final public version report efficient costs of church ... · g adshead d gotze d gotze 10/12/2015...

FINAL PUBLIC VERSION REPORT

Prepared for:

Mr. Patrick Lam

Senior Analyst

Independent Pricing and

Regulatory Tribunal NSW

(IPART)

Ref: V1417

15 December 2015

Contact Details:

Mr. David Gotze

Tel: 03 9650 4644

Mob: 0417 035 244

Efficient Costs of Providing Brooklyn, Church Point and Palm Beach Ferry Services

Final - Public Version Report| December 2015

DOCUMENT CONTROL

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First Draft V1417 First Draft -

Public Version

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G Adshead D Gotze D Gotze 10/12/2015 Public

Final Public Version Indec

Final Report

G Adshead D Gotze D Gotze 15/12/2015 Public

DISTRIBUTION HISTORY

Name Location Issued date

Patrick Lam

Senior Analyst

[email protected] 10/12/15

Patrick Lam

Senior Analyst

[email protected] 15/12/15

IPART


CONTENTS

MANAGEMENT SUMMARY ........................................................................................................................... i

1 INTRODUCTION .......................................................................................................................... 1 1.1 OBJECTIVE ......................................................................................................................... 1

1.2 ASSUMPTIONS .................................................................................................................. 1

1.3 EFFICIENT COST INDEXATION ...................................................................................... 2

2 CURRENT POSITION ................................................................................................................... 3

3 EFFICIENT COST .......................................................................................................................... 4 3.1 OPEX................................................................................................................................... 4

3.2 CAPEX ................................................................................................................................ 7

3.2.1 EFFICIENT CAPEX ............................................................................................................ 8

4 EFFICIENCY GAPS ...................................................................................................................... 11

5 RESPONSE TO SUBMISSIONS ................................................................................................. 12

5.1 BROOKLYN ...................................................................................................................... 12

5.1.1 Fuel ................................................................................................................................... 12

5.1.2 Insurance .......................................................................................................................... 12

5.2 CHURCH POINT .............................................................................................................. 12 5.2.1 Labour ............................................................................................................................... 12

5.3 PALM BEACH ................................................................................................................... 13 5.3.1 Ferry Hours ...................................................................................................................... 13

i IPART


MANAGEMENT/EXECUTIVE SUMMARY

CONTEXT

In November 2014 Indec completed a review of efficient operating and capital expenditure for private

ferry operators in NSW for the period 2015 to 2017. This advice was used by IPART for the 2014

review of private ferry fares.

For the 2015 review of private ferry fares, IPART invited all ferry operators to provide updated capital

and operating cost information. This included actual information in 2014 and 2015, and proposed

expenditure in 2016 and 2017. Three ferry operators submitted revised information; Brooklyn Ferry

Services, Church Point Ferry Services and Palm Beach Ferry Services.

IPART has commissioned Indec to assess whether the updated cost information provided by these

operators is reasonable and efficient. In addition, Indec has been asked to assess whether any other

costs have materially changed in the past 12 months – in particular, whether there has been a material

change in fuel costs from last year‟s review.

Most private ferry operators are small commercial businesses and in most cases compete with other

modes of transport. The approach in this report is therefore based on an assessment of the

reasonableness of each operator‟s reported costs. The assessments have also been made having regard

to comparisons of costs for different operators and benchmarks.

This report is a public version of the confidential advice provided to IPART.

Operating expenditure (OPEX)

The reported cost inputs of ferry operators relative to efficient cost is summarised below.

Brooklyn – operator costs do not exceed reasonably efficient cost

Church Point – operator costs exceed reasonably efficient cost

Palm Beach (Basin) - operator costs exceed reasonably efficient cost

Palm Beach (Ettalong) - operator costs exceed reasonably efficient cost

Capital expenditure (CAPEX)

Persistent under investment or inadequate levels of CAPEX are likely to eventually prove

unsustainable for some ferry operators. Therefore, notwithstanding the operators‟ current capital

expenditure intentions for ferries and other assets, Indec has independently assessed efficient CAPEX.

Capital expenditure incurred by private ferry operators relating to vessels may include, without

limitation:

Ferry acquisition costs and related depreciation

Spare parts (ferries)

Safety equipment

Engine rebuilds and mid-life overhaul expense

Structural repairs and refurbishment of the vessel‟s hull and coach house, and on-board services

(electrical systems, etc.).

