industry consultation draft ia roads report 14

8/12/2019 Industry Consultation Draft IA Roads Report 14

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INDUSTRY CONSULTATION DRAFT

Spend more, waste more.Australias roads in 2014: moving beyond gamblingJuly 2014



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Infastructure Australia | 3

Contents

04Execu ve summary

06Infrastructure Australia

and roads: 2008-14

07Australia can now onlyfully fund its roads by

cu ng other items

08How road fundsare raised now

10How road fundsare spent now

12Where is this leading?

13Infrastructure Australiasroad research and analysis2008-14

23The high cost of statusquo to rail and to publictransport aspira ons

25Horizon challenges?

26How does private

investment begin to

contribute to reform?

27Government to play itspart but avoid a grand

solu on approach


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4| Spend more, waste more. Australias roads in 2014: moving beyond gambling

1. Remy Prudhomme, Professor Emeritus University of Paris, paper for the Annual Bank Conference on Development Economics (2004)

In recent years road spending hasin fact outstripped road taxes andcharges revenue, meaning Australiasthirst for roads might now come atthe direct expense of other things.

With enough money, most roadproblems are soluble. But giventhat governments will never haveenough money to pay for all the road

outcomes they seek, it would be onlyprudent to ensure that:

a. broadly speaking, exis ng taxpayerfunds are being spent produc velyand fairly; and

b. alterna ve capital upli sourcesare ac vely encouraged - so thatless is asked of taxpayers

Yet neither of these things is

occurring.

Australia has a true gamblersaddic on to roads: the moneyspent is not a ra onal investment.Governments assume that majorimprovement is just around thecorner, if they could just spendmore.

Execu ve

summaryWith expenditure pushing above $20 billiondollars annually, there has never been moremoney poured into the na ons roads. Yet inlate 2013, Infrastructure Australias State of Play report on economic infrastructure ranked roadsas by far the na ons worst asset class, by allmeasures.

A third dimension of the probleminvolves asking whether all ofAustralias road wishes reallyneed sa sfying at all. The currentAustralian system assumes that roadsare an answer to most transportproblems and seeks more and morefunding to that end, with li leconsidera on of alterna ves thatmost other developed parts of the

world enjoy, such as signi cant heavyintercon nental rail networks anddominant heavy mass transit systems.

This ma er needs resolu on inthe interests of na onal scal andeconomic e ciency, as poli cally-driven infrastructure may and o endoes consist of white elephants aswell as of highly useful roads 1.

It is ironic that as long ago as

2007 the Council of AustralianGovernments Road Reform Project was begun. This mul -million dollarprocess has been led mostly byroad agencies themselves; it hasdeliberated largely outside of publicview. On the evidence available, ithas achieved nothing, other than toreject outright some of the pillars ofAustralias compe on principles.

Barring some notable excep ons, theculture of road agency monopoliesis extremely resistant to change at mes ac vely so. Crucially, thisincludes very strong resistance toprivate investment in and access toroad infrastructure, which appears asmuch as anything to be a fear of lossof control.

This is a ma er of concern. It placescurrent and future poli cal leadersat risk of becoming cap ve tomonopoly road agencies, which tooo en brief seduc vely on constantimprovements and achievements,when precisely the opposite outcomeis too o en observed in the state ofsome roads and of road nances.The unhealthy focus of road agenciesappears set on ge ng, controllingand spending more taxpayer money,

rather than ques oning e ciencyor value to the motorist andgovernments.

Australia needs to rediscover andnurture entrepreneurial thinking,ques on the orthodox story of roadsand nd new drivers to solve majorproblems.


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Private investment is one suchdriver: Infrastructure Australiasinves ga on suggests strongly thatmarket-led investment contribu onsand advances in modern technologycan unlock billions in extraproduc vity in the road network.

Industry and communi es are lockedout of contribu ng strategically

to roads, or working directly withprivate infrastructure investorsto solve their own problems. Thisneeds to change.

