LUKE FRASER. Road reform, bureaucracy-style: no economic benefit, higher prices for users – and an easier ride for already-unaccountable agencies

From time to time our newspapers pen articles about road reform.  They raise the need for spending to be more efficient and less guided by the electoral pork-barrel and for more value to be visible to motorists.  The call for efficiency is particularly understandable as tax revenue become scarcer: the Westconnex motorway project in Sydney would almost fund the latest Gonski education reform package.  Westconnex would also fund almost half of Australia’s latest submarines purchase[i].  

It should shock the general community to learn that road reform as envisaged formally by road agencies is not going to improve these matters at all.  Instead, what is in prospect would only entrench and magnify the effects of the current politicised and inefficient roads system.

The latest Commonwealth departmental road reform proposal is the grandly-named Land Transport Market Reform Strategy[ii] – an odd title indeed for a plan that seeks to lock out any orthodox market reform of this sector.  It would see the tens of billions of fuel tax and vehicle registration charges paid each year by motorists ‘hypothecated’ directly to road agencies, whose funding levels would be determined not by treasury scrutiny, but by how much they and their ministers wish to spend on roads in the future. This is a recipe for even more inflationary and politicised road budgets – the current approach, on steroids.

The new approach would also seek to strait-jacket an independent regulator from performing any scrutiny whatsoever of the funding base, or what spending actually achieved for motorists post factum.  Fuel tax and registration costs to road users would likely go up by at least 25% and perhaps by much more under such arrangements.

Road charges, taxes and governance are a dry and complex field.  This leads even competent road ministers eyes to glaze over when road reform is raised.  This has left some within the agencies a free hand to plan their own vision of the 21st century: a fully-stocked cash machine for themselves, their ministers and the road infrastructure lobby – and no public scrutiny.

Road agencies are the last throwback to pre-competition reform, 1970s-style government utilities – large, public sector monopolies wielding almost complete power. They control what is spent and where with almost no scrutiny; this creates the conditions for politicisation of vast budgets: a Commonwealth roads minister, for example, can do multi-billion dollar deals with States of choice with near-impunity.

One such deal was agreed by then Commonwealth transport minister Truss and then-Queensland Premier Newman a few years ago: around $10 billion  – almost half the size of the latest much-debated Gonski education deal – was allocated to the Bruce Highway, which runs along Queensland’s east coast – and through Truss’ electorate.  Was there a published business case? No.  Did Infrastructure Australia scrutinise the matter? No.  Did a Senate committee do so? No. Were there alternative spending patterns presented for scrutiny? Who knows?

This is not to single out one side of politics unduly: Labor does this too.  So – almost unrestrained political power, due to the unreformed nature of the utility.  Except for two important features:

  • Roads ministers must submit their budgets to treasuries for agreement. Here, just like education, health and welfare programs, road agency funding proposals are balanced against competing pressures.
  • For trucks, which already have rough-and-ready direct fuel tax and registration charges set every few years, each proposed new pricing schedule must be tabled in parliament. There, unfair outcomes to users can be blocked, as they were in 2007.

These last guarantees of sunlight in the system would be dumped under the latest reform proposal.  What is proposed starts with the trucking industry, but gestures clearly to all vehicles eventually.

Problem

The preferred agency arrangement proposes all truck fuel taxes and registration charges be hypothecated to the road agencies for future spending, bypassing treasury scrutiny and control.  Road budgets thus received would be based on what the agencies and their political masters propose to spend in future, rather than current heavy vehicle charging arrangements which reimburse the agencies for what has already been spent.

This proposal would push up fuel taxes and registration fees, for two reasons:

  • new costs would need to reflect agency future spending plans, which on all evidence become more bloated and ambitious each year: total government road spending grew from just over $9 billion in 2004 to well over $24 billion in 2016 – over 12% annual growth[iii]. No other infrastructure class has experienced such a massive and sustained tax revenue spending increase.
  • for the last decade road agencies have been spending several billion dollars each year more than total fuel tax and vehicle registration fees generate – in effect treasury has been debt-funding road budgets as a top-up – this is a serious but underappreciated matter which Dr Michael Keating AC and others have written about on Pearls and Irritations s[iv]. If road charges are to be hypothecated, presumably the costs – to trucks, initially, possibly to all vehicles later – will need to go up in the order of 25%, in part to cover the gap between road tax received and future road spend.  Depending on how new investments and sunk costs are treated, these charges might be far more expensive again.  One can imagine the impact on some industries.

Either this occurs, or future governments decide not to give the top-up to road agencies, which now retain the same inefficiencies with a dwindling budget base, so that on a quite random basis, some motorists begin to suffer from extremes in lack of service and safety while swinging electorates are showered with funds – this would just be the current system, magnified.

Neither outcome represents worthwhile reform.

