Australia: A bold new model to pay for our road network, and improve its performance

Last Updated: 19 May 2016
Article by Owen Hayford

Most Read Contributor in Australia, August 2016

Key Points:

The community needs to be educated about the flaws in the current system, and the benefits that would be derived by moving to a new funding model.

Most Australians seem broadly comfortable with the way governments are currently building and maintaining our road network. But calls for reform from some sections of our society are getting louder, particularly from those with business interests affected by the performance of our road network or the construction of new roads. However, broad community support for reforming the way we pay for our road network has not yet reached a level sufficient to encourage change.

Is our current road funding model limiting our economic growth potential? Is the performance of our road network reducing Australia's attractiveness as an international destination in which to live and do business? Infrastructure Australia thinks so. Its most recent Australian Infrastructure Plan concludes that if we continue with our current approach we can expect the same results: a deteriorating and congested road network that costs more than it should, and delivers less than it could.

Our road network isn't up to scratch, and it's harming our economy

The quality of Australia's road infrastructure was recently ranked 43rd, behind New Zealand (35th), the United Kingdom (30th), Canada (23rd), the United States (16th), France (ranked 4th), and the United Arab Emirates (1st). 1 This is below average given Australia is estimated to have the 12th largest economy, and amongst the highest median wealth in the world.

Infrastructure Australia's audit found that there was a substantial backlog of required maintenance in our road sector. Underinvestment in the maintenance of our existing road network not only reduces its effectiveness today, but it can also lead to unnecessary expense on repairs and premature replacement. Extending the life and performance of our road network through suitable maintenance is critical as most of the roads that we will use over the next 15 years have already been built.

According to Infrastructure Australia, road congestion cost the Australian economy $13.7bn (or 1% of our GDP) in 2011. It forecasts that, if capacity is not enhanced beyond projects already under construction, the cost will rise to $53.3B (or 2% of GDP) by 2031.

The problem lies in how we currently pay for our roads

Most of our roads are presently government funded. Funding responsibility falls on either the Federal Government, State and Territory Governments or Local Governments, depending on the location and significance of the road. Very few of our roads are privately funded – the most notable examples being the privately operated toll roads in Sydney, Melbourne and Brisbane.

The government funding is raised through a variety of government charges. The current breakdown for road use by light vehicles is shown below. The lion's share presently comes from fuel excise. But this is set to change, as the fuel efficiency of our vehicles continues to rise and users switch to electric, hybrid and alternatively fuelled vehicles. The CSIRO forecasts that fuel excise revenue could fall in real terms by up to 45% by 2050. 2 Accordingly, the existing funding system is unsustainable, and governments will need to find new sources of revenue to fill the hole created by declining fuel excise.

Source: Australian Infrastructure Plan, 2016

While there is a correlation between kilometres travelled by each road user and the amount of fuel excise that users pay, some are now saying the current system is unfair, as those who can't afford newer, fuel efficient vehicles pay more fuel excise than those who can afford such vehicles. Infrastructure Australia says the system is unfair because the link between charging and usage is weak.

Australian Governments at all levels are fiscally constrained. They don't have the funds needed to make all of the productive investments which we could make in our road network.

How can we raise the additional funding required to deliver the road network we need?

One possibility would be to hypothecate (ie. direct) all fuel excise to investment in our road network. However, because more than half of fuel excises collected is presently used to fund other government services, directing this revenue to roads would simply reduce the funding available for other government services. Governments would need to either reduce other services or raise taxes. Accordingly, hypothecation alone of fuel excises is not the solution. More importantly, it would not address the more fundamental problem of the fuel excise funding pot diminishing over time.

The Commonwealth Government could borrow the necessary funding. Provided the funds were directed to "high return", productivity enhancing investments in our road network, the investments would lift our GDP and Commonwealth tax revenues by an amount sufficient to allow the Commonwealth to service and repay the loans. But financing infrastructure investments through government borrowings is politically challenging. Even if the debt is categorised as "good" (income producing) debt, borrowing to address the road infrastructure deficit could place downward pressure on the Commonwealth's credit rating and therefore be politically unpalatable.

So government funding alone will not solve the problem. To build and maintain the road network we want, we need to obtain more funding from users and other beneficiaries.

We could attempt to do this in the manner it has been done in the past, that is by building more self-funding (ie. wholly user-funded) toll roads. Unfortunately, the cost of building motorways in Australian urban environments is now such that the days of self-funded toll roads are probably over. The last "self-funded" toll road in Australian was the Lane Cove Tunnel, which opened in 2007. Every toll road constructed since has also required government funding to supplement funding available from tolls. Even if there remain some road investments that could be delivered via the self-funding toll road model, it doesn't provide a funding solution for the vast majority of required road investments that can't be delivered via this model. The self-funded toll road model has also given rise to other issues, such as inconsistent tolling regimes, and government losing flexibility and control over parts of the network.

We could also do it, in part, via value capture. Public investments in roads often deliver windfall gains for those who own property that becomes more accessible as a consequence of the road investment. For example, new motorways often result in surrounding land being used for higher value uses (eg. semi-rural land becomes a housing or industrial estate) and holiday houses becoming more accessible and hence more valuable. However, while some see the capture of this value uplift by Government as a silver bullet to the funding problem, the contribution value capture can really make towards the funding of our roads and public transport infrastructure is much more modest.

We need a new road funding model, based on full user pays

We need a new model. We need a model that will attract private sector finance to the expansion of our entire road network, and its long-term maintenance. To do this, we need to move towards a broader user pays model.

Happily, Infrastructure Australia has reached the same conclusion, and has recommended that the Australian Government initiate a public inquiry into the existing funding framework for roads. Specifically, it has suggested that the inquiry should consider a detailed reform pathway for transition to a full user pays model covering all roads and all users.