Be er outcomes can start bythese par es working directly withinterested private investors andelected poli cal leaders to obtainproduc ve results that they ndacceptable. These e orts shouldbypass road agencies, which in most

observed cases will only su ocate orover-complicate such opportuni esif given carriage of them: the publicsector will always play a vital rolein roads, but iden fying produc veroad investments and deliverysolu ons should not be one of them.

Private capital - which has neverbeen cheaper or more willing toinvest - with its a endant disciplinesof cost-bene t analysis, assetmanagement and demand-driveninvestment, would, if it began toinvest in su cient scale and numberof road projects, simply force thepresent roads system to developnew structures that could cope.

Much has been said about directuser-charging of roads as a dras creform solu on. This need notextend beyond heavy vehicles onsome major highways in orderto deliver na onally-signi cante ciencies. In return, all direct-charged heavy vehicles should bea orded guaranteed service levelsand legal rights to more produc vevehicle access in these places.

The current road taxing systemo ers no value proposi on tomotorists. Smart, market-led reformsand an a endant restructure ofoutdated monopoly road agencies,combined with a reassessment ofwhat problems are being solved withroads, can arrest an increasinglycostly na onal gambling habit.

Infrastructure Australia o ers manyevidence-based jus ca ons forthis challenging assessment in thefollowing report, which collatesits collec ve research, analysisand reform recommenda onsabout roads in a single referencedocument.


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2. Bureau of Infrastructure Transport and Regional, Economics Australian Infrastructure Sta s cs Yearbook (2013) p.41 , see Tables 1.2E and 1.33. h p://www.budget.gov.au/2014-15/content/glossy/infrastructure/html/index.htm4. Australian Treasury Intergeneraonal Report (2010)

Between 2008-09 and 2011-12,over $4.5 billion more was spent on

roads than was raised in almost allroad taxes and charges 2. Given thatcurrent governments at all levelsdisplay an appe te for much greaterroad spending in future 3, this trendshould give rise to urgent ques onsof e ciency about how road fundsare raised and allocated.

Modelling of the coming scal gapcaused by an ageing popula on

suggests that the gap betweenspending and revenue mustnarrow for Australian governmentspending to remain a ordable.Intergenera onal Report modellingfor achieving this narrowingassumes that transport spendingas a propor on of Gross Domes cProduct will not increase 4. Thissuggests that burgeoning roads

in future will only be paid for bydeeper and deeper trade-o s in

other arms of government services.

Road agencies themselves do notappear to have raised this ma erclearly enough with governments.This suggests that their interest isnot so much in where the moneyfor their budgets might come from- only that money keeps arriving,preferably in ever-larger por ons.

Australia can now only

fully fund its roads bycu ng other itemsAustralias road system is already unsustainable.

Australian Roads1998-99 to 2011-12

Financial Year

A U D

$ 0 0 0

s

Road Spending Road Related Taxes and Charges Expon. (Road Spending) Expon. ( Road Related Taxes and Charges)

Table 1 (above): Total road expenditure and road user taxes and charges 1998-2012 and a trend line.Source: Graph developed from Bureau of Infrastructure Transport and Regional, Economics Australian InfrastructureSta s cs Yearbook (2013) Tables 1.2E and 1.3 p.41

| 1999 | 2000 | 2003 | 2005 | 2007 | 2009 | 2011 | 2013 | 2015 | 2002 | 2004 | 2006 | 2008 | 2010 | 2012 | 2014 | 2017 | 2016 |

$25,000

$20,000

$15,000

$10,000

$5,000

$0


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5. Produc vity Commission Dra Report on Public Infrastructure March (2014)

The current approach to raising roadrevenue from cars and other lightvehicles (ie those under 4.5 tonnesgross weight) involves paying vehicleregistra on fees and fuel excise.

Heavy vehicles (ie over 4.5 tonnesgross weight) receive a morespeci c, periodically-reviewedcharge, built from historic roadexpenditure a ributable to truckwear and tear. Crucially, this chargeis an averaged one: it does not

relate to par cular roads drivenby par cular trucks, nor can theindustry in uence where revenueraised is spent next, because thecharges are not directly related touse of any given road.

