LUKE FRASER. The roads that ate the Australian economy – Part 1 of 2

Australia’s current approach to road spending will soon generate up to $20 billion every year in new public sector debt – making it impossible for any new Commonwealth government to benefit from much-needed tax reform and revenue increases.  This also cooks the goose of the road freight sector which Australia’s economy relies upon, while the perverse pattern of spending neglects our local road networks thanks to the endless fascination with dubious new motorway mega-projects. 

As a matter of the highest priority, the next Commonwealth government must spend less on roads overall and change fundamentally the mix of how this budget is allocated.  Why would a new administration in Canberra need to take this advice?

First, because the path to tax reform and budget repair runs straight through the roads portfolio: revenue repair will be impossible to achieve without addressing the enormous debts and poor economic returns being generated by the roads sector as it operates today.

Second, because our local roads and the freight and communities which rely so much on their safety and productivity are being neglected.

Third, because Canberra is the main offender – leadership here will pay great dividends.

Record spending wherein the white elephants win – and the community loses

Is the author being too harsh on the Commonwealth?  Let the reader be the judge: between the Sydney Olympics and 2017, Canberra increased its road spending by about 220%, real.  By contrast, local government road spending over the same period increased by just about 19%, real – not even enough for local roads to keep up with headline population growth (27%) or traffic growth (vkt – 33%) over that timeframe.

Reducing road spending has not featured in any major public debate about budget repair priorities.  If anything, the bipartisan political answer to road spending is “we need more of that”.

Before road lobbyists launch a campaign suggesting any spending cuts would destroy the economy, let’s be clear: it is Canberra’s addiction to too many poor big city motorway projects and some dubious highway projects which does the most damage.  On the evidence available, too often these are projects the community doesn’t need: they induce more traffic congestion and toll pressures, while doing nothing to promote more equal access to economic opportunity. Meanwhile, rural and regional Australia and fast-growing outer suburbs are left to struggle with underfunded local roads and inadequate public transport.  Future generations will inherit the ensuing mountain of debt.

Road debt is out of sight – and out of control 

The level of new public sector debt generated annually by Canberra’s profligate and misdirected road spending is staggering.  Absolutely nothing is being done about it.

In 2016 Prime Minister Turnbull announced an ‘eminent Australian’ would be appointed to deal with road stuff.  This bought Canberra two full years of doing nothing while it (presumably) scoured LinkedIn for an eminent person. In December 2018 Prime Minister Morrison quietly announced nobody would be appointed at all.  Between Turnbull’s announcement and Morrison’s walk-back, their governments oversaw a growth of probably over $25 billion in new government road-generated debt.

Wrong spending priorities

There is nothing wrong with debt-funding sensible investments in assets like roads but, on the available evidence, ‘sensible investment’ is not what Canberra is doing.

Conveniently – there is absolutely no requirement for governments to publish any ex-post assessments of how major new road projects actually worked out, as opposed to what their proponent promised. But whenever we do glimpse outcomes, as we have written in Pearls before, the news is bad.

  • Not all tollways are bad. But commercial Australian tollway proponents almost always overstate their revenue potential when pitching multi-billion dollar spends, with the effect that benefit-cost ratios (BCRs) appear much better than they finally prove in practice. The horror of all horror charts in this matter was produced by a 2013 independent expert analysis of the early performance of seven major Australian toll roads, showing that once they opened, their revenue cases proved overstated by between 25 and over 75 per cent;  (Some in the infrastructure club grate at this notorious graph and would prefer to throw shade on it.  Fair enough:  let them advance their own ‘alternative facts’, if they can)
  • An approximate $500 million duplication of the Princes Highway west of Geelong returned just 8 cents for every dollar spent – coincidentally, the duplication would terminate not far from the homes of the then local federal member and State transport minister;
  • The cancelled East-West Link in Melbourne would have returned just 45 cents in the dollar – a return so low the Victorian government proponent decided not to put the matter to Infrastructure Australia for independent assessment. It was to have taken 56 years to pay off, far above twice the timeframe of far better tollways such as Melbourne’s Eastlink.
  • When it began as a mere $11 billion dollar motorway, Infrastructure Australia ran a slipshod cost-benefit analysis of Westconnex in Sydney. (IA assumed major connections and benefits such as to Port Botany that weren’t part of the project.)  This analysis found Westconnex was of only wafer-thin marginal benefit at an $11 billion dollar sticker price.  Soon after, Westconnex cost estimates blew out to $17 billion.  Nobody re-examined the value of the project to the community.  Since then, this project has spawned tens of billions in new major interchanges and extensions.  It’s anyone’s guess what the true return is at this point.

