Following on from my previous post, this is a listing of the 16 findings of the review. Not the recommendations, but the findings. I have included some of my own comment on these at the end of each finding. Generally the findings are fair, although I think some of them are repetitive and essentially different sides of the same point. The findings have a strong consumer interest element to them, which is unsurprising given it was led by Allan Fels, but there is also some discussion around public policy implications and a bit around markets and delivery of services. Again it reads a bit like an ACCC series of findings, unsurprisingly.
For me, the main points are the lack of coherence around toll rate setting and structures, the inflexibility to apply time-of-use based pricing to better manage congestion and demand, and the poor policy responses to the current structures. The dominance of Transurban is valid in the toll concession process, but with the presence of E-toll, its retail market share is not monopolistic. Future envisaged toll roads are not intended to be undertaken as PPP concessions, indicating a willingness to take a different approach, although it should be possible to proceed with PPPs without the restrictions and constraints (including the toll rate escalators) implemented in previous years. Following this article will be one on the recommendations and what I think of those. However, for those outside NSW, the main benefit of this report is on lessons to apply elsewhere around toll rate setting, PPP contracts and taking a strategic network view, rather than an ad-hoc approach to separate major projects.
The structure of the findings is a summary of the findings from the report, followed by my brief comment.
The findings
1: The process for setting tolls has been flawed: Largely because governments determined them in advance of PPP concessions, rather than using competition in procurement to incentivise bidders to propose the lowest tolls needed to fund the roads. Long concession periods and higher than inflation cost escalators mean tolls in early years are lower than they should be, as the cost of the infrastructure is pushed towards future users more than early users. Efficient in road and toll operations almost entirely benefits owners of concessions and is not reflected in lower tolls. Comment: Ideally tolls should be proposed by project bidders or proponents and be subject to competitive pressure, and rigorous public sector scrutiny. It is worth reviewing the merits of allowing tolls to increase above CPI if costs do not do so, but not there is also no scope for tolls to reflect actual demand. Rigid concession conditions around tolls affect the ability for future tolls to be able to address distortions in pricing between tolled and untolled roads, and changes in demand across the network.
2: PPP details relating to toll setting are not publicly disclosed reducing information available to assist in public understanding: Commercial confidentiality claims around PPP agreements limit this information, and consequently increase public disquiet about toll rate setting. The Review noted that Base Case Financial Models are confidential and commercially sensitive, but said returns from PPPs are “generous”. The Review cannot publish the differences between actual revenue and model forecasts because of this confidentiality, making it difficult to assess whether tolls set are too high and whether excessive profits are being generated from toll concessions. Comment: Future concessions should enable regulatory oversight of the differences between actual and forecast revenue. A careful balance is needed between incentivising PPPs sufficiently and not enabling rent-seeking behaviour.
3: Toll road users bear a disproportionately high proportion of the cost of toll roads: The key issue is when toll roads bypass the untolled network and generate significant local amenity benefits. The Review noted the Cross City Tunnel (which provides a bypass of inner Sydney between east and west) which brings significant benefits to surface traffic, including property owners and pedestrians, but was expected to be fully funded by the users of the tunnel. There is a case for those others benefiting from the project to contribute towards its costs. Comment: Toll roads offering significant local amenity improvement, due to removal of traffic and enhancing of property values ought to be partially supported by revenue generated from surface traffic (through network charges such as fuel taxes) and property taxation from property owners. It is clear the Cross City Tunnel in Sydney is underutilised due to its high toll structure.
4: There is no overall system of tolls: Tolls are all set in isolation of each other, and although they could be set to send price signals to optimise the use of road infrastructure they are not designed to do so. The complexity of tolls as they are, including toll relief schemes, untolled motorway sections (which are often used by many motorists paying tolls on other sections). Comment: From a network perspective, tolls in Sydney send inefficient price signals that distort behaviour and do not encourage efficient network use. For example, overnight toll prices are far too high and ought to be set to remove traffic from surface streets whilst peak period tolls are often too low, and should be priced to encourage time and modal shift. There are no effective means to enable this.
