CBH, Arc rail deal on track

CBH, Arc rail deal on track

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CBH Group chief executive officer Jimmy Wilson (left) and chairman Wally Newman announcing the first agreement achieved using the rail access code since the State's freight rail network was privatised in 2000.

CBH Group chief executive officer Jimmy Wilson (left) and chairman Wally Newman announcing the first agreement achieved using the rail access code since the State's freight rail network was privatised in 2000.

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It took six years to negotiate a seven-year deal, but last Friday CBH Group became the first customer in 19 years of privatised Western Australia's rail network to achieve an outcome under the State's freight rail access regime.

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IT took six years to negotiate a seven-year deal, but last Friday CBH Group became the first customer in 19 years of privatised Western Australia's rail network to achieve an outcome under the State's freight rail access regime.

The cost of negotiating and the fixed and variable cost components of the deal, which starts January 1, 2020 and concludes at the end of 2026, allowing CBH to run grain trains on the 15 freight lines it currently uses, including the Miling line recently plagued by derailments, are commercial in confidence and have not been released.

Under the Commercial Arbitration Act 2012 both CBH and rail lines operator Arc Infrastructure must both agree on release of any financial details.

Arc Infrastructure was Brookfield Rail when the process started and remains part of the Canadian-based rail, road and port logistics, energy and gas storage and transmission conglomerate Brookfield Infrastructure Partners.

CBH is planning community meetings with grain growers to advise them of the arbitrated outcome, but growers may still have to trawl through annual report figures and ask questions at annual general meetings to try to establish what the negotiated freight rail costs are on their lines and what the whole process under the Railways (Access) Code 2000 has cost them.

The past three and a half years of the process involved CBH and Arc sharing the cost of flying the arbitrator, Queen's Counsel, commercial law expert and retired Federal Court judge Kevin Lindgren, to and from Sydney to preside over negotiations.

On top of the shared cost, each company paid for its own legal representation.

On Monday CBH chief executive officer Jimmy Wilson acknowledged the legal costs were "expensive" for both CBH and Arc.

But he and CBH chairman Wally Newman were adamant WA grain growers "are in a better position today than if we had not sought access under the rail access code".

"The question is always was it worth it?" Mr Wilson said.

"The average freight rate across the entire network today is lower than what it was in 2011," he said in answer to his own question.

Mr Wilson pointed to CBH figures that showed the average freight rate - rail and truck - across its network set for the current financial year is $13.44 per tonne, an increase from just under $13/t for the past three financial years due to the arbitration outcome, smaller crop size expected, annual inflation and uncertainty around fuel price.

Without investment in its own trains and other above-rail efficiencies CBH had achieved, the projected freight rate would have been $16.32 this year, the figures showed.

In March CBH told State Treasury, as part of an ongoing review of the freight rail access regime, that rail access cost growers about $7.40 a tonne.

From the few details released it seems that cost may increase marginally initially under the agreement, but future cost rises may have been contained.

Mr Wilson said CBH decided to initiate the process under the rail code in the first place because it considered "below rail (cost) increases were excessive and negotiations were too one-sided".

"We've had a number of wins," he said of the outcome.

"By containing rail access to the network as we know it today, we've managed to achieve an economic price for lines, there are certain performance requirements that need to be met by Arc in the agreement and we do believe this lays the groundwork for change to the rail access code.

"We are certainly very excited about some of the opportunities it presents, it provides a lot more certainty and we are more confident of being able to move more grain on rail going forward.

"We also believe that working with Arc and Watco (the train operations contractor that provides crews for CBH grain trains) we should be able to achieve some leverage to maximise grain on rail over road."

Now it had an agreement for seven years, Mr Wilson said CBH's strategy was to maximise grain tonnage on rail and to reduce train cycle times as much as possible.

Part of this was expected to be achieved through Arc providing "fit for purpose" rail lines under the agreement, with fewer restrictions on axle loading or speed because of track condition, he indicated.

He also indicated that with access guaranteed, CBH could now look at more efficient train loading and unloading technologies.

"CBH has done a lot of work on fixed storage, done a lot of work on inbound (grain coming from paddock to receival sites), now we can focus on outbound to the ports," Mr Wilson said.

He indicated access costs set out in the agreement continued to comprise a fixed cost component paid no matter what tonnage was carried and variable costs for each train path.

