Luke Fraser. Rail and roads: a reform blueprint to match Turnbull’s boldness and innovation

Australia’s new Prime Minister demands boldness and innovative action. Amen. To date road and rail reform has proven too dry and monolithic for most Prime Ministers. But failure to act is now accruing several billion dollars in road debt annually. Transport consumes over $30 billion of taxpayer treasure annually. Boldness and innovation here can bankroll many other solutions across Australia’s economy.

Recently I juxtaposed the continued failure of Australian rail with the US experience, where Jimmy Carter’s bold market reforms have seen $AUD 800 billion of market money invested in rail since 1980. But what are the solutions for Australia?

I propose five matters which promise to not only solve our core rail freight issues, but which will also bring responsible and productive reform – indeed, tax reform – to our road sector:

  1. Don’t look to government’s Inland Rail project for any answers

Inland Rail is a $10 billion dollar project conceived by the transport bureaucracy to link Australia’s east coast freight task. Good in theory, but execution falls flat: several hundred pages of government business case fail to present a plausible commercial prospect to investors at even the thinnest rates of return. Even at a lower government investment rate, Inland Rail only shows an economic benefit cost ratio of 2.6:1 – and a great deal needs to go right to make even that ratio realistic[i]. Spending taxpayer treasure to build this would be lunacy. Inland Rail only works in the context of pricing reforms for east coast highway trucking.

  1. Address the lack of direct pricing arrangements for inter-capital road freight

Is our economy big enough for a fully commercial east-coast freight railway? Probably. But for now over 85 per cent of Australia’s east coast interstate freight runs on trucks[ii], because they offer a more efficient service than rail can provide. This is primarily due to the antiquated way trucks are charged and the overwhelming historical expenditure bias towards highways. No other modern large economy is so truck-dependent for long haul.

While highway trucks pay steep fuel tax and registration charges for their contribution to road damage, the devil lurks in the detail of this charging system: it is an entirely averaged charge across all trucks and roads nationwide. In other words, charges don’t reflect the true costs of maintaining the major east coast highways which out-compete rail: a semi-trailer pays the same taxes and charges, whether it is hauling interstate freight on the Pacific Highway or delivering to a farm on a dirt road in the outback. Not all roads need to attract a direct charge, but the major highways which compete directly with railways should be so charged (initially the charge might not even need to be actually levied, but rail investors at least need to see what it might look like).

To put this in context, average road charging of trucks on the major rail-competitive highways would be like our electricity providers charging a flat connection fee for suburban homes and large factories alike: the quantum of fees raised might be right, but home-owners rightly would be furious at having to cross-subsidise the business sector.

In some cases, developing direct prices on the intercapitals might make some road freight routes even cheaper. So be it: rail and road investors and their financiers simply need certainty and transparency around pricing before anyone will open their chequebook on any projects. This step would bring competition reform to roads in a controlled and useful way, one designed explicitly to minimise unintended consequences.

  1. Market-test the government’s national railway – but be careful about it

The government signalled the sale of Australia’s national railway (the Australian Rail Track Corporation – ARTC) in its 2015 budget. This is the right outcome: Experienced market proponents are the only people to run commercial rail. As in the United States, the new owners should be relieved of all commercially-crippling passenger train responsibilities.

But if a ‘quick and dirty’ asset recycling of ARTC occurs without first establishing the fair direct price trucking should be paying for use of competitor highways to the railway, the new owner of Australia’s railways will be buying a pig in a poke.

Tasmania and Victoria allowed this to happen to their grain branch lines around 15 years ago – railways were sold, the new commercial owner found them mostly non-commercial against trucking and promptly began ‘asset stripping’ to make what was left viable. this resulted in the Crown buying back railways at a cost of hundreds of millions of dollars and great embarrassment. Western Australia and its grain growers are living through precisely the same stuff-up today. To allow this to happen to Australia’s national mainline network would be not far short of economic vandalism. An ARTC sale could consider appropriate enforceable obligations, such as allowing connected rural branch railways to be run profitably by farmer cooperatives to the mainline, as often occurs successfully across North America. But the vendor should not be too prescriptive about what stays, what goes and what new railways get built.

Inter-capital highways are the only parts of the road network competing directly with national rail for freight custom. Highways are also one of the biggest spending pressures on our spiralling, debt-laden roads budget. They should be the first subject for innovative and responsible road reform.

  1. Align funding control with accountability: hand national highways over to the Commonwealth

Since Whitlam, most ‘national’ highways have been the sole funding responsibility of the Commonwealth, yet for over 40 years Canberra has taken no responsibility whatsoever for their delivery. This disconnect encourages Federal transport ministers to throw vast taxpayer dollars at highway ribbon-cutting and then blame the states for failure to deliver when anybody criticises highways. The States should stop being made the whipping boy here and call Canberra’s bluff in an important reform to Federation: hand full responsibility for all national highways to the Commonwealth – make Canberra directly responsible to the voter for the outcomes of profligate, politicised and erratic highway spending patterns.

  1. Examine market models for national highways

It would be logical for Canberra as sole owner and financier of a national highways network to examine more productive commercial operation of these highways, with trucks paying a fair and transparent direct charge in return for pro rata fuel tax and registration rebates: in short, productive fuel tax reform.

Throughout Europe, professional road services companies have managed highways very effectively for decades, providing good service levels far more efficiently than bureaucracies with their large fuel taxes and inflationary construction costs. Bringing pricing and spending disciplines to the expensive highways might even reduce the cost of truck charges overall because the quantum of non-commercial road spending would be reduced significantly.

The alternative to bold and innovative future with a competition reform pedigree is more mindless, politicised highway spending, more State and Commonwealth transport blame games, billions in new government debt accrued each year, no national rail sector of any substance and little if any productive market investment in either rail or highways.

That is not a future that squares with our new Prime Minister’s narrative.

 

 

Luke Fraser is founder and principal of Juturna, a public policy consultancy specialised in road and rail freight and market investment reforms. He is a former national trucking industry CEO and has authored several reform studies for Infrastructure Australia. In 2012 he was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.

[i] Remarkably, the Inland Rail business case appears to overlook specific new motorway infrastructure in northern Sydney – Northconnex – which is likely to reduce interstate road freight travel times significantly on the run through Sydney. This might render Inland Rail’s stated improved delivery times thoroughly uncompetitive.

[ii] Bureau of Infrastructure Transport and Regional Economics Interstate Freight in Australia Research Report 120 (2010)

 

 

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