Monday, 19 May 2014

Australian infrastructure lobbying group and motoring clubs call for radical reform

I reported on 27 March that Infrastructure Partnerships Australia had published a discussion paper called "Road Pricing and Transport Infrastructure Funding" which has essentially recommended a move from ownership and fuel taxes to distance based charges for road use, including mass, location and time of day components.

I have since had a chance to read the report, so that I can now give a more detailed review of the paper.  It's worth reading in its own right, at least because the way it is presented and structures the key issues is both accessible and logical.

It's notable for being a report commissioned not only by contracting sector lobby groups (who would traditionally be expected to endorse more construction), but also motoring clubs (who would traditionally be expected to endorse more construction and resist user charging).  This report is not pushing construction, and openly admits that big cities are unable to "build themselves out" of congestion, although there will be an ongoing need for new road capital investment.  It does support road pricing, and it also supports using some road pricing revenue to enhance public transport.  That is fairly revolutionary in thinking from these sorts of entities, and is to be applauded.  

It is important to note that not all Australian motoring clubs are parties to this report, but many key ones are.  It indicates a level of analytical rigour and honesty to admit that the future will be improved by measures that, on the face of it, many if not most motorists will be sceptical about.  There are plenty of motoring clubs worldwide that simply oppose user charges and call for more road construction to fix major problems, hopefully this report will catalyse some to apply some more economic rigour.
The report has a number of key things going for it:

- The key limitations of existing forms of motoring taxation are outlined.  Taxing ownership and fuel has major issues of equity, sustainability and lack of flexibility, which are not compensated for by simplicity.

- The benefits of user charging are made clear around network efficiency and addressing congestion.

- A range of options are looked at, and assessed at a strategic level according to some clear objectives

- A pathway of small steps to go forward with is presented.

- It has the endorsement of a number of several (although not all) motoring clubs in Australia.  Getting support from this lobby is crucial and important, given how influential it is.

It is worth reading in its own right, but I thought it would worthwhile providing a brief synopsis of the main points.   I have also included some graphics from the report, which is blatant plagiarism, but help to explain some key points.

Problem defined

In Australia, fuel tax is collected by the Federal Government, but what is called in the report "fixed access charges" taxes on owning, registering and transferring vehicles are collected and set by the states.   Funding for roads is split between those levels of government, with the Federal Government granting funds to states for national and state highways, and states making their own contributions from their own taxes.  None of the taxes are hypothecated, so funding levels have little relationship with taxes collected from motorists.  On top of that some states have embraced tolls for new highway infrastructure, particularly New South Wales, Queensland and Victoria, others have not.

Australia's complex road charging and funding governance, clearly not by design

One key limitation on the report is that it doesn't seek to parallel work on truck charging that is now called the HVCI (Heavy Vehicle Charging and Investment reform) project.  That is a separate piece of work which concluded that the net benefits of only shifting trucks to distance/mass charging were low, but that it was worthwhile if combined with other reforms (and could be worthwhile further if part of a broader switch to wider pricing reforms).  So no more is said about trucks, which is a pity, since they are a critical part of the equation, although it is acknowledged that charging trucks could be an important transition step, although it wont address wider strategic issues such as congestion.

The report recognises the Henry tax review which concluded that existing motoring taxes are unsustainable. The primary reason being diminishing yields from fuel tax, but also the distorting effect of ownership taxes being raised to compensate for this.  In short, increases in fuel tax cannot keep pace with fuel efficiency without raising significant equity issues and exacerbating the cross-subsidies inherent in the current taxation of motor vehicles.

Now Australia has had circumstances many think are unparalleled, having not experienced recession at all in the past 20 years, although economic growth has slowed somewhat in the past couple of years, so what this has meant is ongoing growth in road transport demand and vehicle ownership, not quite the impression seen in some other developed countries.

Some key statistics presented:
- A$20.4 billion (US$19.1 billion) in revenue is collected from road vehicles per annum, but $A16.9 (A$15.8 billion) billion is spent on roads (although part of that money comes from local rates by local authorities).  All taxes are treated as general revenue.

- Ownership/registration taxes vary by state and (light) vehicle type between A$191 (A$179) and A$670 (A$627) per annum.

- Fuel tax is A$0.3814 per litre (US$0.3566 per litre or US$1.35 per US gallon).

- The proportion of road expenditure on maintenance declined from 50-70% in the 1990s to around 35% in recent years, as new capital spending on new capacity has been brought forward.

- Fuel tax revenue has declined as a proportion of GDP from 2% in 1997 to 1.2% in 2010.

