5 April 2017

2nd Reading Speech

The Hon. ADAM SEARLE ( 21:09 ): The Labor Party opposes the Transport Administration Amendment (Transport Entities) Bill 2017 for three principal reasons. Firstly, the legislation aids and abets this Government in erroneously removing billions of dollars from the budget bottom line using an accounting trick to falsify the budget and make it look better than it really is over the forward estimates, thereby seeking to con the wider public. Secondly, under the model proposed by this bill the safety of train services in this State will be at risk, placing at risk the train-travelling public and winding back previous reforms directed at promoting public safety with respect to rail transport. Finally, the legislation will allow for the privatisation of rail assets in this State by a ministerial directive without further deliberation or decision by this Parliament. I do not think members in this place or the other place are fully aware of that; certainly the public is unaware of it.

The bill proposes a staged process whereby Sydney Trains, for the metropolitan services, and NSW Trains, in regional New South Wales, deliver railway passenger services. RailCorp will be the asset manager and will be assigned further asset management functions. There will be a Residual Transport Corporation to assist in the wind-up of activities that transport agencies no longer need to undertake. Finally, RailCorp will be turned into the Transport Asset Holding Entity [TAHE], and converted into a state-owned corporation. The term “administration” in the name of the bill is misleading and does not reflect the enormous scope of the legislation.

Due to the TAHE accounting changes the budget result has been improved, according to the 2015-16 State budget, by the following amounts: In 2015-16 the budget surplus is artificially inflated from $713 million to $2.5 billion, increasing the surplus by $1.8 billion. In 2016-17 the budget surplus is artificially inflated from $756 million to $3.1 billion surplus, an increase of $2.4 billion. In 2017-18 the surplus is increased from $811 million to $2.6 billion surplus, a further $1.8 billion increase, and from 2018-19 the surplus is artificially inflated from $895 million to $2.3 billion, a further $1.4 billion inflation.

Over the forward estimates the budget bottom line is improved by $7.4 billion without actually changing the money in or money out. It is just an accounting trick to try to con the public and money markets that this Government is a reasonable economic manager. When we peel back that veneer we see that that is just not so. In June last year, the Rail, Tram and Bus Union NSW Secretary Alex Claassens indicated that the inclusion of the Transport Asset Holding Entity in the budget should be a major concern for commuters and workers because it is another step towards the privatisation of the transport services. In 24 June 2015, a columnist with the Australian newspaper, Adam Creighton said:

The NSW budget reminded us governments, with their vast array of on and off-balance sheet entities, can. Were it not for the creation of an independent agency to oversee transport infrastructure, the much-flaunted surplus would have crashed from $2.1 billion this financial year to $700 million next year.

Instead, the surplus is rising to $2.5bn then $3.2bn. Almost 70 per cent of the $10.6bn of surpluses projected over the next four years depends on a new Transport Asset Holding Entity, a public trading enterprise similar to Landcom or Sydney Water, outside the general government accounts, that will manage the state’s public transport assets on a consolidated basis.

So we can see that billions of dollars have been wrongly, we think, removed from the budget bottom line. The Government created the TAHE asset from 1 July 2015 as a public non-financial corporation responsible for managing the rail assets separately from providing railway passenger services.

This was done to move it, effectively, off budget. The Government and the Treasurer at the time, now the Premier, stated that this was consistent with the Australian Bureau of Statistics [ABS] classifications. In the 2016‑17 Budget Paper No. 1 at page 1-2 there is quite a good illustration box at Table 1.1, which states that in accordance with Government Finance Statistics classification, the Australian Bureau of Statistics has classified TAHE as a commercial public non-financial corporation. If the Australian Bureau of Statistics had, in fact, done that, why the need for the legislation? The Government has already moved to bank the savings.

For TAHE to be taken off budget it needs to make a commercial return of at least 7 per cent, and that is very difficult because rail assets are not profitable in a straight profit-loss sense. There are tens of billions of dollars worth of rail assets that are depreciating assets and, as all members will be aware, rail journeys are publicly subsidised to the tune of about 73 per cent—fares cover less than 30 per cent of the cost. How then can this new entity make a commercial return of at least 7 per cent? I will return to this, but it is clearly not only smoke and mirrors; it is having to sell off assets reposed into this new body.

