KANGAROO ISLAND WATERGAP PROJECT 1. BACKGROUND Although Kangaroo Island is only 112km from Adelaide, it is economically and socially disadvantaged by its 16km watergap separation from the mainland. There are two access routes to the Island ferry and air. Both are relatively expensive and create access barriers for residents, business and the Island s significant tourism customer base. The Kangaroo Island Development Board (KIDB)-initiated Watergap Project seeks to achieve the application of Federal and State Government subsidies for the movement of freight and passenger vehicles between Kangaroo Island and the mainland. The aim of the project is to remove or mitigate the significant impediments to the Island s ability to facilitate economic growth for the region and to contribute to a range of targets within the South Australia s Strategic Plan (SASP). Kangaroo Island Development Board engaged Meyrick and Associates to assess the viability and benefits of a subsidy mechanism to underpin the economic sustainability of Kangaroo Island and, if sustainable, develop a Business Case for the application of subsidies to ferry movements between Kangaroo Island and the mainland. The resultant report confirms that the current cost of ferry services is an impediment to the economic and social development of Kangaroo Island and confirms that there are strong grounds for the application of subsidies. Competitive pricing will bring potential benefits such as increased tourism, business and investment attraction, population growth and employment outcomes. The project has significant KI community, business and agency support. 2. KANGAROO ISLAND ECONOMY The two major economic drivers are tourism and agriculture/aquaculture/fisheries. Currently, together they generate over $82m or 52 % of Kangaroo Island s Gross Regional Product (GRP). Both sectors have significant potential for growth, but are impacted by the cost of the watergap crossing. 3. ISSUES Kangaroo Island suffers a significant transport cost disadvantage when compared to mainland counterparts. The cost of doing business is seen as the most significant impediment to tourism, business retention and growth. Freight cost disadvantage experienced by producers in the agriculture/forestry/fisheries sector is significant. Examples of cost disadvantage are provided at Appendix 1. As indicated in the example the 16 km watergap makes transportation almost four times more expensive. The extent of cost disadvantage attributable to moving commodities across the watergap by ferry is also demonstrated by a formula that is applied by the Federal Government to the implementation of the Tasmanian Freight Equalisation Scheme (TFES). Indicative calculations are based on a cost of $2.25 to move 9.15m of freight 1km over a road network. The distance across the watergap between Kangaroo Island and the mainland is 16kms. If this watergap were a road, the cost of moving 9.15m of freight would be $36. The cost to
move the vehicle 16km by ferry is $311 therefore the extent of disadvantage is $275 ($311 - $36). This type of disadvantage is ultimately reflected in the price of commodities transported to and from the Island. The actual impact of cost disadvantage is dependent to some degree on the type of commodity being transported. The lower the value of the commodity (timber) the greater the impact. The transportation costs for passenger vehicles are also extremely high and at $168 return amounts to $5.25/km. This presents a significant disadvantage to those living on Kangaroo Island and tourists/visitors alike. This disadvantage impacts on the economic and social development of the Island by: Acting as a disincentive for tourism; Acting as a disincentive to business attraction and expansion; Making the competitive pricing of goods difficult; Influencing the cost of housing and construction Increasing the cost of household goods and consumables; Acting as a disincentive and impediment for population growth; Impacting heavily in areas of social equity and social inclusion; and Generally impacting on all aspects of Island life. 4. ECONOMIC GROWTH THE LONG TERM SOLUTION The solution to economic sustainability (self-sufficiency) and therefore increased jobs, population, wealth and economic growth is the mitigation of the high cost of doing business between the Island and the mainland. Meyrick and Associates recommend two critical approaches to generate sustainable growth for the Island, both of which benefit the major industries. 1. A freight subsidy from the Federal Government 2. A passenger vehicle subsidy from the State Government Application of State and Federal subsidies for the movement of freight and passenger vehicles between the mainland and Kangaroo Island will realise a significant increase in tourism and stimulate the economy through: Business expansion and attraction; Investment attraction; Population growth; and Facilitating business sustainability by providing an even playing field in the commodity-pricing arena. It should be noted that the implementation of the Federal Governments Bass Strait Passenger Vehicle Equalisation Scheme (BSPVES) in 1996/97 realised a greater than 30% increase (in year one) in passenger-accompanied vehicles moving between Tasmania and the mainland. This resulted in an increase in tourism spend of approximately $30m pa. As evidenced at Appendix 2, subsequent annual growth in visitation over a 10-year period was sustained at between 22% and 30% per annum. The Bureau of Infrastructure, Transport and Regional Economics (BITRE) attributes this growth to the introduction of the passenger vehicle subsidy. Mitigation of the current transport cost disadvantage and resultant stimulation of the economy as identified above will require a commitment to both a freight and passenger vehicle subsidy.
