Should the NSW Government buy our toll roads?

There’s nothing wrong with tolls on roads. Designed well, they can both pay for roads and ensure they are used efficiently.

Without tolls, drivers considering whether or not to travel on particular roads at particular times need only consider the delays they themselves experience – those caused by the cars in front of them.

They don’t need to consider the delays they impose on the users behind them. It’s one of the reasons we have too much congestion.

Properly designed tolls that vary with distance, location and time of day can make those costs apparent and get drivers to drive in ways that minimise congestion.

But as drivers in Australia’s three largest cities of Sydney, Melbourne and Brisbane know especially well, Australia’s tolls are exceedingly poorly designed.

Sydney might or might not be the “most tolled city in the world” but many of its tolls are very high and many of the surrounding roads aren’t tolled at all. This encourages drivers to under-use toll roads and over-use suburban streets, needlessly exposing people on those streets to noise, pollution and danger.

It is also unfair to those drivers who have no choice but to use toll roads. Other drivers who can use freeways that aren’t tolled don’t have to pay.

Private ownership stops properly designed tolls

Getting a system of tolls that is well designed ought to be easy, but the existing toll road operators have long-term contracts with state governments requiring compensation if what they can charge is changed.

Private ownership of public roads has long been regarded as less than ideal, including by the father of modern economics, Adam Smith, who in 1776 argued:

If a state’s government operated toll roads in that state, it could charge for their use sensibly, but in NSW a single corporation, Transurban, operates most of them. Transurban is a public company listed on the stock exchange and also runs toll roads in Brisbane, Melbourne, and the United States.

Transurban charges tolls that will maximise the profits accruing to its shareholders, rather than tolls that will ensure its roads are well used.

Some of its contracts with the NSW government allow it to increase its tolls by the higher of inflation or 4% each year.

NSW should buy Transurban

Renegotiating the morass of existing contracts, each with its own set of interlocking ownership agreements and counterparties, contract-by-contract, would benefit only lawyers and not enable a comprehensive transformation.

In order to set tolls properly, the NSW government ought to buy Transurban, as well as its partners on individual roads.

With a market value of A$38 billion at the time of writing, buying Transurban might seem daunting.

But only about half of this value relates to Sydney. The rest is split between Victoria (27%), Queensland (16%) and the United States (7%). This means the net cost for NSW would most likely be less than $20 billion after selling off parts.

That cost could be financed by issuing bonds that would be paid off with future toll revenues. The organisations that currently hold Transurban shares might even buy the bonds. As with Transurban, they would be a safe bet.

It would be open to Victoria and Queensland to buy their parts of what’s left, take back control of their toll roads and issue bonds funded by future tolls to pay for the transaction.

Under public control, tolls could be set properly

Once it had obtained the right to set tolls, NSW could set them in a way that optimised traffic flow and reduced congestion in order to cut travel times.

It could be done without political interference by an organisation such as the NSW Independent Pricing and Regulatory Tribunal, which currently determines maximum public transport fares.

Operations and management of the newly acquired motorways could be contracted out and regulated as appropriate, just as are bus operations, where contractors run the buses but the independent tribunal determines the fares.

Applied to all major roads instead of just some, the toll revenues could be lower on average, and could also be used to improve public transport.

Navigating the legal complexities and financial risks would be difficult, but the interim report of the NSW independent toll review released in March made a number of recommendations that would move tolling in this direction, including establishing a state TollCo that would negotiate tolls with the operators.

Taking over the operators is the next logical step.