The budget has been artificially improved by this accounting trick and the Government has already banked the savings, as can be seen from that page from the budget papers; the $7.4 billion is already banked in last year’s budget even though there was no legislation. The ABS has apparently reclassified the holding entity, the Government has banked the savings in the budget, so why the legislation now? Could it be that the ABS is not satisfied with the Government’s work to date, or maybe the classification, if it has taken place, is conditional upon legislation? Certainly, the Government has been lacking in transparency around the process, but proper process would have seen legislation occur before the Government cooked the books. The Government should have sought and obtained parliamentary approval before engaging in this grand deception.

Our understanding is that the ABS has informed the Government that the current arrangements regarding the TAHE are not sufficient to enable it to be taken off budget. We therefore believe that the Government has erroneously banked the savings and has now been sent back to the drawing board to obtain parliamentary approval and to lock the assets into a state-owned corporation ostensibly governed by an independent board. Clearly, the ABS is not content with the Government, in the current arrangements, having the ministerial control and direction; the ABS wants it in the hands of a state-owned corporation, which allows it to claim it is more independent of the Government.

The Government now wishes to convert the TAHE into a state-owned corporation with the main objective being to have it become a successful business. If the bill does not go through, the TAHE will need to be added back to the budget, which will significantly deteriorate the budget position and possibly lead to a budget deficit in future years. But if this bill does go through, there is a strong possibility that the ABS will be unsatisfied with the state-owned corporation arrangement being able to make a commercial return of 7 per cent, and the TAHE would still need to be added back on budget. We therefore oppose the legislation for that.

Under this model, we believe that the safety of train services will be at risk. The separation of asset ownership—TAHE—from rail service delivery, Sydney Trains and NSW Trains, is what the New South Wales Labor Government introduced in response to national competition reforms in 1996-98. In 2000-01, the New South Wales Government witnessed the risks with that approach; for example, the asset holder—Rail Access Corporation at the time—dropped the ball on ensuring that its assets were maintained properly because of the need to operate commercially and return dividends to Treasury. One way to achieve this was to reduce costs by extending the maintenance cycles as part of its asset management strategy. The risk is even higher with the objectives and functions of TAHE—the new Rail Access Corporation—which is now 100 per cent focused on being commercially successful and maximising its net worth to New South Wales. It is a classic asset manager with no safety responsibility.

This is appropriate for a property fund but not for managing assets to run rail services. The objectives and functions of Sydney Trains and NSW Trains do not compensate for this. The primary objective of both is to provide safe services in an efficient, effective and financially responsible manner. While the bill says that this objective is the one that supersedes all others, the other objectives also require it to be commercially successful and to maximise net worth. So in its objectives, I think in clauses 10 and 11 of the bill, we have this tension set up that undermines the objective of public safety. There is a risk that the combination of these commercial objectives and the need within the primary objective to operate efficiently and financially responsibly will inevitably mean that safety is not the primary focus of management, and of course there will be consequent risks to the public.

This risk is even higher as Sydney Trains and NSW Trains have other functions that have more to do with running a diverse transport business than running rail services. Lessons in Government show that, in the aftermath of rail accidents, the more competing objectives and functions that these agencies have the less focus there is on safe rail services. It will be inevitable that the management of Sydney Trains and NSW Trains will become seduced by the opportunity offered by their objectives and functions to build a successful and diverse transport business.

The three protections referred to in the Minister’s second reading speech to ensure the primacy of safety have all failed and led to the merging of previous agencies into one entity. The first of these safeguards is that the transport secretary can direct Sydney Trains and NSW Trains, and also sits on the Transport Asset Holding Entity [TAHE] board. Other statutory state-owned corporations [SOCs] within New South Wales have caused problems for Governments because they operate within their commercial mandate and directors, despite being appointed by the Government, take seriously their director’s obligations to act in the best interests of the company, not the Government. The secretary of course will be only one voice on a board of up to seven people and will only be able to direct Sydney Trains and NSW Trains to effectively prioritise safety above all their other functions if he is fully informed by those organisations of all risks in a timely way. Relying on this assumes that information asymmetry does not exist.