How do the road agencies propose to get away with this power play? The Commonwealth advances a ‘fig leaf’ regulator to rubber-stamp these matters.  I write ‘fig leaf’ because buried in the details of the paper, the authors set out quite explicitly the things the ‘independent price regulator’ will not be doing:

  • Defining efficient, prudent, or recoverable expenditure (incl. community service obligations)
  • Scrutinising (road agency) data to ensure only efficient, prudent, or otherwise recoverable expenditure flows through to road user charges
  • Developing and setting agreed service levels
  • Monitoring delivery of agreed service levels, including community service obligations
  • Conducting ex-post evaluation of investments

In other words, agencies and their political masters will decide absolutely everything about their expenditure patterns.  They will never be asked to show how the money was spent and to what effect, they will never need to instigate service levels to motorists or show how they met these service levels. They will present their politicised wish list each year and a tame price regulator will stamp it.  With that, the money will be deposited in the agency account.

Let’s leave aside the rejection of both democratic process and competition reform principles implicit here, as well as the arrogance on show in the disabling terms of reference set for a regulator.  In simple realpolitik, the scale of tax and charge increases required dooms this plan –no government would risk levying perhaps 25% increases on voters without vast and guaranteed user gains secured.

Part-solution

Real road reform boils down to finding ways for governments to spend less on roads, not more – and to spend what they do much more efficiently.

This leads us to partial market reform – most likely on major highways and in major cities:

  1. Billions go into improving our interstate highways annually.  This is mostly to cope with wear and tear caused overwhelmingly by trucks and from the safety challenges of having so many trucks on these roads.  This is not to suggest trucks cause most of the accidents: it’s just that they are big, they are there, and as such they demand more expensive infrastructure solutions.

On many major intercapital routes, most trucks are on these highways because they out-compete interstate rail on price and convenience.

Highway spending might be drastically reduced by examining the pricing of these trucks on routes where they compete directly with interstate railways, to see whether these trucks are in effect being subsidised against rail freight through insufficient fuel tax and registration levels compared to a fair direct charge for use of that highway.  It has always been within the power of regulators and road agencies to find the answer to this question.  If these trucks are indeed being subsidised, a better solution would be to simply publish a credible, transparent direct highway truck charge and thereby show governments, potential rail infrastructure investors and all freight users what they are likely to be losing in the long run by persisting with subsidised road freight.  This is particularly relevant on the east coast, where unlike every other comparable large nation on earth, Australian trucks deliver 80% or more of long-distance interstate freight while trains do very little business outside commodities like coal and grain.

  1. A serious approach to congestion pricing in genuinely-congested major cities like Melbourne and Sydney: as previously posted, Stockholm’s model rather than London’s offers real promise; good recent analysis by Infrastructure Victoria has shown that this could reduce Melbourne traffic to school holiday levels of congestion[v].

Doing these two things alone might reduce road agency spending calls by billions annually.  We can all imagine ways to use that money to better effect.  Beyond these likely candidates for market reform, we move into the more uncertain realm of major community service obligations in roads, offering far less reform benefit for effort.

These two prospective reform avenues could be explored with modest, smart effort.  Within a short space of time, an independent economic regulator or some other competent party could produce reference cases to show the pricing and likely economic and commercial impacts on offer from partial market reform.  That would be a useful starting point for a responsible and intelligent conversation with motorists about microeconomic reform in roads.

Only one thing remains near-certain: the partial market reform path will never be advanced by the road agencies themselves:  to do so would be to denude their own influence.  In any event, for now, governments appear happy to let road agencies play with their fiscal doomsday device for a bit longer.  At some point, this approach will become too expensive to bear and governments will demand savings, not more agency spending.  Eventually, even road users might ask for a cheaper, better system.

Luke Fraser is the founder and principal of a transport infrastructure policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. Prior to this he was a national freight industry chief executive. He has been a board member of Open Family and worked with Les Twentyman’s Twentieth Man Foundation.

[i] Assuming the subs project – a matter of almost unprecedented scale and complexity for our nation – sticks to its budget, which is unlikely.

[ii] Land Transport Market Reform – Independent Price Regulation of Heavy Vehicle Charges (2017) discussion paper online at  https://infrastructure.gov.au/roads/heavy/files/IPR-Discussion-Paper.pdf

[iii] See BITRE Infrastructure Yearbooks

[iv] See https://johnmenadue.com/michael-keating-luke-fraser-infrastructure-improvement-or-impoverishment/ and https://johnmenadue.com/john-austen-roads-another-year-of-congestion-causing-deficits/

[v] See https://johnmenadue.com/luke-fraser-congestion-charging-stockholm-melbourne-and-turnbulls-legacy/

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4 Responses to LUKE FRASER. Road reform, bureaucracy-style: no economic benefit, higher prices for users – and an easier ride for already-unaccountable agencies

  1. James Fortesque says:

    Luke’s point that benefit/cost analyses can be nonsense is obvious as an eternal truth in all natural sciences – yes, even tobacco tests have been falsified!

    But I’d rather have Treasury Regs than NSW’s cesspit of lobby-driven consensus of ignorance. Billions are spent on Chinatising the railways.

    The lobbies extoll Bradfield, the most meticulous of engineers, while praising Gladys Berejiklian, creator of Houses of Cards. Oh bow thee down to the great god Crane!

