Speech to the Roads Australia Annual Lunch

It is a pleasure to join you at this Roads Australia Annual Lunch.

Yours is a very important organisation comprising people who are involved in the planning, delivery, maintenance and operation of Australia’s road system – a vital national asset with a value of some $200 billion.

Each year we spend about $23 billion on roads.

That money largely comes from taxes and charges paid by road users – such as fuel excise, state motor vehicle registration charges and other taxes and charges.

The Turnbull Government has signalled some reform directions in relation to road funding. One of those directions is to appoint an eminent Australian to carry out a study into options for direct road user charging for light vehicles – and we will have more to say in coming months about that study.

But another direction is reform of the present, rudimentary, system under which heavy vehicles – 4.5 tonnes and above – are charged to use our roads.

Today I want to speak about the work we have underway to reform the way that heavy vehicles are charged to use Australia’s roads. I want to start by arguing that our current system has significant weaknesses; then turn to the case for change; and lastly describe where we are on the reform journey.

 

Current system has significant weaknesses

Let me turn firstly then to the way that heavy vehicle users are charged to use our roads today.

Each year the National Transport Commission runs its ‘PAYGO’ model to calculate the total amount to be collected from heavy vehicle users.

This model takes the actual expenditure on roads by the state and territory road agencies over the past seven years, and derives a weighted average, with earlier years having a lower weighting than later years.

Around 22 per cent of the total cost is assumed to be attributable to heavy vehicles, based on engineering and cost estimates.

There are two sets of charges applied to heavy vehicle operators to recover this amount. First, there is the vehicle registration charge, administered by State and Territory Governments. Second, there is a per litre fuel excise charge imposed by the Commonwealth. This year, after allowing for fuel tax credits, that net excise charge stands at 25.8 cents per litre.

This system has some serious weaknesses.

First, it is a long way from a user pays system. There is no linkage between the amounts charged to heavy vehicle operators and the amounts that are invested in our roads.

The amounts charged go into consolidated government revenue; road investment decisions are made separately, year by year, often in the form of one-time grants.

Nor is the present system necessarily fair as between different heavy vehicle operators. For example, most states charge a flat annual registration fee – regardless of whether the truck is used all year or only for part of the year.

Another problem is that a per litre charge is a highly imperfect proxy for actual road usage. One operator gave me a good example earlier this year.

She runs trucks from Adelaide to Perth – and when there are strong winds on the Nullarbor her trucks use more fuel than when conditions are still. So using a given length of road on a windy day costs an operator more, through fuel excise, than on a still day.

The present system also creates problems for road owners and managers – either the state government road agencies or local councils. They face unpredictable funding which is affected by the political process.

We politicians prefer to give money for shiny new roads – rather than boring old maintenance of existing roads. It’s hard to get a media release or photo opportunity out of maintenance.

This issue was highlighted in economic analysis done for my Department earlier this year by Deloitte Access Economics. Today, funding for maintenance is often provided on an ad hoc basis, meaning maintenance is undertaken when funding is available, rather than at the most efficient time during the life of the asset. Deloitte found that if the road agencies had more predictable revenue flows, more efficient maintenance practices would emerge over time, resulting in cost savings.

 

The case for change

With all the weaknesses in our current system of heavy vehicle user charging, it is not surprising that report after report has recommended change.

Seventeen years ago, the House of Representatives Standing Committee on Primary Industries and Regional Services concluded:

A pricing system for land transport infrastructure needs…. A pricing system that ensures the correct price signals flow to both users and providers of infrastructure.[1]

Over the last ten years, change in this area has been advocated by the 2007 Productivity Commission Inquiry into Road and Rail Freight Infrastructure; the 2010 Henry Tax Review; the 2015 Harper Competition Policy Review; the 2016 Australian Infrastructure Plan and, this year, the Productivity Commission’s Five Year Productivity Review.

Today, the case for change is stronger than ever. Our national freight task is expected to grow by around 70 per cent over the period 2010-2030, with about a third of the task needing to be met by road.