Secondly, TAHE will need to comply with an operating licence issued by the Minister. But previous experiences in Government show that the board rarely refers to operating licences when making investment decisions. Relying on contracts to ensure asset managers focus on passenger safety is a recipe for failure. It is a disaster for public confidence in the rail system if the Minister has to enforce the operating licence to improve a focus on safety. Thirdly, the State Owned Corporations Act gives the Minister for Transport the capacity to direct TAHE to act in the public interest. However, this is not foolproof. First, the board can resist this if it feels the direction undermines the commercial objectives and, secondly, the Treasurer, as TAHE shareholder, must agree to it. If the Minister for Transport has to use this power to make TAHE focus on asset safety, this shows the model is fundamentally flawed and has failed.

It took the death of numerous railway workers and the tragic Glenbrook rail accident in 1999 for it to be understood that public rail passenger rail operations should not be split up—they should be integrated. The New South Wales Labor Government combined the rail infrastructure owner and rail infrastructure maintainer in 2001 and then combined them both with the passenger railway service operator for the metropolitan area. This Government is now splitting up rail operations once again. Labor opposes the bill because of the huge safety issues and ramifications that will arise out of this new arrangement.

As I indicated, this legislation will allow for the privatisation of rail assets. TAHE is expected to run out of money by year four. Therefore the Government in 2020 and beyond will be running an entity that is required to make a 7 per cent return but draining significant amounts of public expenditure. It is quite clear that privatisation will be the tool used to cover up losses to be made in year four and onwards. By setting up TAHE as a state-owned corporation whose main objective is to run a successful business, the Government is preparing for TAHE to be privatised. Under clause 10 (1) (B) TAHE is to be a “successful business”. It is to “operate at least as efficiently as any comparable businesses” and to “maximise the net worth of the State’s investment in TAHE”. The public has had a gutful of privatisation, and we will not stand for this. We will oppose the legislation for this reason, amongst others.

Schedule 1 to the bill changes the way Sydney Trains and NSW Trains are established. Currently they are subsidiaries of RailCorp under the Transport Administration (General) Regulation 2013. They were created as subsidiary corporations to RailCorp in 2013, because the New South Wales Government could do that by making a regulation under section 55C of the Transport Administration Act. The Government preferred to do that because it wanted to avoid putting legislation to the Parliament where, of course, it would have had to run the gamut of the upper House. From 1 July 2013 RailCorp remained in existence as a statutory corporation, effectively as owner of all public transport rail assets. Sydney Trains and NSW Trains had a right to control and manage rail infrastructure on which they run passenger and bus services on the RailCorp-owned network under the terms of contracts and licences between RailCorp and the subsidiary corporations.

Both Sydney Trains and NSW Trains will be rail authorities under schedule 6A of the Transport Administration Act and item [56] of schedule 1 to the bill spells that out. Each of them will be a rail infrastructure owner as defined in section 3 of the Transport Administration Act in respect of the rail infrastructure facilities they manage or control. The land on which the rail infrastructure facilities are situated will continue to be owned by RailCorp until it becomes TAHE when schedule 2 to the bill commences. Presumably the current contractual arrangements under which Sydney Trains and NSW Trains control and manage the rail infrastructure on which they run services will continue.

Once schedule 2 to the bill commences and RailCorp is converted to TAHE this can change, and I will come to that later. Under item [23] of schedule 1 to the bill government funding of Sydney Trains and NSW Trains will be sums advanced directly by the Treasurer, appropriated by Parliament for Transport for NSW purposes and allocated by Transport for NSW or as otherwise appropriated by Parliament for each agent specifically. They will still be able to collect revenue from commercial activities, authorised investments, fines and penalties. Item [27] of schedule 1 to the bill permits each of Sydney Trains and NSW Trains to make orders setting charges, including fares, similar to existing powers in existing legislation.

Employment of staff will be under the same provisions that exist now; that will not be changed. However, there is a significant change to the power of the Minister for Transport to transfer assets, rights and liabilities out of transport authorities. Currently, section 94 (1) of the Transport Administration Act empowers the Minister to transfer assets, rights and liabilities from rail authorities to “another rail authority, a subsidiary of a rail authority, a state-owned corporation, the Crown or any other person or body acting on behalf of the Crown or a local council”. The current definition of “rail authority” includes RailCorp, Transport for NSW or any other person or body prescribed by the regulations and SRA Residual Holding Corporation, the Transport Secretary and any other person or body prescribed by the regulations.

