Research project on minimum payments for road transport contractor drivers. KPMG detailed guidance material. April 2015

Transcription

1 Research project on minimum payments for road transport contractor drivers KPMG detailed guidance material

2 Contents 1 Introduction Objectives Scope Approach to modelling Structure of this document 6 2 Cost model structure 7 3 Minimum payments Separate per hour and per kilometre rates Single hourly rate Presentation of minimum payments 10 4 Vehicle and trailer classification system Principles for selection of vehicle classes and trailer types Vehicle classes and trailer types Comparison of vehicle and trailer classification systems 14 5 Representative vehicles and trailers Principles for selection of representative vehicles and trailers Representative vehicles and trailers 17 6 Cost components Principles for selecting cost components Selection of cost components 20 7 Global assumptions Annual hours worked Annual kilometres travelled 33 8 Calculating cost model payments Labour and on-costs Finance Fuel & Oil Registration & Insurance Tyres Maintenance and repairs Administration Other 61 9 Adjustment of data inputs References A affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. i

3 Important Notice If you are a party other than the Road Safety Remuneration Tribunal (RSRT), KPMG: owes you no duty (whether in contract or in tort or under statute or otherwise) with respect to or in connection with the attached report or any part thereof; and will have no liability to you for any loss or damage suffered or costs incurred by you or any other person arising out of or in connection with the provision to you of the attached report or any part thereof, however the loss or damage is caused, including, but not limited to, as a result of negligence. If you are a party other than RSRT and you choose to rely upon the attached report or any part thereof, you do so entirely at your own risk. Inherent Limitations This report has been prepared as outlined under our engagement letter ( Services ). The services provided in connection with this engagement comprise an advisory engagement, which is not subject to assurance or other standards issued by the Australian Auditing and Assurance Standards Board and, consequently no opinions or conclusions intended to convey assurance have been expressed. No warranty of completeness, accuracy or reliability is given in relation to the statements and representations made by, and the information and documentation provided by, the Fair Work Commission s management, personnel and stakeholders consulted as part of the process. KPMG does not make any statement in this report as to whether any forecasts or projections included in this report will be achieved, or whether the assumptions and data underlying any prospective economic forecasts or projections are accurate, complete or reasonable. KPMG does not warrant or guarantee the achievement of any such forecasts or projections. Any economic projections or forecasts in this report rely on economic inputs that are subject to unavoidable statistical variation. They also rely on economic parameters that are subject to unavoidable statistical variation. While all care has been taken to account for statistical variation, care should be taken whenever considering or using this information. There will usually be differences between forecast or projected and actual results, because events and circumstances frequently do not occur as expected or predicted, and those differences may be material. Any estimates or projections will only take into account information available to KPMG up to the date of this report and so findings may be affected by new information. Events may have occurred since this report was prepared, which may impact on it and its findings. KPMG have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report. KPMG is under no obligation in any circumstance to update this report, in either oral or written form, for events occurring after the report has been issued in final form. The findings in this report have been formed on the above basis. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. ii

4 Third Party Reliance This report is solely for the purpose set out in the Scope section and for the RSRT s information, and, with the exception of publication by the RSRT, is not to be used for any other purpose without KPMG s prior written consent. This report has been prepared at the request of the RSRT in accordance with the terms of KPMG s contract dated 17 October Other than our responsibility to the RSRT, neither KPMG nor any member or employee of KPMG undertakes responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that party s sole responsibility. This report may be made available on the RSRT website. Third parties who access the report are not a party to KPMG s contract with the RSRT and, accordingly, may not place reliance on this report. KPMG shall not be liable for any losses, claims, expenses, actions, demands, damages, liabilities or any other proceedings arising out of any reliance by a third party on the report. Any publication of this report (other than by the RSRT) requires the prior written approval of KPMG, and is to be a complete and unaltered version of the report and accompanied only by such other materials as KPMG may agree. Responsibility for the security of any electronic distribution of this report remains the responsibility of the RSRT, and KPMG accepts no liability if the report is or has been altered in any way by any person. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. iii

