R1.108 Promoting

Technological Investment in

Rail Freight Rolling Stock

Michael Charles, SCU

Nattawoot Koowattanatianchi, SCU

Project goals

Original intention to test aspects of

the Environmental Benefit Scheme

(EBS) devised by the ARA

Looking at Accelerated Depreciation

(AD) in particular

Project then looked at other

measures to encourage investment

Why more investment?

Background of:

Potential carbon price / constraint

Fuel price volatility

Energy security

Need for more efficiency to compete with other modes

And to contextualise matters …

Genesee & Wyoming grain train

(near Geelong, CLP12 at front,

delivered Jan 1972)

GE Evolution Hybrid

How?

3-pronged research approach:

1) Qualitative data collection

(interviews with those involving in

asset replacement)

2) Quantitative modelling

3) Expert focus group to further

contextualise previous stages

1. General observations

General view of poor performance

Cost prohibitive to acquire new equipment

Infrastructure constraints

Carbon price wouldn’t recognise rail’s environmental advantage over road

Govt need to do more to promote investment

1. Specific results

90% of locos are acquired (not

leased)

Long asset life for locos and wagons

Can’t order ‘one off’ locos

Too few suppliers (duopoly)

Some operators cannot risk new loco

purchases

1. Ideas

Shorter depreciation schedules instead of 25 yrs for locos and 30 for wagons (need to be tax positive)

Investment allowances (as above)

Tax credits (as above)

Upfront subsidy or grant from govt

Greater tax benefit for R&D on new equipment

2. Modelling

A model was developed and a

number of hypothetical tax

regulations fed into it.

Model for both locos and

wagons.

2. Tax

Codes

TC 1: Current depreciation rate used. 30% investment allowance rate to new equipment. No investment tax credit.

TC 2: New locos written down over 12 yrs (15yrs wagons). No investment allowances or investment tax credits.

TC 3: New locos written down over 12 yrs (15 yrs wagons). 30% investment allowance rate for new equipment. No investment tax credit.

TC 4: New locos written down over 3 yrs (5 yrs wagons). No investment allowances or investment tax credits.

TC 5: New locos written down over 3 yrs (5 yrs wagons. 30% investment allowance rate for new equipment. No investment tax credit.

TC 6: Current depreciation rate used. 30% investment tax credit for new equipment. No investment allowance permitted.

TC 7: Current depreciation rate used. No investment allowances or investment tax credits. Tax rate is reduced by 50%.

2. Modelling results

All hypothetical tax codes likely to

increase the marginal opportunity

cost of holding current rolling stock,

therefore more rapid replacement

Accelerated depreciation alone is

unlikely to be effective

Tax code 6 most efficacious (current

depreciation + 30% tax credits)

2. Observations from

modelling

Other possible financial policies such as cash grants and subsidies can be incorporated into the replacement model in a similar fashion as the investment tax credit

Cash grant more effective since no discounting of the benefit (up-front vs. delayed)

3. Focus group observations

Infrastructure precludes optimal performance and reduces axle loads on the infrastructure (e.g., often 3 locos where there should be 2)

Cyclical nature of some sectors means long-term investments are problematic

3. Focus group observations

AD likely to be supportable, but potentially more effective for wagons than locos, esp. if used combined with other policies

Investment allowance likely just to bring planned investments forwards

New locos difficult to run on ‘low performance’ routes (poor infrastructure)

Conclusions: A two-tier

approach

Methods exist to encourage investment on infrastructurally sound routes (‘high performance’)

These methods would have minimal impact on ‘low performance’ routes.

Therefore need to apply mechanisms to refitting or ‘rebirthing’ existing locos

And the most important point

Fixing the below-rail

infrastructure is the only way to

ensure the sustainability of the

rail freight sector in terms of

energy efficiency

(consider electrification)

Born again (2008) after 54 years

and exceeding EPA Tier 2