Productivity Commission renews call for road funding reform

Australia's road network faces a looming crisis, according to the Chairman of the Productivity Commission, Peter Harris.

Mr Harris has been promoting the Commission's report from last year, 'Shifting the Dial', and will be presenting the report's recommendations at an infrastructure conference tonight.

He has already been quoted in the Australian Financial Review this week as saying that our current system of funding the country's roads through fuel excise is the "greatest failure of my time in infrastructure".

According to the report in the AFR, Harris says that governments have failed to sell the idea of shorter commutes or lower fuel use as a quid pro quo for user charging – the vehicle user paying for upkeep of the roads. It's the only way forward, as far as the Productivity Commission is concerned. Currently Treasury collects 40 cents for every litre of fuel sold in Australia, but the amount available for road infrastructure works has been steadily dwindling.

Numbers don't lie

As a percentage of GDP (gross domestic product), revenue from fuel excise was nearly double the expenditure on roads back in the financial year 2003-04. Since then, however, revenue has been in a steady "structural decline" and is almost at parity with expenditure, as of FY 2014-15.

The Productivity Commission blames this decline on the take-up of electric vehicles, since they don't need fuel to operate, so there's no excise payable to government for owning an EV.

But in practice, battery-electric vehicles account for a very small number of cars on Australia roads. Inflation, over a longer period of time, is having some effect, as are global fuel pricing fluctuations.

Right up among those factors exerting a negative impact on the Treasury coffers is the rise of fuel-efficient internal-combustion cars. These include not only hybrids, but also popular prestige models rated below 7.0L/100km to circumvent the luxury car tax up to a purchase price of $75,526.

As supporting evidence of this, the National Transport Commission's annual reports have revealed a consistent reduction in CO2 emissions from light vehicles in Australia. Even without the arrival of affordable EVs and plug-in hybrids, fuel excise revenue would be on the wane.

<a href="https://motoring.pxcrush.net/motoring/general/editorial/i394ah_05.jpg"><img class="alignnone size-csn-inline-image wp-image-245204" src="https://motoring.pxcrush.net/motoring/general/editorial/i394ah_05.jpg?height=427&width=640&aspect=fitWithin" alt="" width="640" height="427"></a>Highly-charged discussion

Lenore Fletcher, General Manager Corporate Communications for BMW Australia, is a passionate advocate for electric vehicles. She told motoring.com.au today that she found the Productivity Commission's report disturbing in the way it seemed to single out electric vehicles for special mention.

"This is a really interesting proposition, from my point of view," she said. "For the first point, I'm really happy to see the government taking advice and starting to think strategically about the future – and perhaps even taking a leadership position in mobility and services and infrastructure.

"But I'm mystified as to why electric vehicles have featured prominently in this report. It almost feels like the government is more concerned about maintaining an income stream rather than providing for future generations," she said.

"We should have been doing this 10 years ago – and looking at what was going to happen. We are really late to the table.

"What we'd really like to see is some encouragement of this low-emission technology in conjunction with the actual strategic infrastructure that's needed.

"We should be incentivising, not de-incentivising."

EVs are no drain on the public purse

Ms Fletcher objected to the argument that EVs don't pay their way, because owners don't pay fuel excise.

"They're still paying for their normal registration and on-roads, they're paying for their import duties and they're paying for LCT. So I think they're punching above their weight in a lot of cases."

That's a sentiment shared by the CEO of the Electric Vehicle Council, Behyad Jafari.

"Electric vehicle users in Australia pay a much higher rate of tax than people who own petrol or diesel vehicles."

Jafari points out the catch 22 situation. Without support from government, in the form of concessions, EV buyers are forced to pay more for EVs at the current level of technological development. A company like Tesla supplies high-end products with more margin built in to offset the higher landed cost. The Tesla Model S consequently incurs the Luxury Car Tax even at entry level. Nissan's LEAF costs more than a conventional car of similar specification – and earns more GST for the government as a result.

Jafari estimates that a Tesla buyer is typically paying between $35,000 and $40,000 over five years for the privilege of driving a Model S, which is an aggregate of import duty, GST and Luxury Car Tax, plus the GST on electricity to run the vehicle. A conventional car, below the LCT might cost the owner $6000 to perhaps $8000 in taxes over a five-year period, even with fuel excise costing around $350 to $400 a year. Balanced against the tax received by government, the typical Tesla owner is helping energy security and public health, as well as reducing CO2, says Jafari.

Road user charging offers advantages

The EV Council is otherwise supportive of a user-pays system, says Jafari.
"From a transport perspective, the issue of moving from what we have today in fuel excise towards road pricing produces something that transport experts, academics and people in the industry have agreed for a very long time is a much smarter system, because it lets you deliver a much better societal outcome," he said.

