The survey included 23 large companies with more than 200 employees (average number of employees 1,076) with the remainder classified as small to medium with an average employment size of 4.1 employees. The small to medium category was a very diverse one. It included single truck owner/drivers, the majority of whom work as subcontractors to large fleets, have little control over freight rates and are generally seen as at most risk in terms of maintaining a viable operation. Croke argued many medium sized operators, on the other hand, provide specialised freight services such as bulk liquid freight, dangerous goods freight, over-dimensional freight and local freight services. By offering specialised services they were likely to exercise more control over freight rates they charged and would on the basis of this be expected to be more profitable.
In the small to medium category, the data indicated (see Table 19) that the average operator had been trading viably in all years from 1992-93 through to 1997-98. Viability dropped significantly in 1994-95, improved in 1996-97 and decreased slightly in 1997-98. According to Croke (written submission, page 9-10), average operators asset turnover fell from 2.8 times in 1993-94 to 2.0 times in 1997-98 (ie fewer sales generated for each dollar invested). Operator balance sheets also indicated a significant increase in the proportion of equity capital being used (from 47% of total capital employed in 1991-92 to 61% in 1997-98). Croke argues that, in combination, the two trends indicate that operators were not including an adequate rate of return on equity capital in their freight rates (ie the common costing problem referred to earlier). Croke (written submission, page 10) adds:
Many operators have commented that they cannot cut costs any further without compromising the safety of their operations. This suggests that, unless freight rates can be improved, more and more operators will have their viability threatened which in turn may induce operators to further compromise the quality of their operations.
Table 19: Return on Net Assets (RONA) by small and medium sized business units (SME’s) with fewer than 200 employees