5: The lack of a unified tolling system creates complexity, inefficiency, inequities and unfairness: With different vehicle classification systems and toll regimes, similar trips are priced differently across the network. Roads with similar levels of service are priced differently. Smaller trucks are in some cases charged the same as larger trucks, discouraging them from using some toll roads. Comment: As above, there should be more efficient pricing applied by location, distance and time-of-day and vehicle class. More standard pricing across the network, unless particularly costly parts of infrastructure are being used, would be rational and efficient.
6: Tolls are too rigid and locked-in for decades without options for review: No other sector of the economy sets prices for such a long period, certainly no other transport mode. This increases perceptions of unfairness over time, as prices rise faster than inflation. The Review reports modelling that around A$123 billion in tolls will be paid between 2024 and 2060. With no processes or means to review tolls during those concession periods, it raises serious questions as to why it is justifiable to have prices set for well over a generation through contract between the private sector and state government. Comment: Concessionaires like guaranteed toll levels and escalations, but no other investments in the private sector guarantee such revenues without regulatory oversight (see energy and water utilities which are subject to such oversight). This suggests that future PPPs have provision for regulatory oversight of pricing at regular intervals.
7: On most toll roads, time-of-day tolling is not used: At off-peak periods many toll roads are heavily underutilised, and at peak periods several can be highly congested. Pricing should enable better utilisation of the infrastructure. Comment: Generally, there are wider economic benefits in enabling better use of tolled infrastructure, especially since most of it has natural monopoly characteristics and there are some amenity benefits in enabling it. However, there is limited elasticity of demand off-peak, in that lower prices will result in lower revenues (as additional traffic is unlikely to offset reduced prices), although at peak times higher tolls that reflect demand profiles should improve congestion on a network basis and encourage modal shift. There are considerable merits in enabling time-of-day pricing, subject to regulation, in ways that do not undermine concession net revenues, but significant improve outcomes for the transport network.
8: The financial impact of tolls is greatest in Western Sydney: Western Sydney suburbs have the highest proportion of motorists paying over A$60 a week on tolls, reflecting the extent of tolled infrastructure in the West and the lack of useful alternative routes. This arguably affects access to employment and other opportunities for residents in those suburbs.
9: Transurban’s profitability has not been excessive in recent years, but its NSW toll road portfolio profitability is likely to increase over time in line with traffic and toll rate escalation, and declining construction costs: Sydney generates 50% of the toll revenue for Transurban, but its returns are not excessive when considered against the Weighted Cost of Capital. However, it is expected that profitability will row in future years. Comment: This is critically important, as it is important to ensure that Transurban isn’t extracting excessive rents from Sydney road users. However, it also suggests that the toll rate setting system for future concessions should not enable continued increases above inflation.
10: The level of tolls appears to be higher than necessary and desirable: This is in part, counting earlier points as follows. There was no competitive bidding for PPPs on the basis of toll price, concession agreements allow relatively high returns for multiple reasons including a regulated monopoly price safe from competitive challenge, incentives for efficiency are largely captured by concessionaires (and not shared with users). Toll roads are relatively free-flowing and potentially underutilised (indicating tolls are certain times are too high) and motorists perceive tolls as too high. Most of those surveyed who claimed tolls are too high tend to use alternative non-toll routes or reduce frequency of non-essential travel. 15% use other modes, but nearly 40% do not change behaviour (but pay the toll). Comment: There is clearly a distortion in travel between tolled roads and untolled roads essentially because of underpricing of untolled roads. Surveying the public about tolls is likely to result in an answer that many people think tolls are too high, but the real evidence is that the tolled network has much less congestion, on average than the untolled network. Many complain about tolls but still pay them, but that does not mean that tolls are not too high, but it does mean that this is overplayed. Toll roads take up land, and are high capital cost assets and arguably it is fair they generate a return on capital (even if this isn’t what explicitly happens with other roads). However, the negative externalities of pricing only part of the network are not insignificant, and there is a strong case for enabling time-of-use pricing.