5 1 Introduction This guidance material relates to a road transport contractor driver cost model ( model ) created by KPMG for the Road Safety Remuneration Tribunal (RSRT). The RSRT is an independent national tribunal that has functions relating to the road transport industry, established by the Road Safety Remuneration Act 2012 (Cth). The RSRT in December 2013 made the Road Transport and Distribution and Long Distance Operations Road Safety Remuneration Order 2014 (Remuneration Order) providing various entitlements for covered road transport drivers. 1 It did not set minimum rates of remuneration for drivers covered by the Remuneration Order, but foreshadowed consideration of this issue in the future. 2 The purpose of this guidance material is to outline the methodologies, assumptions and sources used to prepare the model of road transport contractor driver costs. The cost model and produced minimum payments are purely a research project conducted by KPMG and should not be taken to represent the views or a decision of the RSRT. 1.1 Objectives 1.2 Scope The primary objective of the modelling approach is to create a product that applies a consistent treatment to producing minimum payments and is accessible for all participants in the road transport sector. The model seeks to include representative operating costs for road transport contractor drivers in accordance with the objectives outlined above. The model includes the following features: 1 Covers two types of road transport operations; Distribution and Long Distance operations, as follows: - Distribution: the provision of a road transport service wholly or substantially in relation to goods, wares, merchandise, material or anything whatsoever destined for sale or hire by a supermarket chain (RSRT, 2013a). - Long Distance: any interstate operation, or any return journey where the distance travelled exceeds 500 kilometres and the operation involves a vehicle moving 1 RSRTFB, Road Transport and Distribution and Long Distance Operations Road Safety Remuneration Order 2014, 17 December 2013 (PR350280). 2 The RSRT foreshadowed a conference of interested persons in respect of rates of payment for road transport drivers and associated issues, and these are ongoing: [2013] RSRTFB 7 at [ ]; [2013] RSRTFB 3 at [49]. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4

6 livestock or materials, whether in a raw or manufactured state, from a principal point of commencement to a principal point of destination. An area within a radius of 32 kilometres from the GPO of a capital city will be deemed to be the capital city (RSRT, 2013b). 2 Considers a range of vehicle types relevant to Distribution and Long Distance operations as outlined above. 3 Provides for more than one method of payment, including Per hour standing and per kilometre running rates and Single hourly rates, defined as follows: - Per hour and per kilometre rates: a road transport contractor driver to receive an hourly rate in addition to a per kilometre rate. - Single hourly rates: a road transport contractor driver to receive an hourly rate regardless of distance driven. 1.3 Approach to modelling The cost model is set out in a spreadsheet (published on the RSRT website with this document) which contains estimates of fixed and variable operating costs incurred by road in the course of their operations. The model contains inputs and calculations that are used to estimate operating costs for a number of vehicle classes and trailer types. The model aggregates the cost component estimates for each representative vehicle and trailer to generate the minimum payments. The payments calculated by the model seek to afford road cost recovery for operating costs included in the model. The payments are disaggregated by the following components: 3 cost of labour costs of owning and operating the vehicle costs of owning and towing a trailer (where the trailer is owned by the contractor driver) costs of towing a trailer (where the trailer is provided by the hirer of the contractor driver) 4 cost of operations in the Northern Territory, Tasmania and regional Western Australia. 3 As the objective of the model is to provide cost recovery for road, it does not include a component for a margin of profit or return on capital investment. See Section In circumstances where the trailer is provided by the hirer of the contractor driver, the payments for this component only cover costs related to towing the trailer (e.g. additional fuel costs) and not costs incurred through ownership of the trailer (e.g. finance costs). 5 affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

7 The vehicle classes and trailer types used in the model are outlined in section 4.2. The representative vehicles and trailers chosen to represent each classification group are outlined in section 5.2. The cost components are outlined in section 6.2. The methodologies, assumptions and sources that underpin the calculation of each cost component are outlined throughout section 8. The minimum payments produced by the cost model are set out in a separate document, titled Research project on minimum payments for road KPMG guidance material on cost model outputs, published on the RSRT website with this document. 1.4 Structure of this document The remainder of this guidance material is structured as follows: Section 2. Cost model structure Section 3. Minimum payments Section 4. Vehicle and trailer classification system Section 5. Representative vehicles and trailers Section 6. Cost components Section 7. Global assumptions Section 8. Calculating cost model payments Section 9. Adjustment of data inputs Section 10. References affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6

8 2 Cost model structure The model aggregates estimates for a range of costs (labour and non-labour) incurred by road in the course of their operations. The operating costs faced by drivers vary by a number of factors including: the type of vehicle used the configuration of the vehicle used the service delivery type the state/territory of operation the route and operating conditions, among other factors. Accordingly, the model produces tables of minimum payments that account for the varied operating structures of road. The model is contained in the spreadsheet published on the RSRT website with this document. The structure of the model in the spreadsheet is shown in Figure 1. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 7

