The Inquiry received a large number of submissions arguing that tendering practices in the industry often amounted to little more than crude competition to see which transport operator could offer the lowest price for a freight task. This approach was seen as a consequence of intense competition within the industry, with a large number of small operators always at the margins of existence, along with an overriding concern on the part of customers to get their freight delivered at the minimum cost. Customers, it was suggested, almost always took the lowest bid even where they had reason to know or suspect that this price did not represent cost recovery for the operator concerned (and if a small subcontractor was involved almost no opportunity for cross-subsidisation with other trips).
For its part, the ARA saw the structure of the transport industry as contributing to its problems in terms of under-bidding for work. The ARA noted that an investigation of tendering practices amongst its members had proved difficult in terms of making generalisations. Outbound freight was typically organised through standardised contracts that were negotiated directly by the larger retailers (smaller retailers and those in particular locations might use consignors or loading agents). The ARA offered the following observations:
We do know in some cases there are ad hoc deliveries but generally it would appear that for the mainstream arrangements where there is a principal contractor, there is a tender. The tender specifies a range of things, price being one but commitment to standards of quality and driver training are other factors…. [in terms of average contract duration] the survey we did showed between one and three years. There were a couple, I think, that went a bit longer but generally between one and three years. And I think the issue that our people make is that going to the market with those tenders they request and ensure that part of the tender process is an understanding and expectation that people comply with their obligations. Now there’s an issue there, I think, once people walk out of there after they negotiate the tender. The structure of the industry of course lends itself to shaving of margins as you go down the line. I think that’s a concern we have - that we enter into contracts in fair and profitable way. We enter a commercial arrangement but regrettably its the structure of the industry that creates problems (oral submission, Bill Healey, ARA).
A critical problem identified by the ARA was the subletting of work at reduced margins once a tender has been settled with a principal contractor, something it sees as consequence of the structure of the transport industry. Subcontracting is standard in major retail contractors. When the ARA asked member companies if their principal transport contractor/s used subcontractors 13 replied yes and only four said no. Those retailers relying on transport contractors who used subcontractors had a clear expectation that the principal contractor would manage their subcontractors and meet their legal obligations to the subcontractors (oral submission, Bill Healey, ARA). At the same time, subcontracting was seen to effect not only price (ie the shaving of margins down the line) but also, according to the ARA, meant that the delivery schedule had been set for the owner/driver by the contractor that engaged them not the retailer. The Inquiry received other evidence that extensive use of subcontracting had a critical impact on tendering and the low freight rates paid to some operators and this issue is examined in some depth below. At the same time, the ARA emphasised that its members sought to enter into contracts in a due and proper way. While recognising that subcontracting-
based shaving of prices might affect the overall freight rate the ARA also referred to these as outcomes of essentially commercial arrangements:
I would have thought that there are problems given the nature of the industry that because of the existence of essentially cost shifting down the chain, because we make the point there that the drivers are price takers, you are in some cases getting prices put up that… in a different set of circumstances may not be sustainable. Now the question is in a commercial contracting relationship how far do you go in saying to someone your quoting too low. That’s the real challenge here and …its happening across the board… (oral submission, Bill Healey, ARA)
The ARA stressed that while price was not the only determinant of retailer’s decisions to proceed too far down the path of pre-empting price negotiations would be to undermine if not invalidate the tendering process (oral submission, Bill Healey). Further, it argued that in some circumstances the tender price may be acceptable but it was ‘cuts’ taken by various levels of subcontractor that was the problem. It saw the structure of the industry as the critical factor to be addressed if it was shown such arrangements were compromising safety.
Large retailers, like most other large transport users, have a set of key performance indicators (including price, delivery time, quality/damage to freight/loss ratios, legal compliance and reliability) that are incorporated into both the tender process and final contract. Once a contract has started these indicators are monitored on a regular or ongoing basis, not just periodically (oral submission, Bill Healey). The ARA (oral submission, Bill Healey) went on to state that the requirement to meet all legal obligations, including safety, was either stated in general terms or implied, rather than being specified in detail. Retailers incorporate specific termination provisions for some contracts (such as the supply clothing via outworkers) but the Mr Healey was unaware if similar provisions applied to road transport contracts. In relation to the inclusion of more specific safety-related requirements in contracts with transport companies the ARA noted that some companies (notably Coles Myer) had already moved in this direction. The Coles Myer Logistics Code of Conduct, which now forms part of all transport contracts with the company, includes a requirement that the contractor have a fatigue management plan in place and ensure that all drivers, agents and subcontractors comply with this. Amongst some other retailers there were concerns as to what should be included in these contracts and the legal ramifications of this. This appeared to reflect concerns examined in the previous section of this Report as well as very practical issues. Mr Healey (oral submission) stated:
That’s the other issue. It’s one thing to put it in there [safety clauses into contracts], and its another thing to say how you’re going to know.