The assumed useful economic life is 25 years for slow ferries and 15 years fast ferries. The average

economic life in years of some ferries exceeded the useful life by a considerable margin reflecting the

ii IPART


operational method of the operator catering for both patronage and use of asset type preference. The

age of some ferries in the current fleet demonstrates that theoretically the life of most slow ferries can

be significantly extended beyond the generally accepted economic life of 25 years, particularly in the

case of „heritage‟ ferries which are popular amongst patrons. Replacement in such ferries is therefore

driven by any structural integrity issues or availability of spare parts. It should also be noted that

these vessels are subject to periodic surveys by AMSA and NSW Roads and Maritime Services.

The useful economic life for other asset classes has been assessed as:

3 years for engine rebuilds

12.5 years for slow ferry engines replacements

7.5 years for fast ferry engines replacements

5 years for all other asset classes

Capital expenditure incurred by private ferry operators that does not relate to vessels may include,

without limitation:

Office accommodation (building, equipment and furniture)

Vehicles

Efficient capital cost calculations have been based on Modern Equivalent Assets (MEA) and the whole

of life cost of selected asset classes. Generally we have made an allowance for replacing all ferries that

are of an age exceeding the economic life of the asset (25 years for slow ferries and 15 years for fast

ferries).

Indec has assessed the replacement costs of ferries under normal market conditions. Specifically, the

replacement cost estimates have not been based on depressed market conditions that have prevailed

in the boat/ship building industry in recent years. Indec acknowledges that in some circumstances

operators may be able to procure replacement ferries at lower prices. It should also be noted that

whilst the average economic life of a number of ferries exceed the useful life limit of 25 years for slow

ferries and 15 years for fast ferries by a considerable margin, there is no contractual obligation on

operators to replace their fleets within those parameters. The efficient CAPEX for ferry replacement

and refurbishment by operator for the period 2015 to 2017 has been summarised below.

Efficient Capex 2015 to 2017 ($2014)

Operator 2015 ($) 2016 ($) 2017 ($)

Brooklyn 875,000 - 20,000

Church Point 20,000 960,000 100,000

Palm Beach-Basin 20,000 1,080,000 -

Palm Beach-

Ettalong - 3,000,000 100,000

Material cost changes in the past 12 months

Indec has also considered whether there has been any material changes in costs over the last 12

months which warrant an update to the efficient OPEX recommended in last year‟s review.

iii IPART


Indec recommends that IPART accept the ferry operators updated fuel, insurance and berthing costs

as these costs have been assessed as a given and considered reasonably efficient.

Fuel costs have reduced for all three operators by varying percentages, Brooklyn by 9%, Church Point

by 18% and Palm Beach by approximately 26%. The movement in FuelTrac Sydney fuel prices from

the average for 2013/14 to the average for 2014/15 (30 September 2015) was a reduction of

approximately 25%.

Insurance costs are mostly dependant on claims history, size of the ferry and the age of the ferry. As

Indec aren‟t privy to the claims history of each operator, we have recommended an efficient insurance

cost based on the data provided. In reviewing the movement in insurance costs per ferry from 2014 to

2015, Brooklyn‟s insurance costs have increased by approximately 9% and the other operators costs

have increased by approximately 20%. As indicated previously, as Indec isn‟t privy to insurance

claims or history it is difficult to assess if the percentage increases are accurate or if the costs are

efficient. However, in reviewing the Australian Bureau of Statistics index on insurance for Sydney

(A3602793W) the movement in the index over the last year was approximately 5%.

In the 2014 efficient cost report Indec indicated that berthing and mooring costs have been assessed as

a given and considered reasonable efficient, therefore the reported actual costs by the ferry operators

for the 2015 review and their proposed 2016 and 2017 costs for berthing and mooring are considered

reasonably efficient. Berthing and mooring fees vary significantly between operators over the three

year period from 2015 to 2017, ranging from 55 cents to $2.91 per service hour and average $1.60.

There have not been any significant increases in berthing and mooring charges over the three year

period from 2015 to 2017.

IPART

1 INTRODUCTION

1.1 OBJECTIVE

To review and assess the revised costs proposed by Brooklyn, Church Point and Palm Beach ferry

operators and to determine whether they are reasonable and reflect the total efficient costs of

providing contracted ferry services to inform the 2015 fare review.

In addition, advice should be provided on whether any other costs have materially changed in the

past 12 months – in particular, whether there has been a material change in fuel costs from last year‟s

review.

