‘Safe rates regime would penalise efficiency’


Hassall says the minimum rates order would have thwarted owner-driver productivity and efficiency

‘Safe rates regime would penalise efficiency’
Kim Hassall

 

Associate professor and industry expert Kim Hassall says equity and vehicle financing techniques play key roles in the success of owner-drivers.

A majority of owner-drivers acquire their vehicles through the second hand market and not through financial leases and the rules under the safe rates regime would have ended up restricting their profit margins, Hassall notes.

He shares the example of a group of owner-drivers, who were able to use equity to their advantage while staying competitive in the market.

The group comprised around 40 owner-drivers, who worked for a medium-to-large Melbourne-based road transport company during peak and special periods, and were able to almost entirely dictate the rules of their runs.

Aged between 40 and 65, many of these owner-drivers had been working in the industry for 20 to 30 years.

Over the years they had built a "significant" equity in their prime movers, with some of them even owing their trailing equipment.

They were very specific about what jobs they would do and were always able to successfully negotiate their terms with the transport company.

But how was it possible that the drivers of this group were able to almost govern their destinations and dates?

The answer was two-fold, Hassall explains.

"They all had built up sufficient equity, some even 100 per cent, in their prime movers and trailers over a 30-year period. 

"Debts were minimal and in many cases their kids had grown up and the financial pressures were not as great.

"Like many owner-drivers, the capital equipment was not acquired through a financial lease on a new vehicle and trailer with a buyout of the residual asset.

"Virtually all of the drivers had never bought a new truck.

"They had borrowed and purchased say a seven-year-old prime mover, run it for three years, traded it for a five year old prime mover, run that for three years and traded it for a four year old prime mover etc etc.

"At the end of 20 years, it was not uncommon that a driver had a four- or five-year-old, fully operational prime mover, and held in excess of 85 per cent equity in the rig."

This level of equity allowed them to offer a freight rate up to 10 per cent less than the market rate and still make profit even after the freight forwarder margin was removed, he explains.

"So an owner driver in the above example would potentially have be shackled by a ‘safe rates’ regime because he/she had acquired the capital equipment by a smarter way than through a financial lease with a residual purchase.

"All owner drivers do not acquire their vehicles that way although the modeling for the remuneration tribunal would lead us to think that.

"It would be ridiculous to have different rates for owner drivers based on the many variations in their capital purchasing schemes as well.

"In the 1997 Transport Workers Union 15 per cent wage push, the standard model used for vehicle acquisition, involved a driver buying a new Freightliner and tautliner with 100 per cent borrowed funds.

"This modeling was as inappropriate as the current financial modeling was for the Road Safety Remuneration Tribunal (RSRT), based on the fact that a large sensible number of owner-drivers acquire their vehicles on the second hand market with regular trade-in cycles and not through financial leases."

Additionally, the rules under Contractor Driver Minimum Payments Road Safety Remuneration Order 2016 (RSRO) would have seen owner-drivers getting stuck to weekly routines that would have thwarted both productivity and efficiency, Hassall says.

"If an owner driver can have a mate do, say, a Sydney to Broken Hill return , or a Melbourne to Mildura return on a weekend, why should a proportion of this capital efficiency gain not be passed on to the customers?

"This would make this owner-driver’s operation a little bit more attractive to some fowarders and even some direct customers.

"Such efficiency under a ‘safe rates’ regime would be penalised and the weekly routine of the ‘standard owner driver’ would become the lowest common industry denominator.

"In fact, a safe rate regime could entrench capital inefficiency by having all owner drivers being benchmarked to a norm that is actually restrictive to productivity."

This is a section of the second instalment of a two-part article where Hassell examines the arguments around the ‘safe rates’ RSRO.

Full coverage can be found in next month’s ATN. Click here to secure your copy.

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