As the economy grows, fuel tax revenue does not keep pace

- Vehicle fleet numbers have increased considerably since 2004, from 13.5 million to 16 million in 2010.

- Vehicle Kilometres travelled have also increased from 199 billion in 2004, to 226 billion in 2010.

- Fuel sales remain relatively static, although diesel has supplanted petrol as the primary transport fuel (49% compared to 46%) with LPG a distant third.  Fuel efficiency means traffic growth is not matched by commensurate revenue growth with fuel tax.

- Annualised congestion costs are estimated at being around A$14 billion p.a. (US$13.1 billion) and expected to grow to A$20 billion (US$18.7 billion) by 2010. This is with expected increases in highway and public transport capacity (which for both are considerable).

Avoidable costs of congestion in Sydney over time

- VKT in Sydney increased 50% over between 1990 and 2010, but traffic speeds actually increased in the AM peak by 3% and 8% in the PM peak (which is explained by new capacity which is tolled - built it and they will come, but if tolled not in such volumes as to make congestion worse). In Melbourne, average speeds during that time were static, but worsened in the peaks (indicating new capacity improved conditions off peak, but facilitated further demand at the peaks).

Impacts of highway construction on average traffic speeds in Sydney

- Total numbers of trips have increased in Sydney, on all modes (except bus), in other major cities trips have plateaud across modes (although distance travelled continues to increase).

- Mode share for public transport is at the same levels as in 1978 (it had dropped in the 80s and 90s) at around 11%.  Road traffic congestion and improvements to services have driven patronage increases which maintain mode share.

The main problems identified by the report are:

- A disconnect between how roads are charged (and by how much) and how funds for them are allocated.

Taxes on fuel and on owning and trading motor vehicles are simply treated as revenue for the state and have no link at all to how much is spent on roads.  With barely any semblance of the user pays principle, it means that some road users are punitively taxed to pay for other government activities, others are undercharged and there are extensive cross-subsidies in the system.  Increases in usage of the system does not necessarily translate into more expenditure.  In short, user demands as reflected by revenue have no impact on spending decisions, which with any other utility would seem strange.  Bureaucrats are not seen as best placed to allocate resources for telecommunications and energy infrastructure, so why roads?  Is it efficient or equitable to deny spending for highway capital spending if the revenue from users would pay for it, or likewise if it is seen as efficient and equitable to tax road use for other purposes, should this not be transparent? (I'd argue that running roads at a profit that pays dividends, that may not all go to reinvestment in highway capital, may be a way of doing that).

- There is a perceived lack of funding for new capital works.

That indicates that there isn't enough revenue or there are other priorities for government spending that reallocates revenue from road users to other purposes.  If the capital works are efficient, then this would appear to be a failing of the current system, it might be another issue if the capital works are poor value for money.

- Entrenched, but largely invisible inequities in the current system.

The example cited is that users of streets in small rural towns where there is never any congestion pay the same as those filling up high capital cost motorways in cities which are congested.  It is clear that from a capacity/demand point of view, the latter should pay more.  Similarly, it is unclear why so much tax is paid to own, buy or sell a motor vehicle, compared to using it (which consumes road capital and creates pollution). The other inequity alluded to is that very low usage long rural roads are likely to have high fixed costs that are not easily recoverable from direct charges, but there are ways to address this.  More generally, by basing changes in the amounts charged on fuel consumption, it means those who can afford new more fuel efficient vehicles pay less to use precious road space at peak times in cities, than those with older vehicles and encouraged peak driving by reducing the marginal costs of doing so (with less fuel tax paid).

-  Does not encourage efficient use of the existing system.

The obvious example is that congestion is the result of undercharging a scarce resource, which means that road space is relatively underutilised at off-peak times and in places where there is ample capacity it may be overpriced.  Similarly, by not sending signals about the costs that some vehicles impose on road infrastructure, and the costs of those infrastructure, then optimal vehicle use is undermined (this is a heavy vehicle issue with axle/tyre configurations that may reduce road wear).  One figure on congestion is that whilst 64% of peak commuters leave after 1800 in Moscow (and 48% in Madrid), only 12% do so in Perth and Brisbane.  Some may say that it is because of a lack of things to do in the central city, but wouldn't pricing roads efficiently help contribute towards fixing that, if more found it opportune to stay in town longer because of road costs?  Public transport patronage is described as being "stubbornly low" in some places, despite major capital investment.  The figure below indicates how there might be scope for better network efficiency by spreading some types of trip out of peaks.

Weekday travel by time of day in Sydney by purpose (all modes)
What can road charging do?