1.2 ASSUMPTIONS

Indec has relied on the information request for data generated by IPART and augmented by

clarifications and further information provided by the three private ferry operators during the

analysis process and on review of the outcomes. The data received by IPART was from the three ferry

operators Brooklyn, Church point and Palm Beach ferry services.

The request by IPART covered actual results for 2014 and 2015 and the proposed results for 2016 and

2017 for:

Capital expenditure;

Operating expenditure; and

Ticket sales (patronage).

The 2015 results provided were only for the nine months to September, for Indec to be able to

ascertain meaningful comparisons, the year to date to September data was extrapolated for a full year.

The data received for Palm Beach did not have the level of detail required to separate from the total

the slow and fast ferry data. Therefore, for the purpose of comparing and augmenting the data

received from IPART, Indec has also referred to its 2008 survey data and CVACI report to IPART1 and

its 2009 survey data and report on potential private ferry contract arrangements to the Ministry of

Transport NSW2 together with its 2014 report to IPART on the Efficient Costs of Providing Private and

Newcastle-Stockton Ferry Services3.

Palm Beach on reviewing outcomes of this 2015 analysis identified that the ferry hours, the revenue

hours for regulated services only, were understated. Palm Beach identified that during the summer

months they run two ferries on both the fast and slow routes to cover the increased summer and

holiday capacity. These additional ferry hours have now been included in this report.

The analysis and observations in this report should therefore be considered in light of the assumptions

listed below and throughout the report.

Some conclusions in this report are based on interpolation of data from different time periods (for

example, allocation of costs and other metrics between slow and fast ferries where operators run

both vessel types)

1 Indec – Final Report: “Relative Weightings in the Commercial Vessel Association Cost Index (CVACI)” October 2008 2 Indec – Report: “Development of Contract Arrangements for Private Ferry Operators” June 2009 3 Indec – Report: “Efficient Costs of Providing Private and Newcastle-Stockton Ferry Services” October 2014

IPART

Combining data from different time periods does not have a material impact on the validity of

the ratios and the subsequent analysis;

Survey data, clarifications and further information provided by ferry operators has not been

independently audited or verified;

Contractual obligations on the ferry operators such as service levels and drivers of government

sourced revenues have been based on Commercial and Non-Commercial Ferry Service Contracts

generally dated 2011 to 2013, between the Director General of the Department of Transport4 and

private ferry Operators.

No asset condition surveys have been carried out on either vessels or infrastructure such as

wharves, etc. to verify the economic life of assets (vessels).

In the 2014 efficient cost report Indec indicated that fuel, insurance and berthing and mooring

costs have been assessed as a given and considered reasonably efficient, therefore the reported

actual costs by the ferry operators for the 2015 review and their proposed 2016 and 2017 costs for

those three categories are considered reasonably efficient.

1.3 EFFICIENT COST INDEXATION

The efficient costs calculated by Indec in the last Private Ferry Efficient Cost review completed in 2014

were in 2014 dollars. The financial data provided by the three operators, as Indec has been advised, is

representative of those years proposed costs inclusive of any known increases to provide a true

representation in each year. As a consequence, unless otherwise stated, Indec has indexed the 2014

efficient costs for 2015 through 2017 in accordance with IPART rules, as shown in Table 1.

Table 1 Efficient Cost Indexation

Index Used 2014 to 2015 2015 to 2016 2016 to 2017

All categories Bloomberg‟s

Forecast 2.0% 2.6%

All categories Midpoint of the

RBA target range

for inflation

forecasts

2.5%

4 For and on behalf of Transport for NSW

IPART

2 CURRENT POSITION

Indec has reviewed the current data sets provided by IPART and augmented that with additional data

from ferry operators to gain a more robust understanding of the current financial and operational

position of the three slow ferry services and one fast ferry service operator.

For clarity, the three ferry operators (Brooklyn, Church Point and Palm Beach in total) provided actual

data for 2014 and 2015. The current position is shown in real dollars by the individual operators. Cost

categories reported below include:

Labour - should include the wages, workers compensation, payroll tax (if applicable) and

superannuation of all permanent full-time and part-time staff and any casual employees

employed directly by the operator.

Fuel - should include the cost of fuel in relation to the provision of regulated ferry passenger

services net of any fuel tax credits (excise rebates).