  2. john austen says:

    mr fraser: interesting article and good suggestions.

    is there some competition for the most stupid infrastructure idea. each new report sinks below its predecessors!

    there might be a few further wrinkles on this one eg:
    i. if charges are set on intended spending, what if (after the money is collected from the public) the expected spending doesn’ happen? refunds to all? no wonder treasury was a co-author

    ii. given that current road related revenue is a combination of Commonwealth and States charges, is it intended that the regulator will ‘determine’ how much either tier of government can collect? does anyone believe this can happen? and they will be free from political pressure like from another never ending whinge such as about the GST carve up?

    iii. combining i and ii what are the incentives for the Commonwealth and States to makes claims about how much they intend to spend?. or will one tier tax to finance the other tier’s spending without looking at wider fiscal issues – in their own little transport world. yeah, good idea.

    top effort from Canberra. i can hardly wait for the next report.

    regards

  3. Michael Lambert says:

    I refer to the post by Luke Fraser dated 17 July, “Road Reforms, bureaucracy-style: no economic benefit, higher prices for users and an easier ride for already-unaccountable agencies”. I was the chair of the Heavy Vehicle Charging and Investment Reform Board which reported to COAG and which was abolished in 2014 by then Prime Minister Abbott on the basis of confusion and misinformation. The Board, of which Luke was a member, developed both a charging approach for heavy vehicles based on telemetrics that charged on the basis of distance, location and mass and linked the charging to cost recovery of the forward road expenditure program for heavy vehicles.
    I agree with Luke that road reform has largely escaped microeconomic reform and is in desperate need of such reform, a judgment that two papers he criticizes also concur with. Where I disagree with Luke is in his characterisation of the reforms contained in the two papers: the Transport and Infrastructure (Ministerial) Committee’s Heavy Vehicle Reforms (2016) and the Department of Infrastructure and Regional Development’s Land Transport Market Reform Discussion Paper (2017). The post criticises the proposals on the following grounds:
    • Would hypothecate heavy vehicle revenue to use in funding vehicle costs and projects and hence removes the only external scrutiny of expenditure proposals in the form of treasuries
    • The independent regulator is totally constrained in the review role of expenditure both ex ante and ex post
    • There would be a large increase in road charges because the charges would now be set on the basis of forward expenditure plans not historic expenditure and there would be a need to fund through charges the expenditure currently funded direct from consolidated revenue

    The post fails to mention the following three key features of the two papers:
    1. the proposed reforms are multi staged, not the single first stage set out in the post
    2. even the first stage of the reforms involves significant improvement on the current situation
    3. the subsequent stages of the reforms, if implemented, more than address the concerns set out by Luke
    The first stage of the reforms is an improvement over the status quo for the following reasons:
    • Shifts from a pricing approach that simply recovers historic costs to one that is forward looking and funds a program developed in consultation with industry
    • The pricing is determined by an independent price regulator after review and assessment of the proposed program of expenditure rather than the current approach where pricing is normally set by ministers as a political compromise

    The subsequent stages involve potentially major reforms including:
    • Moving from an independent price regulator to an independent economic regulator with greater powers and responsibilities including directing changes to the proposed expenditure and undertaking ex post evaluations of projects
    • Setting prices not on the current basis of fuel consumption but through the use of telemetry where factors such as distance, mass , roads used and even, if relevant , time of day can be taken into account , noting that increasingly with greater fuel efficiency and the use of electric vehicles fuel consumption will be a far less relevant basis for charging for road use
    • Capturing the true costs imposed on roads and society by heavy vehicles and hence creating a more even playing field with competitors such as rail freight haulage
    • Extending road cost recovery from just heavy vehicles to all vehicles
    Michael Lambert, former Secretary of NSW Treasury

  4. Luke Fraser says:

    Hello Michael, good to hear from you and thanks for your eminent views.

    You make the important point that ‘the first stage of reforms is an improvement on status quo because…the pricing is determined by an independent price regulator after review and assessment of the proposed program of expenditure’.

    That would be right if it were accurate, but I fear you have been misled: the paper is clear (table 1 p.5) in actively excluding the regulator from the following roles in stage one reform:

     Defining efficient, prudent, or recoverable expenditure (incl. community service obligations)
     Scrutinising (road agency) data to ensure only efficient, prudent, or otherwise recoverable expenditure flows through to road user charges
     Developing and setting agreed service levels
     Monitoring delivery of agreed service levels, including community service obligations
     Conducting ex-post evaluation of investments

    I don’t see any ‘review and assessment’ role here that would give either politicians or the paying motorist any confidence that this improves arrangements, nor any comfort that the reform will place downward pressure on inflationary road spending. What would this ‘regulator’ be doing, precisely, other than rubber stamping agency expenditure and, by the by, usurping the fundamental role of the parliament in approving a tax (fuel excise)?

    On this basis, I fear there is little point talking about the sunlit uplands of mature reform when you are first being asked to throw yourself into a bottomless non-market reform pit.

    I maintain there has been significant work produced in the past few years to make some targeted effort on partial market reforms worth the effort. If even partially successful, that reduces the scale and nature of the asset we then need to argue over.

    Best,
    Luke

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