Paying for roads – driver of a new road management ecosystem

Road user charging is coming. In what precise form, we don’t yet know, but we know that Governments at all levels will need to change the way that they charge for roads. Current funding mechanisms (a fuel tax) will no longer be appropriate with the increasing efficiency of vehicles, and the expected replacement of the vehicle fleet with electric vehicles that will pay no fuel tax (as currently configured). Heavy vehicle road use charge reform is underway now. There will be a political battle to get this reform through, and it is probably a bigger reform than the GST, but the budgetary imperative from the Federal and State treasuries will no doubt be a significant motivator for both sides of politics to reform how we pay for roads. Though if taxation principles are used to frame the argument, implementation might not be as hard as envisaged.

Technically, it is expected that there will be a use charge, levied per kilometre of road use based on accounting information and use of cost recovery principles (with different rates for different masses and volumes of vehicles and possibly by time of day – cars vs trucks for example). Revenues will likely also be set in a regulated price environment, akin to how other network utilities are managed (for example based on theoretical valuation methodologies like Depreciated Optimised Replacement Cost), and so revenues will not necessarily be perfectly linked to a market price. There are also considerations of how to incorporate some form of congestion charge into road user charging, to manage overuse of roads, such as for example, if automated vehicles see widespread use to discourage empty car movements. The calculation of the use charge though will be more difficult to perform.

But there are a few other more strategic and policy related issues that are going to need consideration in the new institutional ecosystem of road user charging.

A revenue stream linked to usage is going to lead to the ability to create a more ‘normal’ looking road organisation (compared to other businesses across the economy) with financial accountabilities and the ability to establish roads within traditional cost management measures, such as cost and profit centres and management key performance indicators (KPSs). Assuming some factors (including political ones), roads may be managed within such a framework, with revenues and costs brought into alignment, in theory, improving the efficient allocation of resources to the roads where they will be used.

The more efficient management of roads may help ensure that expenditure on a particular segment of roads is matched to the relative value of that road, based on usage (and utility) value. For various reasons (including again politics), the current road planning and funding environment has led to a number of road projects being funded that have poor economic return and so potentially, a new way of analysing road finances will prevent this. Though there are issues to manage around road traffic demand forecasts, as have been shown in toll road projects, which may be overly optimistic and cause project viability (and advisor profitability) problems at later stages. Appropriate, robust estimation methods and mechanisms, and probably their mandated use, will be required.

There will be transitional issues to consider. Some roads may be currently overcapitalised (particularly the ones with poor economic returns as identified above) and usage revenues may not be able to sustain their maintenance or capital costs. Might we see road standard reductions in some segments? It must be highlighted however that in some cases these loss-making roads may fall within community service obligations and may need additional funding to ensure that communities (likely regional ones) are not isolated and left worse off due to policy change.

The role of the private sector will be an important one. Should they be involved, or should roads remain in public hands? Are roads private or public goods? Current involvement of private sector contractors in road construction and maintenance provision will continue. But as with many parts of government that generate cash flows - will governments (at all levels)¹ look to monetise these through privatisation (or other mechanisms such as franchising)? Should they? Should network control be surrendered? (This perhaps helps answer this question). Or should roads be housed within Commonwealth companies or government business enterprises (or their state equivalents) like the Australian Rail Track Corporation, Australia Post or Sydney Water, and given a defined role to manage costs and program delivery? On the other hand, could they be privatised like power and gas distribution networks? These entities will be monopolies or at best duopolies, and considering there are very few truly competitive options when it comes to road transport options, this will require detailed assessment from a public benefit perspective. If the private sector is involved, managing the known self-interest of the private sector and their rent seeking behaviours will be important to ensure they do not distort (or obstruct) transport network investment decisions, especially including situations where they may be responsible for calculating and setting prices (unless regulated).

This ownership question is perhaps linked to the bigger question of whether roads should be for or not for profit. Commonwealth and statutory corporations are run as investments and pay dividends to their (department) shareholders though can be structured as not for profit entities. Whilst a profit motivator will help manage costs, the prospects of the private sector profit from what many people see as a basic human right (i.e. that of free vehicular movement) may not be received well. This will no doubt will be woven into the political elements of the transitional discussion.

Finally, a very important mechanism to manage inter-mode competition is required. This is a known and present issue now, however with different management approaches and incentives (including KPIs), it might become a larger issue in a new ecosystem. Road and rail modes compete significantly for traffic (both passenger and freight) and mechanisms to ensure efficient investment by both modes may be required, and the efficiency and productivity of the road/rail network on the whole is maximised. Instead of building a multi-lane freeway, could a rail link do the job more efficiently (both at the local and national network level)? Where might new intermodal connection points be needed to assist this efficient network investment? This will necessarily be supported by new data sources (including mainly vehicle telemetry data that will necessarily collected to calculate usage charges) to give new insights into the formulation and management of the combined land transport network.

All in all, it will be a far larger exercise, with many more moving parts than just applying a road user charge, and will have a far greater impact than just funding road use. But done well, pricing of roads may be a mechanism to drive increased land transport efficiency across the board, supporting productivity growth of all users of the networks.

^[1] Historical note – in what could be a full circle moment, some local government authorities had their genesis as road districts and so splitting roads from these LGAs is an interesting irony.