Items [34] and [35] of schedule 1 to the bill change the power so that the assets, rights and liabilities of a transport authority may be transferred by ministerial order. The definition of a transport authority will include a rail authority such as RailCorp, Transport for NSW or any other person or body prescribed by the regulations, SRA Residual Holding Corporation, State Transit Authority, Roads and Maritime Services [RMS], Sydney Ferries, the Transport Secretary and any other personal body prescribed by the regulations. This is a significant change that will allow the assets, rights and liabilities of all operating agencies in the Transport portfolio to be transferred out by ministerial order, particularly item [36].

Assets, rights and liabilities include real property, personal property—plant, equipment, structures severed from ownership of the land, contracts, licences and legal liabilities. Because the definition is so broad and includes any other person or body prescribed by the regulations, the Government will be able to make a simple regulation prescribing any person or organisation as a transport authority. For example, a private sector bus operator could be so prescribed and assets of the State Transit Authority could be transferred to it or, for example, Sydney Motorway Corporation, a government-owned but essentially a private company, could be prescribed in regulation and RMS assets could be transferred to it, and Sydney Motorway Corporation subsequently could be sold by the Government to the private sector without further authorisation by the Parliament.

One can see the mechanisms whereby assets can be reorganised simply by ministerial directive to bodies prescribed in regulations as being a transport authority—not necessarily a public transport authority but any transport authority—and therefore effectively alienated, privatised, sold or potentially leased and this Parliament would have no further superintendence of those transactions. One can see that this is not a scare campaign. This legislation will set up the architecture that will enable the privatisation of rail assets, forced as it were by the requirement to make a 7 per cent return. How can a 7 per cent return be made when rail fares are 73 per cent subsidised by the Government and everyone knows that the tens of billions of dollars worth of rail assets are a depreciating asset not an increasing asset.

Item [53] of the bill contains further potentially significant changes. It contains a number of amendments to the current schedule 4 of the Transport Administration Act. The major changes include new clause 13 to permit the Minister for Transport to make an order that severs fixtures from the land, including buildings, and may also include rail infrastructure facilities. New clause 13 (2) says that once severed the asset may be dealt with as personal property, which means it can be sold, leased or licensed to anyone as long as there is a power to deal with personal property. New clause 14 (2) says that such an order transferring assets, rights and liabilities to RailCorp—which of course will become TAHE—Residual Transport Corporation, Transport for NSW or any of their subsidiaries will not constitute a closure of a railway line within the meaning of section 99A of the Transport Administration Act. That means they would not need further authorisation of the Parliament. This is significant, because once the TAHE provisions commence and it becomes a state-owned corporation [SOC], it will own RailCorp’s rail infrastructure facilities because RailCorp will be replaced by TAHE.

Under section 20W of the State Owned Corporations Act 1989 [SOC Act] statutory SOCs can, with the prior written approval of the voting shareholders, form or participate in the formation of private corporations, acquire interests in private corporations and sell or otherwise dispose of interests in private corporations, whether or not the activities or proposed activities of any such corporations are related to the functions of the SOC. Section 20W contemplates that the investment in the private corporation could be in a subsidiary of the SOC, so a severance order could be made and rail infrastructure facilities owned by Transport for NSW could be transferred to a subsidiary of TAHE, a subsidiary SOC. New clause 14 (2) would mean that if a ministerial order were made severing the rail infrastructure from the land, TAHE could then privatise the operation of those rail infrastructure facilities—for example, by licence or operating agreement with the private sector operator, because they are severed from the land. This is a British-style “franchising” of rail operations, which in plain language means privatisation.

