Wednesday, 23 May 2018

Australia's Heavy Vehicle Road Reform programme: An integrated, sound approach to road charging and funding

Although much attention is often given to toll roads in Australia, almost all road distance in Australia does not involve toll roads. As an economy dominated by extraction industries primarily around mining, but with agriculture also important, heavy vehicle use of a large and in many cases, sparsely used road network, is critical to the country's economic progress.  Australia is, after all, a continent, the sixth largest country by area (Russia, Canada, China, USA and Brazil are only bigger), but for its size it is the third least densely populated country (only Namibia and Mongolia have fewer people per square km).  That sparse population explains little when you note that over two thirds of the population live in the eight state and territory capitals, and another 22% live in the remaining urban areas, most of which are located along the coast in the eastern states.  Australia also has some of the largest trucks ever seen in regular use on public roads, with vehicles up to 60 metres long allowed on some routes, and total vehicle mass configurations of well over 100 tonnes. 

So Australia has taken heavy vehicle use of the road network seriously, because the productivity of both heavy vehicle use and the provision of the roads they use, has a direct impact on the economy.

Today, Australia charges heavy vehicles (excluding toll roads) through two means:

- Registration fees collected at the state and territory level (excluding some registered for interstate only traffic);

- Fuel excise duty known as the Road User Charge (which is fuel excise duty minus a refund to reduce it the "Road User Charge" rate), collected by the Commonwealth.  Currently at A$0.258 per litre (US$0.74/US gallon) of diesel.

The National Transport Commission annually reviews the levels of these, based on its cost allocation model, which uses data on recent spending on roads, allocates a proportion of those costs to heavy vehicles, which informs the

A Cost Allocation Model is used, based on historic spending on roads, to inform the setting of both registration fees (which escalate based on the mass/configuration of the vehicles) and the amount of the refund on fuel duty to set the road user charge rate.

For some years it has been acknowledged that this system is far from optimal.  Multiple reports have proposed a shift away from registration and fuel taxes towards direct user charging.

There is a relatively poor relationship between what is paid and the costs that heavy vehicles impose on the roads that they use. Most of the revenue collected through this system is treated as general revenue at the Commonwealth, state/territory levels, so is not dedicated for spending on roads. Numerous studies have noted the scope for reform, and a major reform programme was embarked upon, called the Heavy Vehicle Charging and Investment (HVCI) project, that sought to introduce heavy vehicle road charging. It was abandoned for several reasons, not least the complexity of the proposed programme, and the sequence of reforms, which effectively sought to reform charging before reforming the funding and governance structures for roads.  It also struggled to gain sufficient heavy vehicle user support.

Heavy Vehicle Road Reform

The current Commonwealth Government, under Minister for Urban Infrastructure and Cities, Paul Fletcher, has embarked on a new reform programme that is more holistic and integrated than HVCI.  It is notable in that it seeks to reform funding and management of roads, and how existing charges are set and used first, before replacing the current charging system with direct user charges.

Heavy Vehicle Road Reform seeks to not only reform how heavy vehicles pay for road use, but also to reform the funding and management of roads.

The current system is very much a political command and control model, and is depicted in the image below. Funding for roads is traded off with public spending for other activities, and decisions on priorities for road spending although informed by benefit/cost appraisal, is fundamentally a political call. Road managers primarily operate as engineering bodies, building and maintaining roads, with limited relationship with road users. The money that is spent on the roads is used to inform the charges that heavy vehicles pay, as the National Transport Commission uses data on previous spending (and forecasts of heavy vehicle demand) to inform rate setting of registration and the fuel excise "road user charge". 

The image below from the Department of Infrastructure, Regional Development and Cities is a fair summary of the current situation.

Australia's current system of charging and supplying roads for heavy vehicles

It shows a very limited relationship between road managers and road users, and in the use of revenue collected from road charges and money spent on roads.

The reform steps

The reform agenda comprises four key stages as seen below:

Heavy Vehicle Road Reform stages

Stage 1 is primarily about improve how roads are managed and funded, and how decisions are made as to what construction projects and maintenance levels are appropriate for the road network. In the longer term this may mean restructuring the institutional arrangements for road managers, including their governance and incentive structures. In short, making them much closer to corporatised utilities, in respect of their services to heavy vehicle users.

Stage 2 changes the basis of costs used to inform the setting of existing charge (and will be used for future ones), to be forward looking. By doing this, charges can be linked to a programme of capital and operational spending, with capital spending amortised over the life-cycle of the infrastructure. This brings the accounting for roads closer to that of other utilities, rather than the current PayAsYouGO (PAYGO) system, whereby (with the exception of PPPs), road capital is accounted for through current spending, and is effectively written off once a project is completed (as the capital is not recovered from future users). Independent price regulation takes control of setting charge rates for heavy vehicles from political control to regulatory control, based on the forward looking cost base. The independent price regulator will establish standards of service for road managers to deliver, and will set charges to enable those standards to be achieved through capital and operating funding. The independent price regulator will be informed by priorities of heavy vehicle operators, both expressed and inferred preferences, and wider community service obligations (e.g. guaranteeing a minimum standard of service on routes that cannot generate sufficient revenue to cover maintenance and renewal costs). Under Stage 2, there would still be registration fees and the fuel based road user charge, but those rates would be more transparently related to future spending on the road network.

Stage 3 takes this a step further, as it will mean a direct link between the revenue collected from road users and funding to road managers. Funding for road managers will be based on road use, so a dedicated heavy vehicle roads fund would be established, for revenues from registration and fuel tax to be hypothecated. Although funding may be based on usage, under current charges care would need to be taken to avoid over funding urban road managers and under funding rural ones, through a community service obligation.

Stage 4 is a shift towards direct road user charging, which is the primary interest of this blog. 

The end state is depicted below. Heavy vehicle operators will use the road and pay charges that match usage (which could be across dimensions such as distance, vehicle type, vehicle configuration, location and mass), the revenues would go to a hypothecated roads fund. Planning of capital and maintenance spending would be undertake, informed by user priorities and wider policy objectives. The independent economic regulator would use this planning to set charges and to determine service standards for road managers to deliver.

This programme is quite rare by international standards, in that it combines reform of how roads are managed, how roads are funded and how roads are charges for into an integrated series of reforms. Furthermore, it progresses the reforms through steps that of themselves are of value. Although it would be a pity to stall, if nothing progressed past Stage 3, Australia would have significantly improved the funding and institutional framework for road management. 

End state of Heavy Vehicle Road Reform

The programme is ambitious, but if it does progress to this point, one question is what about light vehicles?

For light vehicles, it should be clear that these reforms will have positive impacts for them. By delivering to standards of service for heavy vehicles, road managers will of course be improving roads for light vehicles as well. More transparent funding and governance of roads for heavy vehicles will mean similar structures for light vehicles, as they use the same roads. Finally, having heavy vehicles paying more directly for road use, should result in better choices by those operators in terms of vehicle type, configuration and route choices.

Where are things now?

Each stage need not be fully completed before the next necessarily commences.  Stage 1 is significantly advanced, and progress has also been made on developing a Forward Looking Cost Base, and in consulting on an Independent Economic Regulator for roads.  Once both are firmly established, Stage 3 should be able to follow.
The more interesting development is the announcement of the National Heavy Vehicle Charging Pilot.  More on that to follow...

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