Both the Grattan Institute [i] and Ross Gittins [ii] have lauded Minister for Urban Infrastructure Paul Fletcher for his hard talk on road reform. Gittins compared him to Paul Keating.
Fletcher is setting out with a reformer’s zeal. Like Keating, he shows a willingness to level with the public about big problems and the costs of inaction.
It would be a pity if poor advice sees Fletcher telling us about the wrong problem. If he is to approach comparison with Keating, he must be alert to policy furphies.
The biggest furphy in roads is a prevailing belief that universal road user charging by our road bureaucracies, on its own and without other significant complementary reforms, can solve things.
The actual cost of providing our roads is far higher than officially reported. This is critical, because it kills practical chances for direct user charging.
At the best of times, road user charging is irresponsible for roads which have little traffic and which are provided as a community service obligation. For all other roads the benefits from road user charging can only be realised if spending on these roads is limited to those that will deliver positive returns over their costs and the charges are a true reflection of those costs.
Here’s the problem: Australia is spending far more on roads than it is currently recovering through bowser taxes and registration fees. This implies that even where they do make sense, the high cost of direct charges required may be nigh-on politically impossible to implement.
Complementary reforms must therefore include some level of competition reform to begin to rationalise our road spending levels. This probably means taking some of the big roads out of agency hands, pricing them commercially and then handing back fuel tax and registration fees to the motorist for their use of such roads.
We aren’t alone in facing runaway road spending. In the United States, actual highway spending runs billions ahead of bowser revenues. US Congress has provided general tax revenue to roads to close this deficit. The Yanks are open about the problem in a way that we are not. This 2011 graph explained to the US Senate just how far beyond their means US road budgets were living: it revealed the $100 billion dollar-plus annual debts that might soon be racked up if general taxpayer funds weren’t made available to prop things up [iii]:
Several options were costed [iv]:
- Limiting spending to only what was collected from road-related taxes like fuel excise would cut US road spending by $13 billion a year;
- Spending only enough to keep the current network in its present condition would require an additional $14 billion in government debt to be raised each year above current levels;
- Spending on any road project that provided returns greater than its costs would cost US taxpayers an extra $50 billion annually.
Universal road user charging for the latter two outcomes entails politically-diabolical hikes in road taxes/charges, to say nothing of the opportunity costs to public education, for example. Here is the Congressional Budget Office’s advice:
‘A system that charged for the full cost of travel would have most if not all motorists paying substantially more than they do now—perhaps several times more’ [v].
Adding insult, vastly higher charges offer no guarantees of better results for motorists, because all roads would still be provided by inefficient road bureaucracies, as before. Motorists would be charged a lot more for road use but not protected at law by service level agreements. Nothing would prevent universal charges from spiralling higher every time a politician pork-barrels some new multi-billion dollar road folly in a marginal seat.
Given wider fiscal constraints, both Australia and the United States are in urgent need of mechanisms to place deflationary pressure on road spending.
- One way is to be more discerning about what road programs are funded. There’s absolutely no sign of this occurring.
- Another is to have at least some roads priced to ration use and deal with congestion. Pricing is not charging. It involves taking some roads out of agency hands altogether and giving them to a commercial operator, under a regulator. To the extent that roads out of agency hands are priced, over time that stock can be assumed to be rationally provided.
- Commercial operators would price their roads for a return, but users could demand government tax rebates for any fuel excise and most of the registration fees involved: for example, if half of my annual travel took place on fully privately-operated roads, I would be expecting half of my annual fuel tax bill to come off the private road charge. In this way, some private roads might cost less to use than they do now, once tax rebates are tallied.
- In big cities, congestion taxing might be pursued; revenues could fund other transport projects.
- Roads which neither interest the private sector to operate commercially nor fall under congestion taxing are community service obligations for government to provide as they do today. It is socially and economically irresponsible of governments to charge people cost recovery or higher here. This is the barmiest aspect of universal road user charges. Why charge the driver full cost recovery on their trip to an outback hospital or school?
This would keep roads provided while beginning to confront the biggest problem: governments spending way above their available road revenues, going deep into hock for roads for very dubious economic and social returns.
The United States sees the problem. We appear to be sweeping it under the carpet.
Dr Michael Keating AC and I first raised Australia’s debt funding of roads last year [vi]. Soon after, official numbers for the subsequent year were altered to show a completely different, rosier picture – a shift of several billions. The Bureau of Infrastructure, Transport and Regional Economics decided to inflate road revenues artificially by counting general tax revenues like GST on car sales as road revenue. Overnight, road taxing and spending balanced again (John Austen’s recent post documents this event in more detail [vii]). The new accounting job gave the impression there was no roads ‘overspend’. It encouraged policy wonks to conclude all we need is a better excise mechanism – a universal road user charging system – for things to be ok. Wrong.
Like his predecessors, Fletcher appears to have been told that fuel excise is a dwindling source of road tax and universal road user charging is the solution. If so, his bureaucrats have handed him a poison pill, rather than offering US-style plain speaking about the real problem.
Part of the greatness of Keating lay in his willingness to consider public policy challenges in depth. As a result, he found it easier to spot bureaucratic bullshitting.
What can Fletcher do? First, he should demand all the facts. As for the USA, our Bureau should publish the real gap that lies between what motorists pay in bowser tax and vehicle registrations and how much is actually being spent on our roads. If Bureau officers wish to hold to the farcical positon that these figures balance thanks to GST revenue from car sales and the like, Fletcher might organise for them to attend a ‘meeting without coffee’ with the Australian Treasurer, who can explain that GST monies are general taxation revenues, not a transport agency balancing line to cover up road spend running billions ahead of road revenue.
Fletcher might then ask the ACCC to calculate what universal charges would look like for the average motorist, given actual road spending levels. The numbers produced will probably be large enough to silence the universal charging ‘talking shop’ that has run inside the bureaucracy for the last decade for no result.
Finally, Fletcher should place all weight possible behind targeted pilots of congestion taxes and of direct privatised road models where proportionate fuel tax rebates are handed back to drivers who travel on commercially-run roads. This is real tax reform. It opens major opportunities for fund investments in existing roads. For ten years, the bureaucracy refused to conduct a single such pilot. South Australian Premier Jay Weatherill committed to one last year in line with his own road reform commitments [viii]; this produced encouraging results [ix]. More such efforts contribute to evidence-based reform.
So: demand published facts on the road debt problem, support practical reform pilots with a competition reform pedigree…and reject agency bullshit, whenever it is served up.
Three steps Paul Keating might endorse.
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. Prior to this he was a national freight industry chief executive.
[i] http://theconversation.com/road-user-charging-belongs-on-the-political-agenda-as-the-best-answer-for-congestion-management-65027
[ii] http://www.smh.com.au/comment/ministers-suggestion-of-new-road-user-charge-may-seem-outrageous-but-it-makes-sense-20160920-grk1bc.html
[iii] Presented in Clifford Winston On the Performance of the US Transportation System: Caution Ahead Journal of Economic Literature online at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jel.51.3.773
[iv] See the testimony of Mr Joseph Kile, Assistant Director for Microeconomic Studies, US Congressional Budget Office (2011) online at https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/05-17-highwayfunding.pdf
[v] Ibid
[vi] http://johnmenadue.com/blog/?p=3834
[vii] http://johnmenadue.com/blog/?p=6943
[viii] http://transportreform.org/news/weatherills-national-heavy-vehicle-charging-proposal-applauded
[ix] A declaration: the author led this inquiry.