The 5 600km Western Australian rail freight network is a strategic infrastructure asset of national importance, carrying around 80 million tonnes in 2012. It remains in State ownership, but has been leased until December 2049 to a private rail operator. The lease arrangement was designed to allow the government to pursue its policy objectives for the network, while allowing the lessee to pursue its commercial interests without undue interference.
The lease enables commercial experience and incentives to be brought into the maintenance and upgrade of the network, subject to policy controls that remain with the State. Provision is made for the network to adapt to changing demand and new technology by allowing the performance standards to be updated by agreement every five years, or when there is a material change in circumstances. The revision of these performance standards is guided by the principle that the entire network should remain ‘fit for purpose’. Performance standards can be raised or lowered wherever the State and the lessee agree that new standards are required to meet the requirements of rail users and remain in step with changes in rail technology.
At the time of drafting the lease, the State recognised that some narrow gauge grain lines would be unlikely to operate profitably for the lessee, particularly in low-harvest years. From December 2006 the lease allowed the lessee to surrender certain lines or request state funding where a line is carrying low traffic and is expected to make a loss over the next three years. In these cases, the government may resume the line or make arrangements to prevent the lessee making an ongoing loss.
The lease establishes a monitoring and reporting regime and empowers the Public Transport Authority (PTA) to supervise compliance, while the Department of Transport (Transport) manages long-term transport planning, determining future needs and investment priorities for rail freight infrastructure. The parties to the lease envisaged a ‘light touch’ approach to supervision and intervention from government where the interests of the State and the lessee are well-aligned through the lease. Where the interests of the lessee and the State may diverge, a risk-sensitive and proactive approach was anticipated.
The network is influenced by changing market and environmental conditions, technology, regulatory requirements and the lessee’s commercial priorities. Effective management of the lease is a complex task requiring a close understanding of these dynamics, including the long-term and immediate effects of decisions regarding maintenance and capital upgrades. Market conditions change, but a well-devised contract management approach should enable the State to benefit from economic growth while also protecting against emerging and known risks.
The audit objective was to assess the management of the 49 year rail freight network lease by the PTA and Transport by determining whether the outcomes to date are in line with original objectives and whether the agencies are managing the rail freight lease to protect the State’s interests into the future.