5. FEDERAL FREIGHT EQUALISATION SUBSIDY Tasmania s Flinders Island and King Island benefit from a Federal Freight Equalisation Subsidy. Based on this precedent, a similar system could be applied to Kangaroo Island. The scheme is currently administered by CentreLink using Ministerial Directions. These Directions identify eligible commodities and who can claim subsidies. Eligibility constraints vary slightly depending on whether the freight is moving from or to Tasmania and King Island. Eligible commodities moving from King Island must: Be produced or manufactured in Tasmania; Be for permanent use or for sale on the Australian mainland (not for export); Be transported by sea; Be non bulk cargo (not shipped as a bulk commodity in a ships hold); and Incur a freight cost disadvantage. Eligible commodities moving to King Island have similar constraints but must be produced or manufactured on the Australian mainland. Subsidy claimants must be the end users of commodities shipped. The extent of subsidy is based on commodity type and extent of disadvantage taking road freight equivalency calculations into account. 6. STATE PASSENGER VEHICLE EQUALISATION SUBSIDY The aim of subsidies for the movement of passenger vehicles between the Island and the mainland is similar to the rationale behind the BSPVES. It is designed to reduce the cost of seagoing travel for eligible passengers by assisting with the cost associated with the transportation of passenger vehicles between the Island and the mainland. Passenger vehicle subsidies help to address issues of social equity and social inclusion and will therefore benefit all residents. The greatest impact will be through stimulated tourism, with resultant positive effect on the local economy. The scheme should not discriminate between sea transport operators. Should a new operator enter the Kangaroo Island passenger vehicle trade, the scheme should apply on the same basis as that applied to the existing service operator. 7. GROWTH IN TOURISM VISITATION AND CONTRIBUTION TO GRP WILL BE SIGNIFICANT The growth target required to make a significant economic impact on Kangaroo Island is a 25% increase in passenger vehicles accessing the Island per annum. BITRE reports on the effectiveness of the BSPVES substantiate that this level of growth is not unrealistic. This will generate approximately $23.6m in additional tourism expenditure, which will grow GRP by $11.2m or 6.6% of the 2006/07 regional total. To achieve a 25% stimulation, the cost of car transportation on the Ferry fare must be reduced by $80 per vehicle (from $168 per vehicle to $88). Based on approximately 55,000 vehicle movements in 08/09, this amounts to a subsidy of $4.4mil pa. This amount is similar to the subsidy provided to users of the 12 ferries over the River Murray in South Australia. Kangaroo Island is South Australia s premier tourism asset. The development of an
enduring tourism industry is a vital pillar of the local economy but a major risk is price sensitivity. 8. MURRAY RIVER CROSSING SCHEME There is a precedent in South Australia for the provision of (100%) subsidised ferry (road) transport across a body of water in this case the Murray River. There are 12 ferries providing access across the Murray River in South Australia funded by state government. The cost of operating and maintaining ferries each year amounts to $4.4 million Investment in bridges spanning the river - $250m. The cost of maintaining the bridges each year amounts to approx $0.6m When comparing the River Murray and Kangaroo Island watergap crossing the following considerations are pertinent: River Crossings Access is free for users. Alternatives are available to travellers. Ferries operate 24/7 Kangaroo Island Access All access to Kangaroo Island comes at a cost. No free vehicle alternatives are available to KI visitors /residents. Limited to operator schedules In effect, Backstairs Passage represents just a wider body of water when compared with the crossings of the Murray River the inherent transportation principle remains the same. 9. SUPPORT REQUIRED FROM FEDERAL GOVERNMENT In order to gain Federal Government commitment, it is necessary to make representation to Federal Government. The basis of the argument is demonstrated disadvantage, precedent and equity of policy. The Commonwealth Government subsidises intrastate freight movements between King Island and Flinders Island and mainland Tasmania. The benefit to Kangaroo Island will be equity of policy, a level playing field (competitive pricing) for products exported to the domestic market and a potential reduction in the cost of living for Kangaroo Island residents thereby removing one of the impediments to population growth, business and investment attraction and general economic growth. 10. REQUIRED STATE GOVERNMENT SUPPORT Freight Equalisation Subsidy The extent of subsidy provided by Federal Government is dependent on tonnages and nature/destination of commodities transported. The consultants estimated that the introduction of an Island Freight Equalisation Scheme, equivalent to the TFES, would comprise $4.6m subsidies and contribute $6.6m in GRP (including flow-on impacts) and also contribute approximately $3.1m in household income to the regional economy.