9 Figure 1: Cost model structure affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8

10 3 Minimum payments The minimum payments generated by the model allow for full compensation of all costs identified in this document. Two alternative methods of payments have been allowed for: per hour standing and per kilometre running rates a single hourly rate. It is assumed that in all instances, the hirer is required to reimburse the road transport contractor driver for out of pocket expenses directly related to their work, including any applicable road tolls. Section 7 of this document outlines the cost model s global assumptions for annual hours worked and annual kilometres travelled. The annual hours worked assumption is used to convert annual fixed cost estimates into an hourly payment. Note, the use of this assumption means if a road transport contractor driver works more hours than assumed, they will be over compensated for fixed costs incurred. Conversely, if the driver works fewer hours than assumed, they will be under compensated for fixed costs. The annual kilometres travelled assumption is only used in the calculation of the Single hourly rate method of payment. 5 The single hourly rate method is the same as the per hour standing and per kilometre running rate method, however all per kilometre costs are converted into hourly costs. 6 The use of the annual kilometres travelled assumption for the calculation of the Single hourly rate method of payment means if a road transport contractor driver drives further than the assumed travel distance, they will be over compensated for their variable costs. Conversely, the driver will be under compensated for variable costs if they travel fewer kilometres than is assumed. Due to the wide variation between road annual kilometres travelled, separate per hour and per kilometre rates will generally be more representative of road transport contract driver costs. 3.1 Separate per hour and per kilometre rates This method of payment ensures road are compensated for all fixed (per hour) and variable (per kilometre) costs that they incur. 5 The presentation of the minimum payments allows for two methods of payment. These methods of payment are the per hour and per kilometre rates and the single hourly rates. These terms are defined in Section 1.2 of this document. 6 This assumption does not impact the standing per hour component as this is already an hourly payment. 9 affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

11 Per hour standing and per kilometre running rates are to be applied simultaneously in calculating the minimum payment that would apply to a given road transport contractor driver. For example, for a 10 hour trip of 1,000 kilometres, a road transport contractor driver would receive the per hour standing rate x 10 and the per kilometre running rate x 1, Single hourly rate This method of payment ensures road are compensated for all (per hour) and variable (per kilometre) costs that they incur in a single hourly payment. This is the same as the per hour standing and per kilometre running method, however all variable (per kilometre) costs are converted into hourly costs using the annual kilometres travelled global assumption outlined in Section Presentation of minimum payments The minimum payments produced by the cost model are set out in a separate document, titled Research project on minimum payments for road KPMG guidance material on cost model outputs, published on the RSRT website with this document. The cost model outputs document provides two options for determining minimum rate payments using the cost model: a simplified four-step guide for determining minimum payments for road transport contractor drivers (worked examples are also provided); and/or schedules setting out the full range of minimum payments produced by the cost model. As outlined above, the cost model provides for two methods of payment: per hour standing and per kilometre running rates and single hourly rates. Separate versions of the KPMG guidance material on cost model outputs document are published on the RSRT website respectively incorporating the per hour standing and per kilometre running method of payment and the single hourly rate method of payment. 10

12 4 Vehicle and trailer classification system This section describes the vehicle and trailer classification system adopted for cost modelling purposes. The vehicle and trailer classification system supports the modelling process by providing a simplified categorisation of the broad range of vehicles and trailers used by road. The model generates annual operating cost estimates for each vehicle class and trailer type, which are then used as the basis for the minimum payments. Ten distinct categories make up the vehicle classification system. Each of these seeks to be representative of a set of vehicles with similar operating costs, on average. The vehicle classification system was also designed to be simple to maintain accessibility to the minimum payments. The principles that guided the selection of vehicle and trailer classification categories are outlined below. 4.1 Principles for selection of vehicle classes and trailer types In selecting vehicle classes and trailer types, the following principles were applied. The vehicle and trailer classification system should be: Flexible allowing for any combination of truck and trailer (including allowing for separate ownership of trailers). Unambiguous ensuring that each vehicle and trailer fits clearly into one and only one class. Representative ensuring that each class is constructed in a way that is representative of vehicle and trailer operating costs for all typical vehicles and trailers that fall into that class or type. Compatible ensuring that the classes are compatible with classifications of significant cost items, including the classification set out in relevant wage setting instruments applying to employee road transport drivers. Simple the system should conform to all of the above principles with the fewest possible number of classes and types. 4.2 Vehicle classes and trailer types The vehicle and trailer classification system was chosen by reviewing a range of existing heavy vehicle and trailer classification systems, and replicating the features of those systems that were most suitable for adoption in the model. The reviewed vehicle and trailer classification systems represent the primary heavy vehicle and trailer classification systems in use in Australia. They include: 11