The Inquiry has given careful consideration to the latter issue. Mr Healey (oral submission) stated that he believed ARA members would look at model clauses such as that based on the fatigue management provision in Coles Logistics Code of Conduct mentioned earlier (the issue of raising customer awareness is addressed later in the Report).
Addressing the issue of client responsibility and industry tendering practices the NSW Road Transport Association (written submission, pages 15-16) argued:
It is fair to say that, up until recently the client or end user of the freight service paid little or no attention to the task of actually moving the freight. It was the freight carrier's task to get the freight from (a) to (b) and the less the client was involved the better. What's more, it was simpler for a client to get the cheapest price for the job by knowing nothing of the task
This attitude pervaded the industry, and was instrumental in the fierce undercutting of rates that occurred in the past, and some say, still occurs today. There is, gladly a lessening of this
attitude in the more responsible carriers, but there is still a need for this to be completely eliminated…
In the past, tendering processes made no mention of how or when a freight task was to be done. The task was to move (x) tonnes of freight from (a) to (b) when required to do so by the client. No request was made for information on: how long the driver would drive; how many drivers would be used; what was to happen if departure was delayed through no fault of the transport company; what was to happen at arrival at destination etc.
The Association argued that questions of how and when tasks were to be accomplished as well as protocols for dealing with delays and unloading were essential to the tendering process if safety was not to be sacrificed. The Report fully endorses this viewpoint. Indeed, it finds it disturbing that these measures were not standard practice over many years. The Report also notes the tenor of the Association's examination of the issue is to indicate that both clients and transport operators shared responsibility for this state of affairs.
The Inquiry received submissions pointing to other practices as contributing to under-bidding on contracts. For example, it was suggested that larger transport operators with diverse activities or warehousing facilities were able to reduce rates by cross-subsidising the freight transport task from other activities. Larger companies can also exploit their economies of scale, flexibility and ability to acquire remunerative return or offset loads, even if at much reduced rates. Such practices have been identified in other countries such as the USA (see Belzer, 2000) and no doubt they occur here although, evidence available to the Inquiry implied these practices, while they may affect some large contracts, were not the principle basis for under-bidding. Of course it may also be suggested that what is labelled under- bidding is simply some operators securing contracts at lower rates but for which their greater efficiency still enables them to make a reasonable return. The Inquiry has no doubt some contracts have changed hands on this basis. However, evidence presented later in this section indicates the transport industry is experiencing low margins and that this also matches the findings of a number of overseas studies and official inquiries.
In addition to the issue of rates, the Inquiry received numerous submissions relating to other pressures being placed on transport operators when tendering for work, especially client demands in relation to scheduling. Even large operators believe these demands had intensified in recent years. For example, a manager of one national company (oral submission) observed:
The tendering process, from my experience in the last ten years, is that it has not changed a whole lot at all in that a majority of large companies [clients] do go out to tender every couple of years. However, it is very much and becoming more so that with those particular clients, large customers, tend to dictate what they want from go to whoa, not just on transit times, rating terms, on insurance, on everything…. They do leave the rates side open for your submission. But they make it very clear in their tender documents that they want you to pick up ‘x’ amount of freight on a given day and then deliver it within so many days or a given time to state ‘x’, ‘y’ and ‘z’. So it’s very dictatorial.
As noted earlier, concern with existing tendering practices that resulted in under-bidding on contracts/squeezed margins and unrealistic scheduling that undermined safety emanated from a wide range of parties, many with no obvious self-interest in promoting this assessment. Typical was the response of the leading NSW motorist organisation, the NRMA.
NRMA does not have documented information on any of these issues…However, anecdotal evidence suggests that industry practices regarding tendering, pricing and scheduling must impact on the level of safety of trucks doing long hauls. Scheduling is a key issue in this regard as an unrealistic schedule can only be achieved by a driver speeding, skipping required rest breaks, or both.
NRMA is extremely concerned that some companies may be winning tenders for a specific job with schedules which are patently unrealistic, given the regulations governing the industry. This practice puts enormous pressure on drivers to break regulations and endanger themselves and other road users. Such practices would contravene relevant occupational health and safety regulations which companies have a responsibility and a legal requirement to follow.
NRMA believes that all transport companies should practice responsible management in regard to tendering, pricing and scheduling. This responsibility extends to clients who should not make unrealistic demands of transport companies to offer inducements for quicker delivery of goods. Strategies need to be identified to encourage companies to act responsibly in this area (written submission NRMA p3).