Jafari says that such a system offers the potential to push consumers towards public transport, where that makes sense, or reduce costs for those compelled to use the car for daily transport. In the longer term it may actually reduce our reliance on roads, which will save costs and the environment.

"You're not just doing what we do today, with fuel excise, which is to charge more taxes and build more roads – and the only end to the congestion is to build more roads over again," he explained.

"We're actually looking at how we use the roads that we have more efficiently. As a result we need to spend less, over the long term as well."

The EV Council is currently in dialogue with Paul Fletcher, the Minister for Urban Infrastructure, in what Jafari describes as "sensible" and "nuanced" conversation about the benefits of electric-powered vehicles on the roads. But Jafari also points out that Australia has "fallen far behind every other developed nation" in embracing electric vehicles as an alternative to internal-combustion vehicles.

"What we don't want to see is this being used as an excuse to level yet another charge on electric vehicles and slow our market down even further..."

<a href="https://motoring.pxcrush.net/motoring/general/editorial/tesla-model-s-70d.jpg"><img class="alignnone size-csn-inline-image wp-image-245202" src="https://motoring.pxcrush.net/motoring/general/editorial/tesla-model-s-70d.jpg?height=427&width=640&aspect=fitWithin" alt="" width="640" height="427"></a>The New Zealand model

A Tesla spokesman also informed motoring.com.au that the company would like to see the Productivity Commission's recommendations go ahead, but more along the lines of a scheme implemented in New Zealand – which would sort of negate the purpose of the commission's proposal, which does seem to be aimed at making EV owners pay for use of the road.

"Like all vehicle owners, Tesla customers pay tax on vehicles and on fuel," the Tesla spokesman said.

"Electricity is just cheaper and becoming ever cleaner than petrol. Our customers’ purchases bring many benefits including a reduction in pollution, benefiting the environment and everyone’s health. That is why many countries around the world encourage drivers to choose electric through practical and monetary incentives.
"As an example, New Zealand charges drivers for road use, however successive governments have exempted electric vehicles because of their health, environmental, and economic benefits."

Will the states toe the line?

If the government were to accept Peter Harris' recommendation to implement a user-pays system by 2020, it would/should mean the end of the fuel excise, since all vehicles would be charged for using a road, irrespective of the means of propulsion. In theory too, it should spell an end to annual registration charges – if the state governments can be convinced that's a reasonable outcome.

The road user charging system at the core of the Productivity Commission's strategy would work like a toll road, but would be publicly owned, not a private road system. In the 'Transport' section of the Commission's 'Shifting the Dial' report, the convergence of revenue and expenditure implies "a need to move to a form of funding road expenditure than is responsive to road user demand (rather than simply predictive of it), does not discriminate by vehicle type, and is directly related to actual road usage".

Not only does the report suggest that the user-pays system might reduce congestion across a road network, it might selectively favour vehicle use in outer-suburban areas where cars are a more practical means of mobility than public transport. This presumably would play out like metered and unmetered downloads for a home internet connection. Some roads would incur a cost, some wouldn't.

Independent oversight

The Productivity Commission also proposes that decisions concerning new road infrastructure be taken out of the hands of elected government officials, to avoid 'pork-barrelling', although that's not a phrase that can be found in the report. It does make sense in Victoria, where government and opposition from both sides of the political divide have in recent years attempted to wedge the other party on infrastructure.

The "institutional frameworks" would be held up to public scrutiny – and hopefully would foster a higher level of trust in the process than is currently the case.

What the 'Shifting the Dial' report reveals:
• "The avoidable social costs of congestion for Australia's capital cities" are estimated to have risen from $5.7 billion in 1990 to $9.3 billion in 2000 and $18.7 billion in 2015.
• "In 2014-15, $2.2 billion was spent on road investment and maintenance. Expenditure has risen by an average of 4.6 per cent per year over the decade to 2014-15."
• Motorists pay "an average of over $1300 per vehicle per annum". Of this figure ($1334), nearly half ($607) is fuel excise handed to the federal government.
• More efficient use of the road network is "estimated to e equivalent to approximately 0.7 per cent of GDP in the long run, or a permanent increase to the level of annual GDP of approximately $20 billion".
• "Over 20 years, the net present value of these GDP gains is $63.7 billion, or $4.5 billion in annuity value terms".
• "Analysis by Infrastructure Victoria suggests that by 2030, congestion will cost every Melbourne resident an extra $1700 per year, or $7 each working day."
• "Better charging for roads could cut travel times on congested roads at peak hour by up to a third; and that if traffic was reduced by just five per cent during the morning peak hour, conditions on roads would be equivalent to school holiday road conditions every day of the week."