13 New South Wales Industrial Relations Commission Transport Industry - General Carriers Contract Determination (NSW IRC, 2014) Fair Work Commission Award Categories for Transport Workers under the Road Transport and Distribution Award 2010 (FWC, 2010a) and Road Transport (Long Distance Operations) Award 2010, (FWC, 2010b). Victorian Government Rates and Cost Schedules for Owner-drivers (VIC DTF, 2014) Australian Bureau of Statistics Motor Vehicle Census (ABS, 2014a) National Transport Commission Charges for heavy vehicles (NTC, 2014) The results of the analysis suggested the classification systems used by the New South Wales Industrial Relations Commission under the Transport Industry - General Carriers Contract Determination and the Fair Work Commission in the determination of award rates under the Road Transport and Distribution Award 2010 and Road Transport (Long Distance Operations) Award 2010 were the most suitable for the purpose and objectives of the model. The resultant classification system for the model adopts features of both the New South Wales Industrial Relations Commission and Fair Work Commission (modern award) classification systems. The classification system is: sufficiently flexible to allow for any feasible combination of rigid vehicle / prime mover trailer combination in the model calculations; unambiguous in that only one criteria is used to distinguish between vehicle classes and trailer types (one criteria for each of rigid vehicles, prime movers and trailers); representative in that the gradations between classes and types are sufficiently fine that operating costs within a class or type will be similar to each other; compatible with Fair Work Commission award rates for heavy vehicle road transport operators; and simple, avoiding an overly complicated system of classifications. The following tables outline the classification sections, titles and descriptions adopted in the model. Table 1 outlines the name and description of the vehicle classification categories. The classification system for heavy trailers and trailer combinations are shown in Table 2 and Table 3 respectively. 12

14 Table 1: Vehicle classification system Class Description LCV C1 C2 C3 C4 C5 C6 C7 C8 C9 Rigid vehicle up to and including 3.5 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 3.5 tonnes, but not exceeding 4.5 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 4.5 tonnes, but not exceeding 9.0 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 9.0 tonnes, but not exceeding 13.9 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 13.9 tonnes, but not exceeding 16.0 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 16.0 tonnes, but not exceeding 20.0 tonnes gross vehicle mass (GVM) Rigid vehicle exceeding 20.0 tonnes gross vehicle mass (GVM) Prime mover with 2 axles ( single axle prime mover ) Prime mover with 3 axles ( bogie axle prime mover ) Prime mover with 4 axles or more 13

15 Table 2: Heavy trailer classifications Types Description T1 T2 T3 T4 T5 T6 T7 Converter dolly Pig trailer Dog trailer Low loader Semi trailer B-double lead trailer Refrigerated trailer Table 3: Trailer combination classifications Types Description Trailer combinations based on Heavy Trailer Type (refer to Table 2 for trailer types) TC1 B-Double T6 + T5 TC2 A-Double T5 + T1 + T5 TC3 B Triple T6 + T5 + T5 TC4 A B Combination T5 + T1 + T6 + T5 TC5 A-Triple T5 + T1 + T5 + T1 + T5 TC6 Double B-Double T6 + T5 + T1 + T6 + T5 4.3 Comparison of vehicle and trailer classification systems Table 4 contains a high-level comparison of the vehicle and trailer classification systems adopted by the KPMG model and other existing models. The reviewed models include the following systems: 14

16 New South Wales Industrial Relations Commission Transport Industry General Carriers Contact Determination (NSW IRC, 2014) Victorian Government Rates and Cost Schedules for Owner-drivers (VIC DTF, 2014) Western Australian Government Owner-driver (Contracts and Disputes) Act 2007 (WA DOT, 2014) Table 4: Representative Vehicle Existing Model Comparison Model KPMG NSW Government WA Government VIC Government Number of vehicle classes 10 vehicle classes 7 vehicle classes 7 vehicle classes Treatment of combination vehicles Rigid vehicle classes Additional daily and hourly allowances are prescribed for supplying or towing various trailers. Grouped by GVM (7 classes) Additional daily and hourly allowances are prescribed for supplying or towing various trailers. Grouped by carrying capacity (5 classes) No system is defined - user inputs vehicle and trailer variables into model Only one combination vehicle is considered (semi-trailer) Grouped by approximate GVM with no strictly defined boundaries (5 classes) Prime-mover vehicle classes Grouped by number of axles (3 classes) Prime movers grouped by number of axles (2 classes) Only considers 3 axle prime movers, with or without a semi-trailer (2 classes) 15

17 5 Representative vehicles and trailers This section describes the representative vehicles and trailers chosen for each vehicle class and trailer type defined in the preceding section. An existing vehicle and trailer was selected to represent each vehicle class and trailer type and serve as the basis of cost estimation. This approach supports the accurate estimation and allocation of costs to each vehicle class and trailer type. The existing vehicle and trailer that is most representative of the vehicle class and trailer type was chosen for inclusion in the model. Characteristics of each selected existing vehicles and trailers are used as data inputs into the model. The data collected about each vehicle and trailer includes capital cost, fuel tank size and number of tyres. These features were used to calculate estimates for finance, fuel and tyre costs for each vehicle class and trailer type. The approach to selecting representative vehicles and trailers is outlined below including the selected representative vehicles and trailers. The results of a high-level comparison of the features of vehicle and trailer classification systems adopted by the KPMG model against other heavy vehicle cost models is also included in this section. 5.1 Principles for selection of representative vehicles and trailers Representative vehicles were selected on the basis of the following principles: Popularity Popularity of the vehicle s make in Australia within its class according to the Australian Bureau of Statistics (ABS) Motor Vehicle Census 2014 (ABS, 2014a). Capital value Purchase price of the vehicle and the rate of capital value depreciation being similar to other popular vehicles in its class according to Glass s guide (Glass, 2014) and private listings. Weight Gross Vehicle Mass (GVM) being close to the middle of the defined GVM range (classes C1 through to C5 only). Table 5 outlines the methodology used to select representative vehicles. 16