As was noted in Section Two of the Report, there is a widespread (almost universal) view amongst those making submissions to the Inquiry that subcontracting of freight tasks is increasing and indeed already a pervasive practice within the industry. This impression is confirmed by a survey undertaken for the NRTC (oral submission, Barry Moore). The Inquiry heard evidence that subcontracting was being used enable larger operators to retain/secure business at lower freight rates than would be possible if they directly employed their own drivers in the task. Small fleets with lower labour costs (achieved through reduced pay and entitlement levels, discouraging workers’ compensation claims and direct award evasion) or owner/drivers (where award entitlements don’t apply) are able to undertake the task. It was common, the Inquiry was told, for trucks and/or trailers still carry the major fleet logos so to the casual observer, a member of the public or even a customer, it appears that an employed driver of the major fleet has undertaken the task.
The view that most large transport operators made extensive use of subcontractors was confirmed by larger company representatives, with one for example estimating that only around 10% of the company’s drivers were directly employed. Another large company, which 15 years ago engaged no owner/drivers, was now moving to meet a goal of only 20% directly employed drivers. A few large transport companies did not fit this pattern, but they tended to be engaged in more specialised transport activities or where the for-hire fleet was an adjunct to a vertically integrated operation that accounted for the bulk of that company's trucking operations. In one such company about 20% of its fleet consisted of owner/drivers (these drivers owned the prime mover while the company owned the trailer, making them indistinguishable from company trucks, and worked exclusively for the company). Overall, available evidence indicates that most large operators now rely heavily on subcontractors. Reflecting this trend, the NSW branch of the TWU (oral submission, Tony Sheldon, state secretary) estimated that it had lost 500 members from the long distance sector over the past seven years. These membership losses overwhelmingly came from larger companies where union membership levels have traditionally been far higher than the long distance sector as whole (ie including medium and small operators and owner/drivers). The union believed most of these jobs had been lost due to subletting contracts to other fleets rather than to owner/drivers. This view was consistent with the pattern of subcontracting described by others making submissions to the Inquiry. The centrality of subcontracting to industry operations finds further support in the viability problems experienced by one large operator that tried to continue competing using directly employed drivers (at award rates and conditions). In a sense large transport companies are transforming into companies that manage freight movements (via arranging contracts, proving warehousing and logistical support) rather than being directly involved in shipping freight. The tendency of these operators to re-badge themselves as 'logistics companies' rather than as 'transport companies' has more meaning than most other road users would guess.
…because they don’t value their labour, all their labour component…he might pay himself a wage but that wage wont be any where near what an employed driver would get from a [names major company] etc. Generally, the interstate subcontractors won’t value the part of their wage that’s tacked on at the beginning or start of the trip.
In other words, the cost savings of subcontracting are achieved not through the greater efficiency of subcontractors but rather their willingness to accept an effectively lower rate (either directly or when calculated according to total working time). These savings derive not only from lower direct labour costs but also indirect costs such as workers' compensation and superannuation. The NSW branch of the TWU (oral submission) claimed that larger transport operators were increasingly requiring subcontractors to incorporate thereby removing their need to provide workers' compensation, superannuation and payroll tax. While this allegation requires further investigation it seems clear that subcontractors are seen to provide greater flexibility (getting drivers when and as you need them) as well as advantages in terms of on- costs (such as workers’ compensation). As noted in an earlier section, to the extent that owner/drivers take out inadequate accident insurance (to fill the void of workers' compensation) or superannuation they are likely to make greater calls on the social security system. This might be viewed as a hidden community subsidy to the freight rates regime in place although its size is unknown. These issues should be of interest to the Productivity Commission given its interest in competitive neutrality.
The subletting of tasks may occur at more than one stage. That is, the subcontractor sublets all or some of the task at a lower price to another subcontractor, who may sublet and so on, resulting in a process known in the building industry as ‘pyramid subcontracting’. Where large contracts are involved, the principal contractor may sublet the freight task to a number of subcontractors (and some of these may not be small in the case of very large contracts), some of whom sublet and so on. The situation is also complicated by the fact that a number of large companies have subsidiaries, which can and are also brought into the subcontracting process. The Inquiry was told that three or four 'steps' of subcontracting (ie from client to those driving the truck) was not unusual. Instances were also cited where the chain had become so elongated that a subcontractor would arrive to pick a load without being fully aware of precisely who they were working for (usually where an owner/driver or small subcontractor obtained work at short notice via minor subcontractors). The Inquiry was unable to determine how elaborate (ie how many steps) the subcontracting networks had become (and this almost certainly varies widely) but the rationale for using them at least was clear. However, in explaining the reasons for this pattern of dependency it is important to recognise that subcontractors are not a homogenous group, ranging from single truck operators through small fleet operators and even including sizable fleets. Many single truck operators are country-based and given high unemployment in many of these areas have, in the eyes of some within the industry, bought themselves a job but do not understand their costs. However, even if they do understand their costs they are generally in a very week bargaining position. The situation may be less acute for small fleets with a number of reliable clients, able to undertake a greater diversity of tasks and able to sublet tasks at profit. Nevertheless, the difference is one of degree at best and the Inquiry found it difficult if not impossible to disentangle poor business skills and weak bargaining power in relation to dealing with larger