Commercial Practices, Operator standards and Entry into the Industry

The intense competitive pressures to undercut rates or engage in unsustainable or hazardous operational practices in the long haul road transport sector are not simply the product of client pressure but are also shaped by factors which make entry of newcomers into the industry relatively easy. These factors include:

• Relatively low capital start-up costs and a willingness of finance companies to lend money to potential entrants

• The absence of formal entry requirements for operators (apart from a truck drivers’ license in the case of owner/drivers)

• The way entry in road transport is viewed as a means of ‘buying a job’, especially for those in regional centres with high unemployment levels/few job prospects or workers who have been made redundant

3.2.6.1 Easy finance/easy indebtedness

Any Tom, Dick or Harry can go and buy a truck. Now I’ll give you an example. I’ve got a son in Tamworth…he can’t borrow money to buy a house but the bank will lend him money to buy a truck. Can you believe that? (oral submission, small fleet operator, mid north coast NSW). It's an easy industry to enter but it’s a hard industry to survive in (oral submission, small fleet

operator for 25 years and truck repairer for other operators, Hunter Valley)

One of the greatest shortcomings of the Australian Road Transport Industry since its beginnings…is the fact that entry to the industry does not necessitate any form of education or accreditation. Ultimately, we are left in many instances with average to good truck drivers who can neither run nor maintain a business successfully. Once pure survival becomes paramount, from a risk management perspective, we have established that the first corners to be cut are on safety, this in itself is a majority of the current problem with the industry. Just to survive, every last shred of the roughly formulated business plan is dependent on operating to dangerous limits (written submission, Owen Driscoll, NTI Ltd, page 24).

Throughout its investigations the Inquiry was repeatedly told that it was all too easy for a person with driving experience but with no demonstrated business skills to borrow money to purchase a truck and so start their own operations. The result is a surplus of transport operators, many with limited business knowledge or acumen, chasing a limited pool of tasks and who, in an effort to survive, must underbid each other on contracts. Considering the overall importance of the long haul trucking industry to the economy, it is essential that it be

conducted in a sustainable way. Whether or not some sort of licensing system should be introduced to help achieve this was an important consideration of the Inquiry.

These problems are not new to the industry. In the mid 1980s the National Road Freight Industry Inquiry (May et al 1984 especially pages 197 to 204) examined the issues of truck financing and entry into the industry. The report noted that it had received many complaints that finance companies were indiscriminately supporting new entrants to the industry, including the offering of low deposit/high repayment finance-packages to new owner/drivers that could not be sustained under normal market conditions. Criticism of the frequent use of homes as collateral was also noted. The Australia Finance Conference rejected this criticism by identifying its lending requirements, but as the Report observed:

The state requirements outlined by the Australian Finance Conference for truck sales and financing appear to diverge from the practices actually in force in the industry, although the divergence appears to have been greater a few years ago. There is, however, considerable potential for this divergence to reappear in time (May et al, 1984:204).

Driving Forward, a report on the public vehicles and carriers industrial legislation undertaken

for the then NSW Minister of Industrial Relations in 1993, made the observation.

The fact remains that lenders do compete to provide truck finance and possibly to finance trading in ‘goodwill’. They take financial but not social responsibility for the outcomes of their lending policies. There is an argument for further consideration of this matter in a broader context of small business borrowing and lending generally. It is supported by this Review (Driving Forward, 1993:22 cited in written submission by its author Hylda Rolfe).

This and other criticism by the report of the lending practices of finance companies in relation to truck purchases drew a response from the Australian Finance Conference in December 1993. In submission to this Inquiry, the author of the report, who has remained a keen observer of the road transport industry, did not resile from the position taken in 1993. Indeed she expressed the view that competition amongst financial institutions encouraged by ACCC may have made the interaction between truck safety and finance even more apparent. The Inquiry is unable to express any view on this. It can say, however, that the view that funds for financing the purchase of a truck are too readily available is widely held by many sections of the industry and other interested parties such as insurers.

Representatives from several insurance companies expressed serious concern at the ease of getting finance to purchase a truck and called for changes to lending practices. For example MMI/Allianz argued

Allianz believe that the finance industry should review current practices and impose minimum standards which require a new finance applicant to produce financial projections as part of a business plan. This should demonstrate how they intend to achieve a return on net assets (RONA) greater then their weighted average cost of capital (WACC refer section 1.5) and ultimately ensure their long-term profitability

…Anecdotal evidence suggests that the more traditional forms of security of bricks and mortar is all that is required for new entrants to purchase a new vehicle. Allianz propose that irrespective of the form of security on offer and the mix of capital required (debt and equity), it is more important for the business applying for credit to demonstrate that their proposal is viable before the institution advances finance (written submission, Dean Croke/MMI/Allianz,

page 19).

Large companies use small operators as subcontractors and these small operators have a very high rate of insolvency. From 1996 to 1997 they experienced a 91% increase in bankruptcies.

Lone operators, the owner/drivers, experienced a 42% increase in insolvency in the same period.

It may be argued that the problem applies to small business generally and the market provides a remedy because those borrowers who cannot operate in a sustainable fashion will simply disappear. Even ignoring the consequences of bankruptcy or losing the family home on these drivers and their families, there are number of other risks and costs that the community may not choose to be exposed to. Most notably, in their efforts to make ends meet after entering into such arrangements, drivers may well engage in work practices (excessive hours, speeding, use of drugs etc) which breach the law, undercut drivers and firms operating legally, and expose themselves and other road users to an increased risk of death or injury. In a competitive labour intensive industry such as road transport, this scenario is indeed a likely outcome. Indeed, concern with these very issues led to the introduction of unconscionable contract provisions in the NSW Industrial Relations Act many years ago. While of some value, this represents at best a post hoc remedy.