18 Table 5: Representative Vehicle Selection Methodology Overview Principle Popularity Capital value Weight Shortlist methodology The Census of Motor Vehicles (ABS, 2014a) was examined to short list the five most popular makes and models within each class. The new and used capital value of all shortlisted vehicles were obtained using Glass s Guide (Glass, 2014), private listings, and quotes from heavy vehicle dealers. This information was used to select vehicles with medium representative capital value for its particular classification group. The specifications of shortlisted rigid vehicles (Class 1-6) were obtained from manufacturers websites to compare GVM and select vehicles with a representative weight for their class. 5.2 Representative vehicles and trailers Representative vehicles were chosen based on the principles outlined in the preceding section. A group of five vehicles were shortlisted for each vehicle classification group on the basis of popularity. An analysis was then undertaken on the popularity, capital value and weight of the vehicle. The vehicle that was most representative of each particular vehicle class was chosen. The selected representative vehicles are shown in Table 6. 17

19 Table 6: Representative vehicles Class Vehicle LCV C1 C2 C3 C4 C5 C6 C7 C8 C9 Toyota Hilux Mercedes Benz Sprinter 310 CDI Isuzu NPR 300 Medium with curtainsider body Isuzu FSD 700 with curtainsider body Isuzu FTR 900 with curtainsider body Isuzu FVR 1000 Medium with curtainsider body Iveco Distributor with curtainsider body Iveco Stralis ATi 450 4x2 prime mover Kenworth T409 6x4 prime mover Kenworth T409 8x4 prime mover The model calculations draw on the same vehicles for determining costs for road under Distribution and Long Distance operations. However, it is assumed that trucks used for Long Distance operations are fitted with sleeper cabins, allowing the model to reflect the additional associated cost. Representative trailers were also selected by consulting the Census of Motor Vehicles and private listings to shortlist the most popular types of trailer. The selected representative trailers are shown in Table 7. 18

20 Table 7: Representative trailers Type T1 T2 T3 T4 T5 T6 T7 Trailer Converter dolly, 2 axle, rigid connector Pig trailer, 2 axle, rigid connector, tipper/box Dog trailer, 3 axle, rigid connector, box Low loader, 3 axle, prime connector Semi trailer, 3 axle, prime connector, curtainsider B-double lead trailer, 3 axle, prime connector, curtainsider Refrigerator, 3 axle, prime connector, refrigeration unit included 19

21 6 Cost components This section outlines the principles for the selection of the modelled cost components. The results of a high-level comparison of the treatment of cost components in the KPMG model against other heavy vehicle cost models is also included in this section. 6.1 Principles for selecting cost components Cost items seek to be representative of operating costs incurred by road transport contractor drivers, but not necessarily comprehensive. Only items that are significant with respect to operating cost and necessary for performing standard road transport contractor driver services are included in the model s calculations. These guiding principles for the selection of cost components were adopted to ensure the development of a robust model that was not unnecessarily complex. 6.2 Selection of cost components Cost components were chosen based on the principles outlined in the preceding section. The selection of cost components involved an analysis of heavy vehicle operating cost models including: New South Wales Industrial Relations Commission - Transport Industry General Carriers Contact Determination (NSW IRC, 2014) Western Australian Government - Owner-driver (Contracts and Disputes) Act 2007 (WA DOT, 2014) Victorian Government - Rates and cost schedules for owner-drivers (VIC DTF, 2014) Overall, the approach to cost components adopted by the KPMG model largely reflects those in other models. Some differences exist, particularly in regard to the less significant cost components. The most significant cost component categories such as fuel, finance and labour costs include similar or identical cost components across all existing models. The cost categories adopted in the model are outlined in Table 8 alongside a description of components in each category. 20

22 Table 8: Cost components Cost component 1 Labour and on-costs Description Costs of labour, casual loading, allowances and superannuation. 2 Finance Costs of financing vehicles and trailers. 3 Fuel & Oil Costs of diesel fuel, engine oil and AdBlue 7. 4 Registration & Insurance Costs of registering and insuring vehicles and trailers. 5 Tyres Costs of replacing tyres as they wear out. 6 Maintenance 7 Administration 8 Other Costs of maintenance and repairs for vehicles and trailers. Costs of administration tasks, including accounting, mobile phone and a laptop for business use. Other costs including telematics, accreditation, training courses, vehicle washing and ASIC fees. A summary of the cost components adopted by other models and how it compares with the KPMG model is located in Table 9. 7 AdBlue is a diesel exhaust fluid used to reduce NOx concentration in diesel exhaust fumes. It is applicable to all heavy vehicles (classes 1 to 9) but not to LCVs. 21