TAHE will not be able to sell or transfer those rail infrastructure facilities directly to a private sector operator, because once schedule 2 of the bill commences item [38] says that new clause 14 (2) protection only applies to a transfer by TAHE if it is to a public transport agency, which under the Transport Administration Act means Transport for NSW, RailCorp, Roads and Maritime Services [RMS], the State Transit Authority, Sydney Ferries and the public or private subsidiary corporations. However, if a TAHE subsidiary was formed under the SOC Act, the voting shareholders could approve the sale of fixed assets and investments of a statutory SOC, under section 20X, or of the main undertaking of a SOC, under section 20Y. After a ministerial severance order the rail infrastructure facilities will not be fixed assets and arguably the subsidiary SOC could then privatise those rail infrastructure facilities because the amendments to the Transport Administration Act say they can be dealt with as “personal property”.

Under new clause 14 (2) those assets would not be affected by section 99A of the Transport Administration Act, which prohibits the closure of a rail line by a rail infrastructure owner. The shares in the subsidiary SOC could be sold with voting shareholder approval and all assets of the subsidiary SOC would go to the purchaser of the shares. The Transport Asset Holding Entity will be created by schedule 2 of the bill as the successor to RailCorp, essentially changing RailCorp’s name to TAHE. TAHE is to be a statutory SOC under the SOC Act and will be governed by a board of directors, including a chief executive officer [CEO] who may be appointed as a director. The CEO will be able to be removed by the Governor or the Minister on the Minister for Transport’s recommendation at any time or for no reason.

The objectives and functions of TAHE, which are in clauses 10 and 11 of the bill, include being safe and reliable. Importantly, it must be a successful business, including maximising the net worth of the State’s investment in TAHE. It must hold, manage, operate and maintain transport assets owned or vested in it or to be owned or vested in it. While all the objectives are meant to be of equal value, it is a downgrading of directive for its operations to be safe and reliable above all else. We think that downgrading is dangerous. There is a range of the provisions that I could go into and there are significant objections to the current arrangement, not the least of which is that it is unwinding reforms that have proven to be necessary. When this Government came to office in 2011, a major policy reform that it shouted from the rooftops was the creation of an independent transport authority and the abolition of a number of transport agencies to allow better coordination and direction of public transport in this State, as outlined by the now Premier, then Minister for Transport, in her speech in the other place on 6 September 2011. I will not go through that.

This legislation is a step backwards and contrary to lived experience in terms of rail safety. The Transport Asset Holding Entity will become a commercial independent statutory state-owned corporation with a mandate to operate independently and above all commercially. It is the requirement to act commercially, to make a 7 per cent return to shareholders, which is the issue at the heart of the legislation. Following the tragic rail accident at Glenbrook in 1999 the special commission of inquiry was critical of reforms to the public rail sector.

The Integrated Railway Authority was split into four separate entities: a freight operator, later sold; a railway passenger service operator; a rail infrastructure owner; and a rail infrastructure maintainer. Each of those became statutory state-owned corporations and they operated commercially. The rail infrastructure maintainer started operating outside of the State. It took the death of numerous railway workers and the tragic Glenbrook rail accident for it to be understood that public rail passenger rail operations should not be split up but should be integrated. The Labor Government then combined the rail infrastructure owner and other entities into a combined operator.

The Government is once again splitting them up and that is placing the public at risk. The requirement of the SOC to make a commercial 7 per cent return on depreciating assets and heavily publicly subsidised services sets a time bomb at the heart of the organisation which will, because it is mandated to act commercially, force it to sell off everything of value it owns—you can call it leasing for 99 years, privatising or outright sale. There will be no other way this body could conceivably make a 7 per cent return. Those are the facts of the case. Missing from the bill is that the Transport Asset Holding Entity is not prescribed as a public authority under the Roads Act. If the body compulsorily acquires a public road from a council for a public transport project it will have to compensate councils under the full valuation of the land, whereas other SOCs are exempted.

It is clear that this very carefully thought out architecture is designed to bolster the Government’s fraudulent cooking of the books in order to make the budget nearly $10 billion better off. The requirement to have a high commercial return on the asset is unaffordable without selling everything of value. History shows the splitting up of these functions and the mandate to operate commercially ensures corners will be cut and maintenance will be cut. There is already a maintenance backlog in rail services. This will compound the problem and place the public at risk once more. For any one of those reasons the legislation should be rejected. The architecture of the bill suffers from all three flaws and this House should join with the Opposition and say no.