Paying a high price for weak links in supply chain

Inefficiencies in logistics will become an even greater drag on the economy as freight volumes soar.

Illustration: Sturt Krygsman.

Everything’s so bloody expensive. It’s a common complaint in Australia. Knowing precisely why things are on the dear side is hard though. Is it big bad monopolies, byzantine workplace rules and penalty rates, or just that we’re so far away from the rest of the world?

One reason is because we’re so bad at transporting goods around. Consider this: it costs a Brisbane-based advanced manufacturing company as much to move its products 35km to the Port of Brisbane as it costs to complete the 13,000 nautical mile journey to Britain.

The cost of freight is embedded in the prices of goods and services. For instance, transportation makes up about 25 per cent of the total cost of heavy construction materials, which in turn affects everything from house prices to the cost of light rail projects.

A report by Infrastructure Partnerships Australia, released this week, highlights how inefficient we seem to be at moving freight around this vast country.

“Despite innovations in automation in recent years, over the last decade Australia has fallen from 23rd to 95th in the World Bank’s rankings for trade across borders. On these rankings, Australia is now trading behind Albania, Nicaragua and Swaziland,” says IPA’s new chief executive Adrian Dwyer.

On the World Bank’s measure of logistics performance we sit at 19th place between Ireland and South Africa.

The vast distances between our major cities and ports means it’s unlikely we’ll ever have the lowest freight costs. More than half our freight travels by train, and almost a third by road, which naturally requires fuel and drivers. In 2016 more than 735 billion tonne kilometres of freight was shipped around Australia (one tonne shifted over 100km would equal 100 tonne-kilometres).

But we can surely do better than 95th in the world. On measures of income per person we sit far higher in the world, suggesting we should be doing much better.

“Whether it is moving product from farms or mines, transporting cars from ports to dealerships, or servicing our major global cities with building materials, groceries or smartphones, we are reliant on complex supply chains largely hidden from everyday view,” the report explains.

Supply costs hobble our importers and exporters too, which matters especially for a nation that trades as much as Australia. Shipping charges for a 40-foot dry container were just above $US1000 in Australia in 2014, compared with $US211 in Hong Kong and about $US500 in Canada. For our beetroot exporters for instance, domestic freight costs are about two-thirds of total freight costs.

Inefficiencies will become an even greater drag on the economy as freight volumes soar a projected 26 per cent over the next 12 years.

The Australian Logistics Council reckons every 1 per cent improvement in the efficiency of the supply chain delivers about $2 billion of gains to the economy.

“People would be stunned to know that we have no idea about the cost or time it takes to get goods to market or even the final destination for our goods. We have no data at all to measure how we drive costs down for businesses and consumers,” Dwyer says.

“Australia’s freight network is the backbone of our competitiveness. It contributes $170bn to our economy, yet we lack clarity on why we do freight badly compared to our international peers.”

IPA is calling for a new agency, a Freight Performance Australia, to collect and analyse freight ­efficiency performance. Having such data and analysis would surely be useful, but is another federal government agency really the answer?

Perhaps Infrastructure Australia, which costs $12 million a year, could do the job instead. We also have a National Transport Commission, another $11.5m.

Every pet shop galah is talking about infrastructure investment, which has doubled since the early 2000s and is projected to keep ­rising. The new Deputy Prime Minister has hinted that the ­federal budget next month will ­include more big-ticket items.

Getting the economics of freight infrastructure can be tricky though. It’s not simply a question of “the more the better”. Working out where the public benefit stops and the private benefit begins is challenging.

US President Donald Trump recently attacked retailing giant Amazon for enjoying an implicit subsidy through the government-owned US Postal Service. He has a point. How much should Amazon’s shareholders benefit from the subsidy that flows to the postal service?

In the longer term, technology should help reduce freight costs. For parcel delivery, studies show more than 50 per cent of the supply chain costs entail the “last mile” of delivery. Let’s hope drones help reduce that.

More efficient freight will also be politically difficult. The supposed shift towards driverless trucks too might help, as driverless technology spreads to Australia’s highways and ports, dramatically reducing business costs. But more than 100,000 drivers — the fifth most common occupation — face redundancy over the next decade, according to a recent report by the International Transport Forum.