11: Transurban has a dominant market share in the current provision of toll roads in Sydney: Although this is clearly the case, there is competition from untolled roads and other modes. Restrictions on Transurban include the limits on toll rate increases and the conditions on maintaining network quality during concession periods. Comment: Transurban has been commercial adept in expanding its presence in the market, but the “market” itself has entirely been driven by the State Government issuing concessions and the conditions it sets for those. The presence of the state account manager adds significant competition in terms of customer service, for “some” services, but concern over Transurban’s dominance is within the control of the State Government for future toll road concessions and in future regulation of them.
12: Transurban has been dominant in the NSW market for acquisition of toll road concession contracts: This is due to factors, such as its experience in bidding, the economies of scale of its existing operations and its access to in-house data on traffic and in modelling. It’s noted that of the four motorways under construction in Sydney today, two wont be tolled and the other two will be state-owned toll roads. Comment: This is essentially a repeat of the previous finding, and what matters is what impact it has on public finances, motorists and the economy. That hasn’t been explained clearly.
13: The significant position of Transurban in the toll retailer market could adversely affect competition for tolling concessions: Until 2019 there were four toll road retailes, but Transurban acquire two of them. Now it is Linkt (Transurban), E-Toll (State Government) and Eastlink (a toll road in Victoria) that hold the entire market, with Eastlink’s presence essentially only for a handful of vehicles that hold such accounts in Victoria visiting Sydney. Barriers to entry are not seen as significant, and clearly the presence of E-Toll makes a difference to Transurban’s performance in the market. Comment: There is a “could” here significantly diluted by the presence of E-Toll, but there aren’t enormous barriers to market entry and future concessions and toll roads should be open to more innovative solutions in providing retail services. This could include the growing mobile phone based suppliers, but longer term the inevitable implementation of RUC in Australia should see providers of such services also being able to supply toll retail services to their customers (e.g. telematics service providers for heavy vehicles).
14: Current tolling information fails to adequately enable, inform, and educate motorists thus reducing user empowerment and efficient decision-making: There is no “one-stop” platform for motorists to obtain all tolling information (including available rebates) and undertake trip planning in a way that is easy to use. Signage about toll rates is inadequate to give motorists sufficient time to adjust route choice. Retail toll platforms do not allow motorists to project future toll usage. There is little understanding as to how tolls are calculated, or understanding about toll administrative charges, and what revenues are used for on non-PPP toll roads. There is also insufficient information about the rights and responsibilities of toll road customers. Comment: This is true, although there is nothing stopping there being such an app or platform to do this, other than the lack of commercial interest in doing so. Signage should better enable route choice, and even could compare travel times by tolled and untolled road, although this would have to be the responsibility of the public road controlling authorities.
15: Toll reform is preferable to toll relief: The current toll relief schemes are inadequately targeted and underutilised, in part due to overly complex administration. Toll relief is not financially sustainable given the existing pattern of toll escalation and limitations on the availability of government resources to fund relief: This is focused on the M5 toll relief scheme which is confined by geography, does not have processes for review. It appears to be politically entrenched and is likely to have significantly affected transport and land use decisions along the M5 corridor. This and other toll relief schemes are blunt and likely to be financially unsustainable, and likely to primarily benefit higher income earners. It would be preferable to reform tolls more widely. Comment: Clearly the current toll relief schemes are inefficient ways to address public concerns about toll rates, and it would be much preferable to phase it out and reform the toll system more widely.
16: Concessionaires are an unintended beneficiary of the current approach to toll relief. Increased traffic and patronage of toll roads, through induced demand created by toll relief, directly benefits operators by increasing their revenues: By subsidising tolls, toll relief effectively benefits concessionaires by subsidising demand for their facilities. It is not enough to generate funds beyond agreed levels that would require upside sharing with government, but is enough to benefit Transurban. Comment: This highlights the inefficiency of toll relief as a subsidy from other road users and taxpayers to concessionaires and the beneficiaries of relief.
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