85% of the network now funded worse than before the Sydney Olympics?

Meanwhile, local government roads – roughly 85% of the national road stock, measured by distance – appear to suffer neglect.  New analysis by John Austen suggests between FY00-01 and FY16-17, spending on local government roads dropped from 28% to just 20% of total road spending.

Inattention to local roads ensures that key freight efficiencies and community safety solutions are also being overlooked. These are the roads people live on, and to and from which businesses despatch their freight. One day soon the national trucking industry, which is already subject to a direct charge of sorts, will wake up and realise that all of this extra wasteful spending on vanity projects will soon materialise as far higher heavy vehicle taxes and charges for the industry to pay.  They’ll surely be delighted, as will all those businesses which rely on efficient road freight. Canberra’s road efforts over the past decade have well and truly cooked their goose.

The rude awakening for would-be tax reformers

On top of every other challenge it will face, the Commonwealth government could surely do without this roads headache, but it won’t be able to deliver any meaningful tax reform or revenue increase if it ignores the problem. Unless the plan is to drain the health, education, social welfare or defence budgets, the path to tax reform and budget repair runs straight through the road sector.

Dr Michael Keating AC has argued persuasively that some form of tax reform is now essential and inevitable, including upwards reforms to tax revenues.  Any new revenues generated should go to productive ends, but as unchecked road debt grows, it would impair even the biggest revenue injections; for example, it would devour probably over two thirds of the approximately $27 billion in extra annual revenue estimated to flow from a 15% Goods and Services Tax rate.

In 2016-17, governments spent a combined $30 billion on roads –  three times as much as in 2001 –  yet they recovered much less in revenues – just under $18 billion.  In real terms, revenue grew just above the inflation rate, while road spending ran 65% above inflation. Go figure.

Road debt generated from 2007-08 (the first year revenues fell below expenditure) to the last reported year FY16-17 stands at over $60 billion. This is bad, but the trend is worse.  The past two years generated over $21 billion in new debt, but even this does not yet reflect all the new motorway spending surges, such as those from Westconnex motorway in Sydney.  We should anticipate annual road debt to go nearer $20 billion per year very soon.

Dr Keating and I were the first to raise the road debt problem in a 2015 essay for the book Fairness Opportunity and Security which was also posted in Pearls.  At the time we posited that the accumulated new debt to 2025 could well rise to $114 billion without action. Under five years later, this estimate now appears too low by some margin.

[A second post examines causes of the problem and solutions open to the Commonwealth Treasurer.]

Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. From the late 1990s he spent over a decade in Canberra in several APS executive, Commonwealth government chief of staff and national industry CEO roles across the transport and defence sectors, including time as a Defence budget director.

[1] See note iii below.

[1] https://www.afr.com/news/politics/deputy-pm-michael-mccormack-shelves-inquiry-into-road-pricing-20181004-h1688d

 

[1] Using BITRE Infrastructure Yearbook statistics as source data, the past two reported years of net road expenditures above net (genuinely) road-related revenue (i.e. mostly fuel tax and registration fees) totals over $21 billion, but we won’t know the precise figure for the period up to late calendar 2018 (when PM Morrison canned PM Turnbull’s review process) until BITRE road spend and revenue figures for the current year are published. Unhelpfully, BITRE’s numbers and reporting basis shift a little each year – and in every year, BITRE wrongly attributes billions in general taxation revenue against roads, so as to obscure the net deficits. The best (i.e. most honest) long-term road spend and revenue data estimate set is maintained on former head of economic policy for Infrastructure Australia John Austen’s wonderful blogsite www.thejadebeagle.com – this post employs that data set.

[1] http://www.robbain.com/Toll%20Roads.pdf

[1] https://grattan.edu.au/wp-content/uploads/2016/04/869-Roads-to-Riches.pdf

[1] https://www.sbs.com.au/news/east-west-link-business-case-revealed

[1] https://johnmenadue.com/john-austen-westconnex-inquiry-report/

[1] https://johnmenadue.com/michael-keating-tax-reform-and-future-federal-state-relations/

[1] https://grattan.edu.au/wp-content/uploads/2018/07/Curtin-tax-overview-July-2018-16-9.pdf

[1] https://johnmenadue.com/michael-keating-luke-fraser-infrastructure-improvement-or-impoverishment/

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Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. From the late 1990s he spent over a decade in Canberra in several APS executive, Commonwealth government chief of staff and industry CEO roles across the transport and defence sectors.

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