Insurance - should include all insurance premium expenses other than ferry insurance. Examples

include public liability, terminal and equipment, and director‟s and officer‟s liability insurance. It

should also include the cost of ferry registration fees and expenses associated with mandatory

public surveys in respect to ferry services provided.

Repairs and Maintenance - should only include parts and consumable costs relating to the repair

and maintenance of ferries. For example; internal and contracted ferry maintenance,

administration buildings, ticket booths, plumbing, electrical etc.

Berthing / mooring fees - means the annual rent paid for moorings/berths in relation to the

provision of ferry passenger services. In discussions with ferry operators, it was established that

these costs are predominantly for overnight berthing and mooring of ferries, not for the use of

wharves for regulated services.

All other costs – should include all other operational costs that aren‟t accounted for in the above

categories. For example; cash collections costs, office rent, communication costs, financial

services, external consultants, advertising, pre-printed tickets and timetables etc.

IPART

3 EFFICIENT COST

Similar to our conclusions in a previous report5 we have formed the view that the cost efficiency of

some private ferry operators is below transport industry labour cost and other inputs and regulated

optimised capital cost recovery. The actual 2015 and proposed 2016 and 2017 cost structures of some

operators are below a viable and sustainable efficient cost level.

For instance, some slow ferry operators have previously indicated that not all labour has been costed

and accounted for in previous surveys. Anecdotal evidence suggests that there are a number of

owner operators that do not charge the business for all the time they spend in the business, either as

salary/wages or owner‟s drawings. As a consequence, labour expense could be understated,

particularly in the slow ferry operator sector.

Within this context, Indec has based its assessment on the reasonableness of the reported costs. For the

purpose of this review, reported costs assessed as „reasonable‟ have been deemed efficient.

3.1 OPEX

The cost inputs of ferry operators relative to efficient cost is summarised below.



Palm Beach ( Basin) - operator costs exceed reasonably efficient cost

Palm Beach ( Ettalong) - operator costs exceed reasonably efficient cost

Labour

Indec have assessed a reasonable annual labour cost per FTE is approximately $63,400. Reported

labour costs for slow ferries over the three year period ranged from $37,700 to $77,920.

Not all ferry services run the same number of crew per service, Brooklyn and Church Point only have

one crew for each regulated service, whereas, Palm Beach Basin service operates with two crew each

service and Palm Beach Ettalong operates with three crew members per service.

In the 2014 review, the labour cost per service hour was approximately $52.00 for ferries that require

only one operator, approximately $69.00 for ferries that require two operators and approximately

$128.00 per service hour for fast ferries. Indec has estimated the efficient labour cost per service hour

after indexation for 2015 as shown in Table 2.

Table 2 Labour Costs per Ferry Hour Indexed per number of Crew

Labour Cost per Ferry

Hour 2014 2015 2016 2017

One Operator $52 $53 $54 $56

Two Operators $69 $70 $72 $74

Three Operators $128 $131 $134 $138

5 Indec – Report: “Development of Contract Arrangements for Private Ferry Operators” June 2009

IPART

Fuel

The 3 slow ferry service operators manage varying ferry sizes, ranging from 27 passengers to

approximately 138 passengers. The size of the ferry and the speed of the ferry impact on the fuel cost.

The fuel cost per service hour for slow ferries range over the four year period 2014 to 2017 from $6.50

to $12.00 and averages approximately $8.95 per service hour. Fast ferry services average fuel cost over

the four year period 2014 to 2017 per ferry hour is approximately $47.00.

In the 2014 efficient cost report, Indec indicated that fuel had been assessed as a given and considered

reasonable efficient, therefore the reported actual costs by the ferry operators for the 2015 review and

their proposed 2016 and 2017 costs for fuel is to be considered reasonably efficient .

The reported fuel costs have been assessed and the movement in fuel from 2014 to 2017 have been

illustrated in Table 3.

Table 3 Percentage Movement in Fuel Cost

% Movement in Fuel

Cost 2015 2016 2017

Brooklyn -9% 9% -

Church Point -18% 0% 3%

Palm Beach-Basin -26% 3% 3%

Palm Beach-Ettalong -26% 3% 3%

The movement in FuelTrac Sydney fuel prices from the average for 2013/14 to the average for

2014/15 (30 September 2015) was a reduction of approximately 25%.