The report identifies the following benefits from road charging:

- Manage congestion by sending better signals of the impacts of usage on networks and other users.
- Changes the management of highways to have a customer focus, and strengthens the case for investing net revenues where users want it.
- Can provide aggregate data on usage and asset conditions to help optimise expenditure on maintenance.
- Develops a direct link between what is paid and what is spent (as road users reasonably assume direct charges are hypothecated to expenditure on roads).

Suggested objectives

The report identified a fairly long list of objectives, which are not contradictory, but range from objectives to key design components.

  • Raise sufficient revenue to sustainably fund both maintenance and additions to the transport network (note it wasn't confined to roads, but included public transport).
  • Promote a fairer allocation of costs and benefits.
  • Develop funding stream security for long term projects.
  • Provide an opportunity to improve network performance.
The more "design guidelines" based "objectives" were:
  • Avoid discouraging private investment (i.e. the ongoing stream of privately financed, built and owned toll roads already seen in Australia).
  • Revenue collected should at least match what is collected now in quantum terms.
  • Net revenues should be reinvested in networks (again not just roads).
  • Simplicity should be balanced with achieving complex objectives.
  • Pilot trials should be used to study impacts and develop concepts.
  • Protection of privacy.
  • Technology should be driven by design, with the market determining solutions through a competitive process.

Option assessment

A strategic option assessment was undertaken, as to whether different types of road charging could achieve the four key objectives:

o   Funding additions and maintenance to the transport network
o   Providing a fair allocation of costs and benefits
o   Providing a secure funding stream
o   Providing opportunity to improve network performance

Cordon/area charging was ruled out as only being able to improve network performance around central cities and offering little in terms of funding opportunities to the network as a whole.

Tolls on national highways only were seen as useful to fund additions and maintenance to the specific roads themselves, but not for the whole network and unlikely to improve network performance.

Vehicle class/partial network (i.e. heavy vehicles on main highways) or selective vehicle/whole network (i.e. heavy vehicles or cars only on all roads) charges were seem as useful for trials or concept development, but could not deliver the improved network performance objective, as it is unreasonable to charge only one group of vehicles that way.

The answer proposed was to charge all roads by distance and mass, with time and place charging to follow - the so called Universal Road User Charge (URUC).

Summary options analysis of strategic options against objectives

How to move forward

A number of steps were proposed to progress this, including:

- Harmonisation of existing motoring taxes across states;
- Introducing hypothecation of motoring taxes;
- Reform governance of the highway sector (although it isn't clear what that means);
- Encourage more use of tolls for major improvements;
- Introduce mass/distance charging as a first major step;
- Refine such charges to include broad time of day and environmental factors (based on emissions ratings);
- Then target congestion more directly by location and time of day.

Before all that the report proposed a "forensic" analysis of the problem, with a clear explanation as to the best solution and detailed articulation of the benefits as part of a programme to promote to the general public the need for reform and how that reform needs to have pricing central to it.   The use of trials of charging systems could help, either to prove technology or also to prove the demand response to better pricing (although reform of tolls to have peak pricing may deliver this, there are issues of diverting traffic onto parallel routes).  It recommends future work be done on how charging might affect transport network performance, modelling revenue under different scenarios, and assessment of the possible need for a Community Service Obligation for rural roads.

That last point is of interest, because it is clear that rural roads in some cases have insufficient traffic to generate enough revenue for maintenance.  That could be addressed by having higher charges, or charging properties getting access from such roads charges to offset this, or by simply maintaining explicit cross subsidies from peak commuters.  

The report claims that when congestion based charging in introduced, there may be a need for more public transport in advance to cope with mode shifts, although that is based on experience in London and Stockholm, and also that there should be analysis of likely "winners and losers" under different scenarios.

Finally, it proposes that the whole issue of road charging and funding be referred to the Productivity Commission, because it has major consequences for the Australian economy (the Productivity Commission has done some other work on similar issues in the past).

The report include some hypothetical examples of users in the future and what they would and would not pay, given it did not include any measure of behaviour change on demand, and benefits from time savings, I haven't replicated it here, but it worth looking at to see at a strategic level, what effects might occur (the key one being anyone not driving at peak times in a major city may pay less).  It did this based on a metric of scheme design that is illustrative, but I don't think should be taken as more than that.  It is useful for contributing to debate, but it isn't helpful to delve too deep into the economics, as the report does have some gaps on this, although they don't undermine the fundamental argument.