23 Table 9: High-level results of analysis of cost components Cost category Notes on approaches adopted in existing models KPMG approach Finance This cost category refers to costs incurred in purchasing vehicles and trailers. Approaches adopted in existing models generally refer to loan arrangements with common cost components including repayment (typically as an annual payment) and depreciation costs. The loan inputs include loan features such as deposit percentage, interest rate, residual percentage, loan term and repayment frequency. Depreciation and return on capital invested are also included, in accordance with approaches applied in the Transport Industry - General Carriers Contract Determination and other models. Fuel and Oil Straightforward and consistent components used across various models calculations are based on most recent listed cost of diesel and some measure of vehicle fuel consumption. KPMG approach is similar to the approach adopted in most models. Cost components relate to fuel and oil consumption. The model will also include costs associated with AdBlue consumption. Maintenance Common cost components used across most existing models (with some minor variations across the combinations of service, repair and/or maintenance costs that are included). KPMG approach treats maintenance as a variable cost component that is incurred on a per kilometre travelled basis. Tyres Common features across components include cost of tyre and replacement frequency. The subcomponents and methods of calculating tyre costs vary across models. KPMG approach includes costs related to new tyre replacement and tyre retreads. The sub-components include number of tyres and retreads per tyre by vehicle type, new tyre and retread tyre costs, tread depth and unit tread cost and tread wear rates for distribution and long distance operations. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 22

24 Registration and Insurance Administration Classification of insurances vary across models. Most models specify comprehensive and public liability insurance. Some models include personal insurances such as income (accident/sickness) and workers compensation insurance. Less common inclusions include trailer-in-control insurance and marine (load) insurance. Inclusions in this category are not as clear as others. The Victorian Government model s definition of administration costs is: includes maintenance of records, preparation of tax returns, mobile phone charges, consumer price index, and sundry business expenses. Most models include at least one category for general administration costs, accounting or consultant fees and mobile phone costs. KPMG approach includes cost components for both registration and insurance. Registration costs are calculated based on an average annual registration cost for all Australian jurisdictions. Insurances that are necessary for undertaking standard contractor operations were included. These include comprehensive, liability, sickness and accident, goods in transit / marine transit and trailer in control insurances. These are deemed necessary on the basis of the minimum requirements needed to operate while minimising risks to personal safety and business security. In addition, KPMG analysis of existing cost models and correspondence with heavy vehicle operators concluded that it was reasonable to reflect the cost of the selected insurance products. The KPMG approach reflects the approaches adopted in the Victorian Government model. KPMG approach includes three administration components; mobile phone costs, accounting costs, and other office expenses such as laptop costs. These costs were all deemed necessary for standard contractor operations. They each also were significant enough to warrant inclusion. Inclusion of administrative overheads as major cost categories aligns with the approach adopted in all existing models. Accounting fees are included in all existing models in some form. Laptop and/or office related fees are included in most models also. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23

25 Other Labour and oncosts This cost component includes costs that were not commonly identified by more than one model, or less significant costs that are not easily placed in the other categories. Components in this category include truck washing costs, telematics operations, vehicle garaging, work-wear and the attainment of various permits and accreditations. All models reference awards applicable to heavy vehicle road transport operators. KPMG approach looks to include cost components that are both necessary for standard operations and significant in size. These costs apply to a majority of contractor drivers and are required to undertake operations to an appropriate standard. On this basis, cost components included in the model are driver licensing costs and costs associated with obtaining various vehicle accreditations (which are mandatory in the case of WA) which are commonplace in other jurisdictions. Training costs associated with obtaining these accreditations are also included where appropriate. Common costs such as payment of ASIC fees, vehicle washing costs and purchase and installation of telematics equipment are also included. Costs that aren t included in the KPMG model but were presented elsewhere include workwear and PPE on the basis that these costs were not necessary for undertaking services, depot costs given these are not necessarily incurred by contractor drivers, and other subscriptions and miscellaneous given most of these are not significant in size. Note, the KPMG model includes costs associated with obtaining Bluecard registration given this is commonplace among contractor drivers. KPMG approach draws labour costs from the Road Transport and Distribution Award 2010 and Road Transport (Long Distance Operations) Award Source: (NSW IRC, 2014); (VIC DTF, 2014); (WA DOT, 2014); KPMG analysis affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24