Insurance

Insurance costs are mostly dependant on claims history, size of the ferry and the age of the ferry. As

Indec aren‟t privy to the claims history of each operator, we have recommended an efficient insurance

cost based on the data provided. In addition, the allocation of registration and survey costs may vary

from operator to operator and this may also impact on the costs attributed to insurance for each

operator. For the five years from 2013 to 2017, the insurance costs per slow ferry range from $9,900 to

$19,300 averaging approximately $14,100. Fast ferry insurance costs per ferry average approximately

$22,400.

The reported insurance costs include all insurances. Indec has not assessed the efficient costs of

insurance for ferries or the impact of replacing the current fleet with modern assets.

Repairs and Maintenance

IPART

Indec established as part of a previous report6, that all of the smaller slow ferry operators maintain

their own ferries and the fast ferry operator outsources some of the more technical aspects of

maintenance.

Repair and maintenance costs per service hour for the slow ferries, for the three year period from 2015

to 2017, range from approximately $6.24 to $22.44 and average approximately $12.40 per service hour.

Fast ferry repairs and maintenance costs per service hour, over the three year period, average

approximately $39.30 per service hour.

Indec reported in the 2014 report that an efficient cost for repairs and maintenance for slow ferries was

approximately $9.14 per service hour and the efficient cost for fast ferry operators was approximately

$22.90 per service hour, indexed to 2015 dollars as $9.32 and $23.35 respectively.

The smaller ferries under a capacity of 100 passengers average over the three year period $7.31 per

service hour and remain under a reasonably efficient cost per ferry hour for repairs and maintenance.

Berthing and Mooring Fees

Berthing and mooring fees vary significantly between operators over the three year period from 2015

to 2017, ranging from 55 cents to $2.91 per service hour and average $1.55. There have not been any

significant increases in berthing and mooring charges over the three year period from 2015 to 2017.

In the 2014 efficient cost report Indec indicated that berthing and mooring costs have been assessed as

a given and considered reasonable efficient, therefore the reported actual costs by the ferry operators

for the 2015 review and their proposed 2016 and 2017 costs for berthing and mooring are considered

reasonably efficient.

All Other Costs

All other costs include all other operational costs that aren‟t accounted for in the above categories.

Examples of other costs include cash collection costs, office rent, communication costs, financial

services, external consultants, advertising, pre-printed tickets and timetables etc.

The 2007/08 survey7 collected other costs with more definition than the CIE survey8. The results of

applying the weights of the 2007/08 to the above efficient unit cost of $10.70 per service hour are

shown in Table 4.

Table 4 Weights of Other Costs - 2007/08 Survey

Other Costs Weight Efficient Unit

Costs

Cash Collection 0.27% $0.03

Terminal & Office Rent or Rent Equivalent Costs 11.98% $1.28

Information Technology & Communications 13.01% $1.39

6 Indec – Report: “Development of Contract Arrangements for Private Ferry Operators” June 2009

7 Ibid.

8 The Centre of International Economics (CIE) – Excel Workbook: CIE Data and Modelling final final 9 October 2013.xlsm

IPART

Professional, Marketing & Financial Services 16.60% $1.78

Motor vehicle expenses 10.23% $1.10

Owners drawings 14.14% $1.51

Other People Costs 5.88% $0.63

Other Ferry Running Costs 27.89% $2.98

Total Other Costs 100.00% $10.70

The reported 2015 to 2017 actual and proposed costs in the „All Other Costs‟ category varied from

$4.50 to $21.92 per ferry hour and averaged $11.80. Indec has formed the view that an efficient cost for

all other costs per service hour in 2014 is approximately $10.70.

3.2 CAPEX

The majority of capital expenditure incurred by private ferry operators relates to vessels. Generally

ferry operators utilise slow ferries which are older or historic style vessels preferred by patrons both

for the heritage attractiveness of the trip and also to provide attractive charter or tourism trips in order

to optimise revenue opportunities. The use of fast ferries is more intended to optimise public

transport capabilities in relation to the route as well as to cater for larger charters.

The assumed useful economic life is 25 years for slow ferries and 15 years fast ferries. By comparison

the June 2009 Indec Report9 at paragraph 4.4 page 21 estimated the useful life for slow ferries at 25

years and that for fast ferries at 15 years. The average economic life in years of some ferries exceeded

the useful life by a considerable margin reflecting the operational method of the operator catering for

both patronage and use of asset type preference. The age of some ferries in the current fleet

demonstrates that theoretically the life of most slow ferries can be significantly extended beyond the

generally accepted economic life of 25 years, particularly in the case of „heritage‟ ferries which are

popular amongst patrons. Replacement in such ferries is therefore driven by any structural integrity

issues or availability of spare parts. It should also be noted that these vessels are subject to periodic

surveys by AMSA and NSW Roads and Maritime Services.

