Cargo crisis

Australia is starting to feel the effects of a recent lack of investment in its transport infrastructure, reports Janine Mace

With Sir Richard Branson’s Virgin brand long being associated with successful business ventures, it comes as something of a shock to hear it being referred to by analysts as a “noose around the neck” of a company.

But those are the words being used by company analysts about the impact of the budget Australian airline, Virgin Blue, on the bottom line of majority stakeholder Patrick Corporation.

Citigroup Smith Barney analysts recently claimed logistics and ports operator, Patrick Corp, would have a much brighter future without its 62.4% stake in the airline Branson started with so much fanfare back in 1999.

Whilst the poor performance of Virgin Blue could be written off as simply the result of the domination of Australia’s domestic airline market by Qantas, or due to the woes of the international aviation industry, it is actually a small part of a much larger story relating to the infrastructure crisis and reform issues facing the Australian economy.

Like many Western economies following the path of fiscal conservatism, Australia has under-invested in its economic infrastructure in recent decades and is now starting to reap the consequences, with many facilities reaching capacity or approaching the end of their useful life.

The OECD noted recently that total Government spending on infrastructure in Australia fell from 2.6% of GDP in 1991-97 to 2.2% in 1997-03, and a recent report by the Allen Consulting Group concluded that “there is increasing evidence of an emerging infrastructure deficit in Australia”.

Both the Australian Consumer and Competition Commission and the Reserve Bank of Australia have drawn attention to the problem of infrastructure bottlenecks, pointing to an economy hitting capacity constraints. This is placing a ceiling on growth prospects, as well as generating fears of upward pressures on input prices, inflation and interest rates.

Capacity concerns

In an economy based around international trade, concerns about the capacity of Australia’s transport infrastructure to handle commodity exports are headline news. And news it has been, with Government busily anguishing at every level over the problem and trying to pass the blame elsewhere.

The Government is under considerable pressure to sort out the infrastructure logjams that have started appearing at ports as commodity exports and economic growth have stepped up in pace.

Strong world demand for commodities such as coal - particularly from China - has fuelled economic growth in Australia, but hold-ups at ports are slowing exports. This was highlighted in April when there was a traffic jam of ships waiting to load coal at the Queensland port of Dalrymple Bay.

In June, an expert taskforce, hand-picked by Prime Minister John Howard, reported that significant reform was required to encourage additional investment into infrastructure.

“In the absence of decisive policy action, significant infrastructure bottlenecks constraining Australia’s exports are likely to develop over the next five to 10 years,” the report from the Exports and Infrastructure Taskforce warned. “Without action to remove impediments to efficient investment in infrastructure, Australia’s export potential over the next five to 10 years risks being compromised.”

Frustrated by an apparent inability of some local and state authorities to upgrade ports and make planning decisions on infrastructure, the Australian Government has threatened to take control of the nation’s ports “in the national interest”.

In announcing the plan, then deputy prime minister and transport minister, John Anderson, said: “For the whole supply chain to work properly… we can’t have a major weak link right at the end of the chain.”

Controversially, he said the Australian Government could take over the role from the states as it “has always had the power to make laws for our export ports under the trade and commerce power in the constitution.”

Anderson also told reporters it was time to extend the Government’s national land transport reform plan, AusLink, to include planning and regulation at major ports.

In support of the plan, he cited the Government’s labour reforms on the waterfront and pointed to the massive increase in productivity flowing from them. These reforms were the result of a bitter waterfront dispute that pitted the Maritime Union of Australia against the Lang Corporation - the former incarnation of Patrick Corporation.

Patrick is now Australia’s biggest port cargo handler and recently announced a significant agenda to redevelop and invest A$425m in its container terminals at Sydney and Brisbane to double their capacity.

According to Chris Corrigan, the company’s chief executive, investments such as this are vital for the future of the Australian economy.

“Australia will need this infrastructure expansion to meet the expected growth in transport and logistics demand in the years and decades to come,” he said in announcing the company’s half-year results.

The involvement of Patrick in both Virgin Blue and Australia’s ports is no accident, with the company’s mission to be the first and only true multi-modal transport company in Australia.

Huge rewards

In such a large country, where transportation is a vital component of the supply chain and one with very high barriers to entry, the rewards for building an integrated chain of transportation and logistics companies could be huge.

Aside from its majority stake in Virgin Blue, Patrick is also involved in Pacific National - a joint-venture rail operation with trucking company Toll Holdings - and domestic freight forwarding and motor vehicle distribution and processing businesses.

The company is also currently pushing for the establishment of a new rail freight corridor between Melbourne and Brisbane.

Patrick’s strategy of having a stake in every level of freight transport, from when goods arrive in the country and are distributed by road, rail or air through to when they arrive at people’s doors, is simple and, if successfully implemented, very profitable.

Taking a majority stake in Virgin Blue in a hostile takeover provided a key component in the creation of Patrick’s unparalleled transport empire encompassing land, sea and air networks.

While Patrick has not made significant job cuts or changes at Virgin Blue since the takeover, it indicated in its bidder’s statement that it would look for “efficiencies” and to share expertise.

The airline is currently negotiating three multi-year enterprise bargaining agreements and has said it will be looking for “greater flexibility” from staff.

These enterprise bargaining agreements are likely to be negotiated in the shadow of the Australian Government’s new industrial relations reforms, which strip away many of the enshrined workplace conditions in industrial awards and allow employees to negotiate for these directly with employers.

The Australian trade union movement is already gearing up for a major battle over these reforms, with emotive television commercials being run prior to the introduction of the proposed legislation in Parliament.

The battle over this legislation is set to form one of the key issues in Australian politics over the next few months, and is likely to see some very bitter disputes arise. Throw into the mix demands for micro-economic reform to improve the transport and logistics chain and remove embedded regulatory impediments and “inflexible” regimes covering ports and rail networks, and things could get very interesting in the next 12 months.

Janine Mace is an Australian finance and business journalist.