It costs more to run a grain train on the main Kalgoorlie-Kwinana line, for example, where there are a number of rail users, than on a side line where CBH is the only user.

But the agreement was "biased" more towards fixed costs, Mr Wilson said, than previous CBH access agreements negotiated privately with Arc outside of the rail code.

The increased fixed cost component would "incentivise" CBH to put more grain on rail to ensure the best value for money, he said, but acknowledged CBH had already moved record tonnages on rail during the negotiations with Arc.

Mr Newman acknowledged the deal was "not perfect" but was the best able to be achieved under the rail code.

"I think it's a good outcome and the majority of growers will be really happy with the certainty so we can plan ahead," Mr Newman said.

He said CBH had tried to have Tier Three grain lines that were placed into care and maintenance by Arc on June 30, 2014, reopened but the capital cost required to refurbish the lines under the code, plus access fees to use them, made that proposal uneconomic.

The lightly-railed Tier Three lines, which serviced Bruce Rock, Corrigin and Yealering, Wickepin, Harrismith, Dudinin and Kulin, Kondinin, Narembeen and Muntadgin and also extended the Perenjori line to Latham and Maya, had axle loading restrictions down to 16 tonnes and speed limits as low as 20km/h in some places when they were withdrawn from service.

"With the Tier Three, there's been a strong case by CBH, myself, the board and all the growers in Western Australia to try and get access to those lines that are owned by the taxpayers of Western Australia," Mr Newman said.

"Under the arbitration we just couldn't make it happen, but it wasn't for a lack of trying.

"If we had of made it work, it would have put freight (costs) up over the whole State."

Mr Newman admitted "going to the umpire" to get an agreement took longer than he had expected - no time limit on arbitration was one of many weaknesses with the rail code previously highlighted by CBH.

He also admitted CBH had taken "a bit more risk" with the higher fixed cost under the agreement this year when a smaller harvest was expected.

But the process had improved the relationship between CBH and Arc, he believed.

"I think the relationship with Arc is better now, we understand each other better," Mr Newman said.

"They realise we are not just going to roll over and keep paying."

Mr Newman said the better relationship and hopefully an improved rail code would make negotiating the next access agreement for after 2026 easier.

He joked that with the time taken to achieve the first access agreement, they should start negotiations on the next agreement under the rail code "tomorrow".

Both Mr Newman and Mr Wilson made it clear CBH's campaign for an improved access regime would continue and achieving an agreement with Arc had not reduced criticisms of the rail code.

Mr Wilson pointed out that under the code the difference between a floor price and a ceiling price for access could be "something like 2300 per cent" and there was "no correlation between price and track performance".

If CBH had agreed to pay Arc for refurbishment of Tier Three lines, there was no compulsion under the rail code for Arc to spend the money on those lines, the work would have taken two years to complete and CBH would then have only had five years of guaranteed access to them, he said.

Mr Wilson said CBH was still working with State Treasury on the rail code and indicated it is also still talking to Treasury about the Tier Three lines.

In March Wheatbelt grain growers Colin Nicholl, Hyden, Bob Iffla, Lake King, Trevor De Landgrafft, Newdegate, Paul Green, Hyden, Dean Sinclair, Varley and Josh Whitwell, Hyden, made a joint submission to Treasury arguing Tier Three lines should be surrendered by Arc to the State government so they could be offered to rail users like CBH who may be interested in taking them over.

"There could be a set of circumstances whereby we see those lines come back," Mr Wilson said.

"Certainly under this agreement it was uneconomic to take them up, we just could not justify bringing those lines back.

"But if the lines were gifted to us it might be possible for us to do something with them."

Arc chief executive officer Paul Larsen said the arbitrator's decision provided a fair outcome that allows both companies to move forward with certainty.

"The outcome will also facilitate the ongoing investment in the areas of the Arc Infrastructure rail freight network used by CBH," Mr Larsen said.

"Both parties will continue to work together to maximise grain tonnes on rail to ensure a sustainable and long-term grain industry for WA growers.

"Arc will ensure the rail network continues to play a vital role in delivering freight and commodity exports to Western Australia's major international trading partners."

Mr Larsen said in the past 12 months, more than nine million tonnes of grain was moved across the freight rail network to the State's ports.

CBH utilised 65pc of the total freight rail network, with about half of the 5500 kilometre network dedicated solely to CBH for grain transport, he said.

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