Suggested steps to reform of road charging in Australia

I'm rather impressed with some of the strategic analysis in this report, and the fact that it has brought both highway contracting and user interests together in a controversial topic.  It is good at highlighting many of the key weaknesses of the current system, and I believe it comes up with what is likely to be the right answer (charging by distance, mass, time and location), albeit not necessarily clarity about how to get there, or even when you do, what the governance arrangements would be.

The report is a very useful contribution to an ongoing debate, so deserves some scrutiny and some reasoned debate as to the impacts current pricing arrangements have on the management and funding of roads, and what pricing can bring, and what the challenges are of moving down a path of more efficient pricing.

It is good in describing the inadequacies of existing motoring taxation, and at a strategic level why the proposed "URUC" concept would address not only the revenue sustainability issue (which is what drives the debate in the United States), but also offer opportunities to improve performance and a more direct link between revenue and expenditure decisions (a point rarely made elsewhere).

The description of some steps forward, including hypothecation of existing taxes and unifying ownership based taxes is useful, but it is clear that there are some major difficulties in taking control of such taxes away from states and centralising it in the Federal Government.  There may be better chances in incentivising states to reform, and the primary tools to do that are around how fuel tax revenues are allocated.  This requires some innovative policy thinking outside the scope of the report, but should support more efficient, more consumer oriented governance of highways and states that support tolls.  This will be controversial, and probably needs the support of at least two major states.

The report almost completely neglects the issue of fixed costs on lightly-used rural roads, which in Australia may be a significant issue.  There are thousands of kilometres of remote roads with low volumes of traffic and perhaps disproportionate levels of heavy traffic, which are almost certainly never going to be able to support charges that would be needed to maintain them.  This could be offset by allowing some cross-subsidies across large rural networks, or by specific charges on property owners to cover the deficit for access.  At the very least, the debate needs to be had.

Governance reform will be critical to making charging work, the key issue being that the dynamism needed for efficient pricing wont be achieved by having to legislate price changes.  A more commercial model, whereby highways are run like utilities, with road users as customers, and prices able to be varied at least within a regulated range, if not a full free market, could address concerns about bureaucratically set charges, but also allow for price signals to truly feed into expenditure and costs.  This would change incentives, but little is said about governance reform other than noting it will be needed.  It could, of course, provide a platform to allow development of charging to be led by such utility companies, but that's another story.   Key is who sets charges and what varies them and on what basis, the closer this is to those who spend the money and manage the network, the more likely it will be responsive to consumers, but not necessarily.

There will be significant revenue impacts from charging for congestion, which may be unexpected depending on the specific circumstances.  Demand elasticity from charging for congestion hasn't been tested on a wide scale in any new world city, as the London, Singapore and Stockholm examples are rather different from Australian cities.  What's important is that they be introduced gradually, but also have offsetting reductions at other times and on other routes so that perceptions of "gouging" motorists are ameliorated.  

Beyond congestion reduction and the growth in public transport demand at such times, there will need to be acknowledgement that such charges may result in wider economic changes in how cities operate.  Cheaper off peak travel may mean some activities shift, both in time and location.  It may encourage decentralisation, and more regional development, but also see further land use changes that are difficult to anticipate (regardless of what planners may wish to have happen).  Over time they will reduce transport costs, but allow better tradeoffs between those costs and land usage costs.

Whilst overseas examples have useful lessons, it is important not to exaggerate the acceptance of charges in say London and Germany.  London is a city where 45% of the population do not have access to a car (many by choice), so charging cars for driving into the central city (where the mode share for cars is less than 25%) was not that big a deal.  Germany's truck tolling system was sold on the basis of charging foreigners for using German roads.  Neither situation has close parallels to Australia.

What has been ignored is the lack of modal neutrality in the current system (which particularly applies to freight).  Addressing that could be a useful dimension of wider reform, of course road freight was excluded from this work (and this offers perhaps the best opportunity to move forward).

The peak/off peak  pricing issue for roads is paralleled with public transport.  In most major cities the majority of public transport capital lies idle between the peaks.  Once roads are efficiently priced, it will be reasonable to consider higher peak pricing for public transport (and much lower off peak pricing), because the economic efficiency arguments for subsidising peak time commuter public transport will evaporate under a scenario of efficient peak road pricing.

In conclusion, I commend the report.  It is highly positive to have some serious, well structured thinking about the future of motoring taxes and road charging.  The steps forward in terms of further work are good, but I'd add a more fundamental look at the cross-subsidies and charges that affect both road and rail transport in Australia, and options for governance reform of highways in the context of moving towards more direct user charging.  It is difficult to think of reforming motoring taxes in isolation of how that will be managed, but also in isolation of any economic assessment of who and what users of transport infrastructure are being overcharged and undercharged.

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