Yet the road sector has not been exposed to microeconomic reform of the kind that has transformed sectors like water and telecommunications – and driven a much greater focus on the needs of the customer.

Telecommunications was reformed in the nineteen nineties. The ACCC was appointed as the economic regulator of the sector. It has the power to set the price for a regulated service – such as how much Vodafone pays to Telstra when a call from a Vodafone mobile terminates on the Telstra fixed network.

In deciding whether to regulate a service, and in setting a price for the service, the ACCC is guided by whether it is encouraging economically efficient use of, and economically efficient investment in, telecommunications infrastructure.

An independent price regulator of heavy vehicle charges might look at road pricing in a similar way. That is, how do you set prices to encourage the efficient use of, and efficient investment in, the road network?

As well as learning from how other sectors in Australia are regulated, we can also learn from how the road sector is regulated in other countries.

For example, New Zealand has a National Land Transport Fund which pays for road infrastructure and road-related services. Revenues raised from road use (including fuel excise imposed on all petrol vehicles, as well as a distance-based road user charge imposed on diesel vehicles) all go into the fund.

The New Zealand Transport Agency manages the fund and operates at arms-length from government under its own legislation. However, it must give effect to the Government’s Policy Statements (GPS) on land transport funding, which set overall transport priorities.

While Australia is different to NZ in some important ways, New Zealand’s institutional arrangements offer some salient lessons for us. Since the Land Transport Fund was introduced there has been significant growth in spending on roads. This in turn has meant rising charges – but stakeholders such as the peak body for heavy vehicle operators, the Road Transport Forum, have been broadly supportive because they can see that these charges are being returned directly into improving road infrastructure.

Perhaps the strongest reason for change is the benefits that it can deliver to heavy vehicle operators – in turn bringing efficiency and productivity benefits to the wider economy.

My Department commissioned Deloitte Access Economics to study how changes to heavy vehicle road charging and investment would affect the behaviour of road users and road suppliers.

Deloitte modelled the economic impact of five heavy vehicle road reform scenarios, relative to the status quo. They found that all five scenarios generated substantial economic benefits – with a net present value of between $8.3 billion and $22 billion.

One source of benefits was more efficient maintenance, as I mentioned earlier. Another source would be improvements in heavy vehicles’ access to roads, resulting in vehicle operators being able to choose a mix of vehicles and routes that minimise freight costs. Deloitte found that a change in the heavy vehicle fleet mix would lead to a corresponding significant reduction in vehicle operating costs.

 

Where we are on the journey

If the case for change is strong, where are we up to then on delivering that change?

Commonwealth and State and Territory Transport Ministers – known collectively as the Transport and Infrastructure Council – committed in May 2015 to a four phase process to reform heavy vehicle user charging.

The first phase was to improve the transparency of road investment, expenditure and service delivery.

That phase has been delivered. Each state road agency now publishes detailed asset registers – with an assessment of the quality of all roads on the national heavy freight network by 100 metre component. They also publish expenditure plans setting out how much they are spending, and plan to spend, on heavy vehicle road infrastructure. This information is published collectively on the Transport and Infrastructure Council website.

The next phase is to establish an independent price regulator – and have that regulator use an economic model with a ‘forward looking cost base’ to set prices. This would be a model similar to the one used by the ACCC today for sectors like electricity and telecommunications.

Under such a model, the regulator will calculate the value of the road assets each year – adding in new capital expenditure in the year, and then reducing the asset base for depreciation. It will then apply a rate of return to work out the amount needing to be recovered from heavy vehicle users.

In November this year, the Transport and Infrastructure Council decided to proceed with preparing a Regulation Impact Statement (RIS.) This will look at the costs and benefits of independent price regulation and a forward looking cost base.

In turn, this work will put the Transport and Infrastructure Council in a position to make a decision on an independent regulator, within the next year.