The useful economic life for other asset classes has been assessed as:

3 years for engine rebuilds

12.5 years for slow ferry engines replacements

7.5 years for fast ferry engines replacements

5 years for all other asset classes

Capital expenditure incurred by private ferry operators that does not relate to vessels may include,

without limitation:

Office accommodation (building, equipment and furniture)

Vehicles

9 Ibid.

IPART

A further capital allowance has been incorporated for engine re-builds at intervals of 10,000 to 15,000

hours or every 3 to 5 years. The average capital cost of an engine rebuild is $AUD 25,000 to $AUD

120,000. The average mid-life engine replacement cost $AUD 235,000. We have been advised that

most ferries have two engines. Capital expenditure incurred by private ferry operators relating to

vessels may include, without limitation:

Ferry acquisition costs and related depreciation

Spare parts (ferries)

Safety equipment

Engine rebuilds and mid-life overhaul expense

Structural repairs and refurbishment of the vessel‟s hull and coach house, and on-board services

(electrical systems, etc.)

3.2.1 EFFICIENT CAPEX

Persistent under investment or inadequate levels of CAPEX are likely to eventually prove

unsustainable for some ferry operators. Therefore, notwithstanding the operators‟ current capital

expenditure intentions for ferries and other assets, Indec has independently assessed the efficient

CAPEX for ferry replacement. In developing replacement cost estimates, Indec has accounted for the

differences in passenger carrying capacity (Table 5 ).

Table 5 Modern Equivalent Asset (MEA) Replacement Costs for Ferries (2014 dollars)

Passenger Carrying

Capacity Replacement Value ($)

40 830,000

50 875,000

60 920,000

70 960,000

80 1,000,000

90 1,040,000

100 1,080,000

110 1,125,000

120 1,170,000

130 1,210,000

140 1,250,000

150 1,290,000

IPART

160 1,330,000

170 1,375,000

180 1,410,000

Efficient capital cost calculations have been based on Modern Equivalent Assets (MEA) and the whole

of life cost of selected asset classes. Generally we have made an allowance for replacing all ferries that

are of an age exceeding the economic life of the asset (25 years for slow ferries and 15 years for fast

ferries).

Indec has assessed the replacement costs of ferries under normal market conditions. Specifically, the

replacement cost estimates have not been based on depressed market conditions that have prevailed

in the boat/ship building industry in recent years. Indec acknowledges that in some circumstances

operators may be able to procure replacement ferries at lower prices than indicated in Table 5. It

should also be noted that whilst the average economic life of a number of ferries exceed the useful life

limit of 25 years for slow ferries and 15 years for fast ferries by a considerable margin, there is no

contractual obligation on operators to replace their fleets within those parameters. The efficient

CAPEX for ferry replacement and refurbishment by operator for the period 2015 to 2017 has been

summarised below.

BROOKLYN

Provision of $875,000 is prudent to immediately replace the ferry „Sun' with a new ferry of similar

capacity and to perform a general refurbishment of the „Banksia‟ ferry in 2016 at a cost of $20,000.

CHURCH POINT

A provision of $960,000 had been made to replace the ferry 'Elvina' in 2016 with a new ferry of similar

capacity to the ferry 'Amelia K‟, as advised in the 2014 report. A provision was also made for general

refurbishment of the ferry „Amelia K‟ in 2015 and an engine replacement and refurbishment of the „L

Duck in 2017 at a cost of $20,000 and $100,000 respectively.

PALM BEACH-BASIN

A provision was made for general refurbishment of the ferry „Golden Spirit‟ in 2015 at a cost of

$20,000. A provision of $1,080,000 was also made to replace the ferry 'Myra' in 2016 with a new

smaller ferry with a 100 passenger carrying capacity. As noted earlier, Indec believes that this smaller

capacity ferry would be more efficient given low utilisation of the ferry „Myra‟ for most of the year.

PALM BEACH-ETTALONG

A provision of $3,000,000 was made in the 2014 report to replace the ferry 'Sensation' in 2016 with a

new ferry of similar capacity. Provision of $100,000 has also been made for refurbishment in 2017 of

the ferry 'Fantasea Joy'.

SUMMARY

The efficient CAPEX estimates for the reviewed ferry operators for ferries and other assets is

summarised in Table 6.