26 A more detailed overview of the key differences between the cost components of the existing heavy vehicle operating models is provided in Table 10. Table 10: Comparison of existing model approach to cost components Model / Cost Component KPMG NSW Government WA Government VIC Government Minimum hourly award rates Rates drawn from relevant NSW Wages and superannuation listed Same as KPMG with casual loading, allowances Award, except superannuation is as line items in worksheet Labour and on-costs (where applicable) and selffunded super contribution separated from the prescribed rates (see schedule 4, clause 6). Includes balloon finance costs Includes lease costs for a four No methodology offered. Line Includes lease costs for a four for a 5 year chattel mortgage year term with a 20% residual items for calculation of loan costs year loan with a 25% residual loan with a 30% residual at a (interest rate unknown) for 70% and depreciation (but not return at a 7% interest rate. 7.6% interest rate with no of the vehicle s capital value. on capital) are included. Depreciation and return on Finance deposit. Return on capital is calculated on the owner- Depreciation and return on capital are calculated on owner-operator Vehicle capital value is a user capital are not considered (assumes 0% owner-operator operator s equity in the vehicle, equity in the vehicle of 30% of input. equity in the vehicle). currently assumed to be 0%. 8 the vehicle s capital value. Depreciation is calculated Vehicle capital values are based on the capital value of defined as the average retail 8 Return on capital invested is the market return on funding invested toward vehicle purchase. The assumption of 0% return on equity capital invested reflects the finance arrangement used in the model (chattel mortgage with no deposit). affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 25

27 Model / Cost Component KPMG NSW Government WA Government VIC Government the vehicle using a straight line depreciation method. 9 The effective life of the vehicle used for depreciation calculations is sourced from guidance provided by the Australian Taxation Office (ATO). Vehicle capital values are sourced from Glass guide for four year old vehicles. The source of vehicle capital values is not available. value of a 4 year old [representative] vehicle. Fuel & Oil Price of diesel in all capital and non-metropolitan areas from the Australian Institute of Petroleum (12 month average). Includes fuel and engine oil but not Adblue. The sources of prices and consumption rates are not available. No methodology is offered. Line items for Fuel and Oil are included. Only considers fuel consumption, not oil or Adblue. Suggests fuel consumption rates for various vehicles and uses the spot price of diesel at the time of publication. 9 The calculation of depreciation reflects ATO guidance. The ATO approach is based on useful economic life and is therefore an economic measure of the actual life value of the asset at the end of the year. This may or may not equate to the balloon payment under any financial arrangements for purchase of vehicle and/or trailer. Balloon payments can in some instances be seen as a measure of residual value and on this basis may be used for calculating depreciation. The balloon payment is a financial metric that often reflects the value of the asset at the end of loan term. The buyer (as mortgagee) can choose various levels of residual (e.g %) of total loan value, which may or may not accurately reflect actual life value of the vehicle or trailer. Consequently, ATO s approach to estimating depreciation is the preferred given a) it more appropriately reflects the annual use value (i.e. opportunity cost of owning the asset), b) allows for consistency in application and c) ease of use. 26 affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

28 Model / Cost Component KPMG NSW Government WA Government VIC Government Price of oil and consumption rates for diesel and oil are calculated using the 2015 National Guidelines for Transport System Management. Registration & insurance Adblue consumption assumed to be 5% of diesel consumption with prices sourced directly from dealers. Cost of registration is an average of all registration fees, levies and mandatory services New South Wales includes registration costs (including compulsory third party insurance) for all representative vehicles in and the following insurances: all jurisdictions. Comprehensive The following insurances were included: Public liability Sickness and accident Comprehensive Liability Income protection Line items for vehicle registration and the following insurances: General (comprehensive) Public liability Sickness and accident Includes registration, permits and TAC charges for Victoria and the following insurances: Comprehensive Marine (goods-in-transit) Sickness and accident Public liability Workers compensation affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 27

29 Model / Cost Component KPMG NSW Government WA Government VIC Government Marine (goods-in-transit) Trailer-in-control Tyres Tyre prices and consumption rates calculated using the 2015 National Guidelines for Transport System Management based on tread wear and unit tyre costs and retreads. The sources of prices and consumption rates are not available. No methodology offered. Includes a single line item for tyres. Tyre prices and consumption rates specified but no source is provided. Maintenance, service and repairs Maintenance and repair costs (cents per kilometre) are calculated using the 2015 National Guidelines for Transport System Management based on representative vehicles. Assumes 10% of total costs (1/9 of all other costs). Includes line items for Repairs and Services. Specifies a cents per kilometre rate but no source is provided. Administration Mobile phone, accounting fees and laptop Mobile phone, accounting fees Line items are included for a large number of administrative overheads. Assumes $2500 per annum for all vehicles classes for mobile phone, accounting fees and other costs affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 28

30 Model / Cost Component KPMG NSW Government WA Government VIC Government Other Driver license, heavy vehicle accreditation, fatigue management, blue card, ASIC fee, washing cost, and telematics. Not included. Many line items are included. Included in Administration. Draws from publicly available Documentation on sources was or subscription sources not available. including Fair Work Commission (labour), Australian Institute of Petroleum (fuel) Sources of and the National Guidelines for costs Transport System Management 2015 (fuel consumption, oil, tyres, maintenance and repairs), Glass guide (vehicle capital values). Source: (NSW IRC, 2014); (WA DOT, 2014); (VIC DTF, 2014); KPMG analysis Only provides a worksheet template for individual owneroperators. Does not specify values or sources. Is intended as a rough guide for individual owner-operators. Specifies some values but sources are not generally available. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 29