Realistically, to gain the necessary community support, the overall costs for motorists, individually and collectively, of using our road network under a full user pays model will need to remain at current levels over the short term. Equity issues will also need to be addressed. Charges will need to be affordable to all types of motorists, including those that live in regional areas, and there will need to be a safety net (subsidies or compensation) for those that need to travel to or from areas poorly served by public transport that cannot afford to pay. However, there is plenty of government experience with such programs, so the issues involved should not be insurmountable.

The community will also need to be educated about the way they presently pay for roads, so that they understand that roads are not free and that the reform is about repairing an outdated charging system rather than simply imposing a new tax.

Any longer term charging increases would need to remain affordable and be offset by improvements to the road network (beyond those that can be expected under the current system), which translate into demonstrable benefits for motorists. The impact of charging increases on any particular type of road user must not be disproportionate to the benefits enjoyed by that type of road user.

Hypothecation of the revenue raised towards direct investments in roads, or perhaps in public transport more generally, will be an important component in generating the necessary community support for the reforms.

Road user charges would also help to manage demand, and guarantee travel times.

A full user pays model would also help to manage demand for our road network, without prohibiting any particular trip. If road user charges were set by reference to the demand at that time, it could help to spread out the morning and evening peaks on heavily congested roads. By managing demand in this way, road operators could guarantee maximum travel times for express lanes.

Driving better investment decisions, to improve the performance of our network.

To optimise the performance of our road network we also need an approach that better aligns the supply of road capacity with demand. Investments in the delivery and maintenance of road infrastructure need to be better aligned with the demand for road services.

Despite the best efforts of our roads authorities to direct road funding where it is most needed, politics can result in funding being spent on roads that are popular with swinging voters rather than roads that are important to our economy, as shown in the graph below from the Grattan Institute. 3

The Grattan Institute suggests that the politics could be taken out of this process by requiring governments to table a robust independent like-for-like evaluation of the net benefit of a project, before committing funding to the project. While this would certainly help, it doesn't address the fundamental flaw of government simultaneously being the owner, operator and regulator of our roads. The government owned monopolies that dominated our electricity, telecommunications and water sectors were reformed through the 1990s to create efficient, competitive markets in these sectors. The publicly owned businesses were corporatised (and in some cases privatised); contestable elements of the supply chain were exposed to competition; and natural monopoly elements were subjected to independent economic regulation, even when they remained in public ownership.

These and other reforms contributed to a period of substantial productivity improvements and economic growth. Those jurisdictions that fully privatised their electricity businesses – Victoria and South Australia – have delivered substantial benefits to consumers. These privately owned businesses are more productive and efficient in their service delivery than their government owned counterparts in New South Wales, Queensland and Tasmania, and no less reliable. Similarly, the reforms in our telecommunications sectors have resulted in significant service improvements and a market structure capable of responding effectively to major technological changes.

The introduction of user pays in these sectors has also resulted in better maintenance outcomes. Inadequate maintenance leading to service failures results in loss of user charges and loss of profit. The relationship between user pays and adequate maintenance is well demonstrated by the below graph from the Australian Infrastructure Plan.

Infrastructure Australia has identified our roads sector as the most significant opportunity for public policy reform in Australia's infrastructure sectors, and is advocating for the adoption of a regulated asset based (RAB) model, similar to that adopted in the other sectors.

RAB models are widely used in utility networks in a range of countries and have demonstrated a strong track record of driving the right investments to optimise network performance, while controlling prices. Its application to the road network is also being explored in the United Kingdom.

How might a RAB model work in the Australian roads sector?

Central to the new model would be an independent economic regulator, responsible for the quality and affordability of the road network. The regulator would have the power to issue licences to private road operators – who would operate sections of the road network, and be entitled to levy road user charges on motorists.

With this revenue stream, the private road operators would be able to carry out essential maintenance and raise finance from debt markets to pay for capacity upgrades. The road user charges which the private road operators could levy on motorists would be capped at a level which enables the operator to recover its efficient costs, including a commercial return on its investments in capacity upgrades.

The private ownership of the road operators would bring commercial rigour to investment decisions. The drive to maximise returns for shareholders will provide a powerful discipline to make the highest returning investments in maintenance and capacity expansions. The regulator would require each operator to meet minimum service levels, thereby ensuring adequate maintenance and renewals.

Infrastructure Australia has suggested that the current motoring taxes (fuel excise, vehicle registration fees, licence fees and stamp duty) could be hypothecated by the collecting governments to the private road operator until such time as they are replaced by road user charges. This needs further consideration, however, as it is the user charges that provide the price signals that optimise investment decisions. Further, it won't be possible to bring forward capacity enhancing upgrades until such time as it is possible to fund them by increasing the relevant road user charges. It may be preferable to implement the RAB model in conjunction with, or after, the introduction of full road user charging.

Conclusion

The way we presently fund our road networks, and make decisions on where investments in our road network should be made, is suboptimal. We can do so much better.

We need to educate the community about the flaws in the current system, and the longer term benefits for the nation of reforming the way we pay for our roads, and the way we make road investment decisions. The public inquiry recommended by Infrastructure Australia is an important step in this education process.

You might also be interested in...

Footnotes

1 World Economic Forum, Global Competitiveness Report (2014-2015), Transport Infrastructure, Quality of roads

2 Graham, P. and Reedman, L. (2015), Projecting future road transport revenues 2015-2050. Report for the National Transport Commission, CSIRO, Australia.

3 Terrill, M., Emslie, O. and Coates, B. 2016, Roads to Riches ? Better Transport Investment, Grattan Institute.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.