Sunday, 19 August 2012

Infrastructure Australia recommends road pricing and privatised toll roads

An article by Tim Colebatch, economics editor of Melbourne newspaper The Age, comments on a proposal by Infrastructure Australia (a federal agency to plan and co-ordinate major infrastructure projects, particularly those with interstate dimensions or effects) that toll roads be privatised and the sales proceeds used to finance further new road and rail projects.

It isn't state or federal policy yet, but the essence of it is almost a reversal of the traditional public-private partnership model (PPP) of letting the private sector finance, build, own and operate a toll road then let it transfer to public ownership, by selling existing roads and using that money to finance future ones, with the "sale" being a long term lease, so that the road can be "sold" time and time again.

Colebatch is open about the political problems and limitations involved, but dismisses most of the reactions as kneejerk prejudices, and if people want major new infrastructure there needs to be innovative approaches to paying for it.  He doesn't express a clear view in favour of it, although he has a vague concern about issues arising from multiple private owners.

Infrastructure Australia's report

Given discussions in the UK about highway privatisation and great concerns in the US about the means to pay for highway renewal, the report from Infrastructure Australia is timely and shouldn't simply be read in the context of Australian problems.  

Some key findings from the report, relevant to this blog:

- "Avoidable" congestion is estimated to cost the Australian economy A$20 billion (U$21.1 billion) per annum by 2020.  (pg.2)

- "The traditional model of government grants conceals the real cost of infrastructure to the community in the form of taxes. Here, users do not directly see the contribution they make, resulting in the tendency for infrastructure assets to be overused. The costs of such perceived ‘free’ access to roads are already being felt particularly though congestion in our cities. Just expanding the current supply of roads is rarely a final solution." (pg. 4)

- "The concept of road user charging is not new to Australian drivers as many of the major thoroughfares in Brisbane, Sydney and Melbourne are already tolled. If the community wants better infrastructure of this kind it needs to reconsider its willingness to pay for such projects."(pg. 5)

- "A network charging regime could also provide consistency and equity for users, as well as appropriate price signals for users to facilitate more efficient outcomes. Currently, user charges are levied on an ad hoc basis, which can result in a network with little apparent rationale for user charges, and contradictory signals for transport choices. A distance based toll may also have greater acceptance rather than a flat fee charged regardless of distance travelled." (pg.12)

- "Another form of user charges is a model that focuses on the application of tolls on freight vehicles in order to fund freight-specific road upgrades and bypasses that improve freight efficiency.  An example might be a part link or bypass project that is funded exclusively through a toll on freight vehicles." (p. 12)

This leads to conclusions that there could be more tolling, but that tolling could be applied more widely so that it is seen to be fairer.  There is also support for tolling trucks, but the idea that it could be used to fund specific road freight projects is curious.  The main reasons road user charging for trucks are introduced are to do with efficiently recovering maintenance costs from the vehicles that generate the greatest marginal costs on the network.  However, it may well be that if this is to be considered in Australia, a link needs to be made to projects that benefit freight.

The notable first recommendation is:

Recommendation 1: Governments should implement targeted measures such as user charges to enhance price signals to better balance supply and demand, and to increase the funding available for infrastructure investment.

Of course, it is tricky when some charges are at the Federal level (fuel tax), but others at the state level (taxes on vehicle ownership).

Also relevant is:

Recommendation 2: State and Territory governments should identify and monetise suitable public assets, allowing the freed up capital and avoided debt repayments to be recycled/invested into infrastructure projects.

This means privatisation of some roads.

In Appendix 5 the report has some valuable points on road pricing, in essence it comes down to the point that users need to see value in what they are paying and that they are not being double charged:

Applying user charges to other fixed infrastructure assets can be investigated – in particular for roads. Road charging options include: tolls, network charging, congestion pricing, distance driven, High Occupancy Toll lanes.

Work on user charges for heavy vehicles is already underway through the COAG Road Reform Plan.

However, the idea of user charging can be unpalatable where consumers perceive they are paying twice – that is, already paying for roads through income taxes, fuel surcharges, car registrations etc, but then expected to pay again through a toll (or are redirected onto toll roads).

Road users are more accepting of a toll if they perceive a utility benefit such as a time saving, a better asset or the delivery of a new asset much sooner than otherwise would be the case without funding through a charge.

User charging may also be more acceptable if applied in conjunction with a range of other reforms such as transparency in pricing, rebates or discounts in taxes/surcharges, and the availability of alternatives or improved services (such as better public transport).

Given that the Australian Government owns very few infrastructure assets, the support of State and Territory governments to implement this option will be needed. There is unlikely to be a uniform approach to user charging across the country given the different attitudes towards user charging from State and Territory governments.

The report tries to point states in the sorts of directions needed to successfully expand road pricing.

In Appendix 1 the report cites a successful PPP toll road in Australia as a good example of what is done now:

The Westlink M7 motorway project in Sydney is widely regarded as a successful example of a Public Private Partnership. The estimated cost was approximately $1.54 billion, with the Australian Government contributing $360 million. The Westlink Motorway consortium selected to operate and maintain the M7 was provided with a 34-year concession term after which the asset will revert to the NSW Government. Construction started in July 2003 and the road was opened to traffic in December 2005.

The M7 demonstrates what can happen when governments effectively plan for the long term, efficiently share risks and incorporate appropriate price signals into infrastructure projects through user charging. For the M7 this is implemented by electronic tolling with the price of the toll capped in real terms. There may be scope to extend the tolling operation at the end of the concession. Another important feature of the project is that the NSW Government also shares in upside demand risk where actual revenue exceeds forecast revenue. This project has led to the building of a substantial piece of well-utilised infrastructure largely financed by the private sector.

It also cites the US TIFIA programme as having useful elements in an Australian context.


Conclusion

Australia's public sector continues to be capable of producing high quality pieces of policy analysis with largely sensible conclusions.  Although this report has a scope wider than roads, many of its recommendations are broadly relevant and in the right direction.  The big issue is what role the Federal Government can have.   Given it levies fuel taxes now, it ought to look at what to do about that and a transition from that as a step forward, and so the issue of heavy vehicle charging becomes an obvious possible first step (shifting from vehicle ownership and fuel taxation to user charges).  However, given states have different levels of enthusiasm for tolling, the powers at those levels are more difficult to direct. 

Public acceptability is the key, and Australians are, by and large, not used to being charged to use roads that were previously free.  To widen the scope of tolling in any form will require some quid pro quo around both existing tolls and existing taxes.  

That is the issue the report did not address.
 
Whilst there remains taxes on owning vehicles and fuel, having additional ways to pay for road use on roads which are not currently tolled (and so are not perceived as having a free alternative), will be controversial.

It can't be just about new revenue, it has to be about a transition from existing revenue sources.

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