31 6.2.1 Contribution of cost components to total costs In order to illustrate the relative importance of each cost component, Figure 2 provides illustrative results from the KPMG model developed for this work that show the relative contribution of each operating cost component for selected vehicle and trailer classifications. These results will vary marginally according to the model settings, including the user s choice of award rate grade and service delivery type (Distribution or Long Distance operations). By way of example, the results below represent the operating costs faced by road on Distribution operations along the eastern seaboard of Australia. The chart illustrates the relative importance of the labour and fuel and oil cost components. Combined, these cost components make up the majority of costs incurred by road. Other significant costs include finance and registration and insurance costs. Other costs such as tyres, maintenance, business administration and licensing costs make up less than 20 per cent of the total cost incurred by road operating most heavy vehicles. 30

32 Figure 2: Proportion of total operating cost by cost component and representative vehicle and trailer classification 31

33 7 Global assumptions This section describes the two major global assumptions and how they affect the outcomes for minimum payments. The annual hours worked assumption is used to convert annual fixed cost estimates into an hourly payment. The annual kilometres travelled assumption is only used in the calculation of the Single hourly rate method of payment. 10 The single hourly rate method is the same as the per hour standing and per kilometre running rate method, however all per kilometre costs are converted into hourly costs using the global assumptions. This annual kilometres travelled assumption does not impact the standing per hour component as this is already an hourly payment. 7.1 Annual hours worked It is assumed that 2,170 hours per year are worked by road for both Distribution and Long Distance operations. This value is the product of assumptions about the number of weeks worked per year and the number of hours worked per week, as shown below. Assumption Source 48 weeks worked per year (with four weeks annual leave) (Fair Work Act, 2009) hours worked per week (average hours worked per week for a full-time adult truck driver on individual arrangements). Employee Earnings and Hours (ABS, 2012a) 12 All fixed costs are assumed to be recovered evenly over the hours worked in the year. The cost components that are recovered as fixed costs on an hourly basis include: 2. Finance 10 The presentation of the minimum payments allows for two methods of payment. These methods of payment are the per hour and per kilometre rates and the single hourly rates. These terms are defined in Section 1.2 of this document. 11 Full time Australian employees are entitled to four weeks annual leave per year as set out in Division 6 of the Fair Work Act 2009 (Cth). 12 Table 1 FULL-TIME NON-MANAGERIAL ADULT EMPLOYEES, Average weekly cash earnings and hours paid for Occupation by Method of setting pay. Average weekly hours paid for, 7331 Truck drivers, individual arrangements. 32

34 4. Registration & Insurance 7. Administration 8. Other. Any increase in the assumed annual hours worked would result in a decrease in the hourly rate, and vice versa. 7.2 Annual kilometres travelled The Survey of Motor Vehicle Use (ABS, 2012b) records annual kilometres by vehicle class, using the two categories of Rigid trucks and Articulated trucks. It has been assumed that rigid trucks represent Distribution operations and articulated trucks represent Long Distance operations for the purpose of the annual kilometres travelled assumption. This reflects an underlying assumption that in practice, Distribution operations are often undertaken by rigid trucks (C1 through C6 in Table 1) and Long Distance operations are often undertaken using articulated trucks, such as prime movers (C7 through C9 in Table 1) with trailers or combinations of trailers. It should be noted that annual kilometres travelled varies widely according to the precise nature of operations and individual circumstances of each road transport contractor driver. The assumptions and sources for annual kilometres travelled are shown below. Assumption Source 35,000 kilometres per year for Distribution operations (ABS, 2012b) ,000 kilometres per year for Long Distance operations (ABS, 2012b) 14 The annual kilometres travelled assumption is only used in the calculation of the Single hourly rate method of payment. 15 This assumption does not affect the calculation of the per hour standing and per kilometre running rates. The cost components that are recovered as variable costs on a per kilometre basis that would be affected by the annual kilometres travelled assumption include: 13 Table 12 Average kilometres travelled, Year of manufacture by type of vehicle by state/territory registration, 2007 and after, Rigid trucks, Australia, Average kilometres travelled (approximate value). 14 Table 12 Average kilometres travelled, Year of manufacture by type of vehicle by state/territory registration, 2007 and after, Articulated trucks, Australia, Average kilometres travelled (approximate value). 15 The presentation of the minimum payments allow for two methods of payment. These methods of payment are the per hour and per kilometre rates and the single hourly rates. These terms are defined in Section 1.2 of this document. 33