Passenger Vehicle Subsidy A subsidy of $80 per return passenger vehicle movement on ferry services between Cape Jervis and Penneshaw. Estimated subsidy is based on current vehicle movements, which equal $4.4mil. (Increasing with natural market growth and market growth stimulated by the subsidy). As noted in Section 7, a 25% increase in tourism will generate approximately $23.6 million in additional tourism expenditure, which is expected to grow GRP by 11.2 million or 6.6% of the 2006/07 regional total. Both subsidies are important components to mitigating or removing impediments to Kangaroo Island s economic growth. The most significant impact will be generated through a State Government Passenger Vehicle Equalisation scheme as described. Nevertheless stimulation of the economy as identified in this document will require the implementation of both a freight and passenger vehicle subsidy.
Appendix 1 to Public Briefing Paper Watergap March 2010 Examples of Watergap Related Freight Cost Disadvantage These examples are typical of the demonstrated cost differential (disadvantage) incurred by Kangaroo Island s primary producers when accessing markets on the mainland, compared to mainland-based producers. Example 1 Freight cost disadvantage experienced by producers in the agriculture/ forestry/ fisheries sector is significant. A producer in Broken Hill can freight a truckload of mutton 831km to Warrnambool for $9/head; KI producers pay $7.40/head to freight mutton 200km to Murray Bridge. This equates to 3.7 cents/km from Kangaroo Island in contrast to 1 cent/km from Broken Hill. The 16 km watergap makes transportation almost four times more expensive. Example 2 Keith (SA) Kangaroo Island (SA) Distance to Adelaide (kilometres) 225 200 Freight Rate Per m 3 $20 $45 Freight Rate Per m 3, per kilometre $0.09 $0.23
Appendix 2 to Public Briefing Paper Watergap March 2010 Impact of the Bass Strait Passenger Vehicle Equalisation Scheme on Melbourne Devonport motor vehicle passenger numbers, one-way trips, 1996-97 to 2006-07 Year Motor vehicle passenger one-way trips Without Scheme (estimates) With Scheme (actual) Difference % change 1996-97 114 956 153 045 38 089 33.1 1997-98 174 921 231 098 56 177 32.1 1998-99 199 805 261 487 61 682 30.9 1999-00 190 884 248 745 57 861 30.3 2000-01 204 650 259 438 54 788 26.8 2001-02 215 286 272 922 57 636 26.8 2002-03 343 630 432 498 88 868 25.9 2003-04 326 273 409 115 82 842 25.4 2004-05 274 248 343 252 69 004 25.2 2005-06 249 821 321 304 62 483 25.0 2006-07 273 702 335 423 61 721 22.6 All years 1 770 405 2 268 348 497 943 28.1 1. Data sourced from the Australian Government Department of Infrastructure, Transport, Regional Development and Local Government (Bureau of Infrastructure, Transport and Regional Economics Statistical Report on Bass Strait Passenger Vehicle Equalisation Scheme 2007-2009