IPART

Table 6 Efficient Capex 2015 to 2017 ($2014)

Operator 2015 ($) 2016 ($) 2017 ($)

Brooklyn 875,000 - 20,000

Church Point 20,000 960,000 100,000

Palm Beach-Basin 20,000 1,080,000 -

Palm Beach-

Ettalong - 3,000,000 100,000

The capital expenditure intentions are in addition to the reported depreciation and interest expense.

Indec understands that IPART‟s building block model makes an allowance for a return on capital, and

a return of capital (regulatory depreciation).

IPART

4 EFFICIENCY GAPS

Indec has shared its observations with respect to individual ferry operators‟ performances for key

efficient cost indicators in its confidential version of this report to IPART.

Indec‟s overall assessment of the cost inputs for ferry operators relative to efficient cost is summarised

below:



Palm Beach ( Basin) - operator costs exceed reasonably efficient cost

Palm Beach ( Ettalong) - operator costs exceed reasonably efficient cost

IPART

5 RESPONSE TO SUBMISSIONS

All ferry operators responded to sections of the confidential report which in some instances cannot be

divulged in this public report. Those comments that can be noted are shown below.

5.1 BROOKLYN

5.1.1 Fuel

Submission

“With respect to fuel cost reductions experienced by BFS Pty Ltd, we would like to strongly argue the following,

reductions to fuel expenditure which we experience are almost entirely attributable to and a result of operator

efficiency, hull maintenance and modifications, a reduction in services to Little Wobby Beach, approximately half

services the Wobby are now on an “on call” basis as patronage from this area is near non-existent, and

modification of driver behaviour and habits. We would like to make INDEC and IPART aware that the FuelTrac

data on Sydney prices is irrelevant to our particular situation, we due to logistics and supplier sources, are

forced to purchase diesel fuel from the only retail supplier in Brooklyn Boat Harbour, who have maintained their

per litre price in the range of $1.84 to $1.90 over the past 12 months, there by amounting to a total reduction in

pricing in the vicinity of 3% which in no way correlates to the stated figure of 25%.”

Response

In the 2014 efficient cost report Indec indicated that fuel, insurance and berthing and mooring costs

have been assessed as a given and considered reasonably efficient, therefore the reported actual costs

by the ferry operators for the 2015 review and their proposed 2016 and 2017 costs for those three

categories are considered reasonably efficient.

As the fuel costs are assessed as a given, the review and benchmarking of fuel costs in the report was

undertaken to ensure that the reported costs by operator fall within the movement of indexes.

5.1.2 Insurance

Submission

“With respect to insurance costs we have recently changed brokers and (Sept / Oct) reduced ongoing costs, but

would believe that most marine insurance costs have increased in a manner differently to “Sydney” ABS

indexes.”

Response

In the 2014 efficient cost report Indec indicated that fuel, insurance and berthing and mooring costs

have been assessed as a given and considered reasonably efficient, therefore the reported actual costs

by the ferry operators for the 2015 review and their proposed 2016 and 2017 costs for those three

categories are considered reasonably efficient.

As the insurance costs are assessed as a given, the review and benchmarking of insurance costs in the

report was undertaken to ensure that the reported costs by operator fall within the movement of

indexes.

5.2 CHURCH POINT

5.2.1 Labour

IPART

Submission

“Labour costs for the Church Point Ferry Service increased this year as the Director of the Company who has

worked without payment since 2008 was paid a large sum.”

Response

Indec‟s reasonable labour hourly charge per ferry hour set as part of the 2014 review and indexed for

the forecast years 2015 to 2017, is inclusive of both operational wages and an additional portion

allocated to cover the cost of administration functions.

5.3 PALM BEACH

5.3.1 Ferry Hours

Submission

“Based on the discussion with IPART on our first submission, we would like to resubmit the ferry hours. The

extra hours run by the second ferry during the Summer School Holidays (6 weeks) and Summer Period (20

weeks) totals 384 hours.”

Response

Indec has reviewed the reasonableness of the suggested increases and agrees that they have been

understated. As a result, Indec recast the reported costs per ferry hour provided by Palm Beach. The

Indec assessed efficient costs per ferry hour do not change however, when reviewing the reported

costs in total against the efficient costs in total, the efficient costs have increased as a result of the

increase in ferry hours.

final public version report efficient costs of church ... · g adshead d gotze d gotze 10/12/2015...

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