Extract of speech by Peter Harris

Since this article was published, Peter Harris, the chairman of the Productivity Commission, has delivered his speech. An extract from the speech follows:

The idea that price should affect allocation of future investment is novel in roads, even as it is common in water, energy, airports, telecommunications or ports. Say 'user pays' and while eyes may roll at some regulator decisions, it's well-known what you mean and how it happens in each mode. And it mostly works.

Because of effective pricing, stuff gets built most often where and when people are prepared to pay for it.

The current lack of effective pricing for roads can be explained by the lack of good crisis. If all else fails, you can generally be sure that better policy will be applied as a consequence of that.

And a crisis may be near to hand.

I'm not endorsing the idea that we welcome a crisis, it would always be better to make policy change in advance of distorting the investment scene with a shock.

But the comfort Commonwealth and State Treasuries have at present that what we spend on roads is generally covered by a road tax paid by someone, somewhere is disappearing quite fast.

The pressure on revenue is coming from a set of changes, some of which will be bigger than we expect, and some smaller. But together they look irresistible.

• Electric vehicles - Tesla took $US400m in $1000 deposits last year for its new Model 3.

• Every major vehicle manufacturer, including heavy trucks is planning widespread use of hybrid engines.

• Higher fuel efficiency standards are mandated in foreign markets, from where we will in future source effectively all our cars and trucks.

• Amazon-style home delivery services are reducing the need for multiple trips to the shopping malls.

So in my view, the revenue crisis means we will need another source of road charging in the 2020s, lest all the owners of fossil fuel guzzlers end up subsidising all the hybrid and fully electric drivers.

There are a few hesitant signs that the Commonwealth Government might be looking more closely at the coming e-vehicle revolution, after both Infrastructure Australia and Infrastructure Partners Australia (IPA) drew attention to the opportunity to embed a road user charge in e-vehicles, given they will pay no fuel excise.

However, a revenue crisis on its own probably won't be enough.

Governments can and will undoubtedly do a little more to defer fiscal impacts by means of more toll concessions and availability payment type schemes. For a short time, that might seem less dangerous than road pricing.

But toll concessions and availability can only deal with new infrastructure, under the constraints we mentally place upon ourselves.

We will need to make that mental shift from paying only for new roads to paying for a mix of older and newer roads and related projects - because the misallocation of resources that will occur if we don't will skew our future new road funding towards investments that can be turned into concessions. And that is not at all efficient. Furthermore, from a social perspective, the feeling amongst outer urban commuters having to pay for their new roads while inner urban residents with newer cars do not isn't going to help bigger arguments that may emerge in the same time frame over social trends like income inequality.

And finally, we should recall for a moment what we can learn from user pays in all other major infrastructure: If we have no market-based linkage between what an individual chooses to pay for and what projects are subsequently funded, we misconstrue the true role of a price in a market-based economy. To be accepted, even if grudgingly, price has to be about consumers driving suppliers, not the other way around. This is what electricity transmission and distribution got so badly wrong.

There are those, too, who will have a different argument about pricing – arguing to let general tax revenues pay for more of what we need, and that road infrastructure should always be free. Here in Melbourne, we have a natural experiment going on with free road transport. The trams are free in the CBD. Which means on wet week-nights, those wanting to go one or two stops and keep out of the rain pack in and prevent those who need the tram in order to get home from getting on. When road use is free, demand keeps piling in. Free is not all it's cracked up to be. .. Curiously, the first step to do road pricing properly is actually not to start setting prices for road access.

No consumer, no heavy vehicle operator can have any confidence in suddenly having to pay for a road that yesterday was apparently free.

You can guess the right first steps if you go back to what I said in opening this address:

• Identify the public interest objective and be open about it, using language that is clear – in this case, we have to pay for what we need and we aren't doing that.

• Establish a structure that aligns the funds raised (today, and forever) from road use with the selection of projects to be funded in future. There's a very good Productivity Commission guide on how to do that (published in 2014 and updated in 2017).

• Involve credible third parties in establishing the linkage between consumers and the projects. These consumer representatives are ready-made in roads – the RACV and its equivalents around the country.

The biggest gains to this reform do not lie in getting more revenue. That will just be the catalyst.

The true public interest objective is a system that selects the right projects – projects where, as in other forms of infrastructure, people have a choice and yet show they are prepared to pay for.

We can sell that, surely.

Picture of Melbourne CityLink courtesy of Muzzamo/Wikimedia Commons