Industry has indicated a preference for the ACCC to be appointed as the independent regulator, although there is more work to be done before Ministers will be ready to take a decision.

Of course this can all sound rather theoretical and abstract – but it has some clear practical implications for heavy vehicle operators.

For example, under the current system, a large one-off expenditure by one state in one year means an increase in the charges faced by heavy vehicle operators all across Australia. A forward-looking cost base means a cost spike in any one year will have a much smaller impact on charges than under today’s PAYGO model.

Another practical implication is that an independent price regulator will provide greater certainty on prices for heavy vehicle operators. Today, prices are recommended by the National Transport Commission – but they are actually set by Ministers through agreement at the Transport and Infrastructure Council. Inevitably that can mean prices move around unpredictably for political reasons.

Now as we continue down the path of reforming the way we charge heavy vehicles operators to use Australia’s roads, it is important to gain some practical experience of how a different system might work. For that reason, we are planning to run some pilots, or trials.

Earlier this year I visited California and Oregon. Both of these US states have recently carried out pilots of road user charging. The pilots used a distance based charge - in place of the current ‘gas tax’ approach which is essentially the same as our fuel excise.

I can announce today that we intend to start a National Heavy Vehicle Charging Pilot. This will commence before the end of 2018 and will last for two to three years.

This will be a structured way to trial the replacement of registration fees and the fuel-based Road User Charge, with a system of direct user charges for heavy vehicles.

The first two stages will be research-based and will focus on developing the options to pilot. The Australian Government will be inviting the heavy vehicle industry to work with us to develop these options.

I should make it clear that participation in the pilot will be voluntary – and the first two stages will not involve participants paying additional or alternative charges as part of the trial.

In early 2018 we will approach peak bodies in the trucking sector, such as the Australian Trucking Association and the Australian Logistics Council, inviting participation in this work.

I can also announce that the Turnbull Government will be establishing a business case program for location-based trials of distance charging for heavy vehicles.

The idea here is to fund business cases for trials in specific geographical regions – where there may be an appetite by the heavy vehicle industry to agree to additional per kilometer charges, over and above what they are paying through the fuel excise system, where those charges are linked to specific benefits to the heavy vehicle industry.

The benefit might be using high productivity vehicles on routes where they cannot presently be used. Or the benefit might be a targeted program of investments to upgrade roads in a particular area which is of benefit to heavy vehicle operators – for example, livestock or grain transporters in a particular rural area.

Whatever the benefit – be it improved access, faster travel times or more flexible operating arrangements – it would clearly need to outweigh the costs of the additional charge so that heavy vehicle operators would find it worth their while to participate.

These trials could allow us to test such matters as particular technologies to record distance and location travelled; or the willingness to pay of operators; or the development of service level standards.

Again, we will be keen to work with the heavy vehicle industry – as well as state and territory governments – to see if we can work up such trials in different locations around the country. Through funding the development of business cases for trials we hope to catalyse a number of such trials over the next few years.

 

Conclusion

Let me conclude then with the observation that the topic of user charging for heavy vehicles can seem extremely pointy headed and theoretical.

Understandably, many heavy vehicle operators are deeply skeptical, and see this discussion as code for increased charges with no benefit to them.

On the other hand, a look across the Tasman shows that heavy vehicle operators are now more supportive of road user charging because they can see a direct link between what they pay and the amount that gets spent on roads.

The Australian Government has a process under way to reform heavy vehicle user charging – but we are very conscious that we need to be able to demonstrate benefits to heavy vehicle operators. We welcome industry participation to influence and shape a fairer system.

Within the next two to three years, the plan is to transition to an independent regulator which will set heavy vehicle user charges.

At the same time we plan to run pilots or trials of different approaches to heavy vehicle user charging – and we will be inviting operators to participate.

If we get it right, we can deliver real benefits to heavy vehicle operators through better maintained roads and more investment in roads – and in turn we can deliver significant productivity and efficiency benefits for the nation.

 

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[1]https://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=primind/rdinq/report/contents.htm