Just as for cars and light vehicles,there is li le to no connec onbetween what is raised in truckcharges and what is then spent ontruck-related road upgrades, other

than the quanta .

This blunt taxing system has existedfor many years. Increases to thistax are a source of regular poli caltension. In 2001 the then federalgovernment placed a freeze ongrowth in light vehicle fuel excise.While this served to reduce fuel taxtension, it also masked the true cost

of providing roads to the generalpublic. Reform was deferred.

As is the case in many countries, taxincreases on the Australian truckingsector can be causes of signi cantpoli cal tension. In some cases,required increases have proven toopoli cally challenging to levy at alland have been deferred under heavyindustry pressure, most recently in2005-06.

A be er system must show morevalue for charges levied: it mustbuild faith with road users thatthe funds being raised are beingexpended with some degree ofra onal e ciency and equity.

Many views have been advancedon how to improve charging.Some including the Produc vityCommission have argued that thedirect user-charging of all vehicles

should be the goal and that workto develop this end-state shouldbegin 5.

This is a dras c jump from thecurrent system, one that would be

poli cally fraught and extremelycomplex. There appear to be othermore contained ways to reformrevenue streams and yet s lldeliver

na onally signi cant value to thecommunity and economy.

Heavy vehicle pricing reform isthe rst and perhaps the onlyimmediate improvement required.

Change should involve movingaway from blanket averaged truckcharges to direct user-pricing ofheavy vehicles on at least somemajor highways which competewith commercial rail. In return,

trucking should have legally-enforceable rights to improveaccess and service levels for theirvehicles on these routes. This wouldunlock signi cant economic value,because it will do much to resolvecompe ve non-neutrality issuesbetween rail and road freight.

To date, none of these approacheshave been pursued by road agencyreform e orts, although the

Produc vity Commissions drareport on public infrastructureappears to assume that this is whatis happening. Direct-user pricing

for heavy vehicles in return forlegal rights of access and serviceguarantees is not envisioned by the

formal reform process.

How road funds

are raised nowAustralias road users pay taxes, not charges forroad use.


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6. See Standard and Poors Toll Road Forecas ng Risks - Study Reports and Updates (2003-05); also New South Wales Auditor-General The Cross-City TunnelProject (2006)7. See Table 3 in this report.

Private toll road levies faceuncertain mes

For private toll roads, generallyusers pay a direct charge to the

toll operator in return for using aroad. This direct charge impliesthat somebodies pays to use aspeci c road because they perceivea speci c bene t (ie reduced travelme, or amenity).

Several prominent private toll roadshave failed to cover construc oncosts from toll revenues. Primarily

this has come about through poores mates of user patronage for thenew route 6.

One of the major risks ahead for

private toll road projects is thatthere is increasing uncertaintyabout growth in demand for car usein major ci es: despite mainstreammedia concern presumingunmanageable passenger cargrowth in Australian capital ci es,growth in aggregate car kilometrestravelled in recent years has in factbeen substan ally below forecasts 7 .

Infrastructure Australias researchsuggests there to be other, more

produc ve and reliable sources ofroad investment for private capital;this is discussed later in this report.


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8. PriceWaterhouse Coopers for the Australian Trucking Associa on A Future Strategy for Road Supply and Charging In Australia (2013) p. 31

Unlike almost every other agencyimaginable across all levels ofgovernment, road agencies cannotbe held to task for not achievingoutcomes or mee ng standards.None are expected of roads.

Roads con nue to be untouchedby the Na onal Compe on

Reforms that drove produc vity andreshaped the Australian economythrough the 1990s.

There is no oversight of roadspending pa erns, or of outcomesfor the money spent. There is in factno na onal informa on availablewhatsoever on the condi on ofAustralias road asset. There areno minimum agreed standardsfor di erent classes of Australian

roads, against which taxpayerrevenue might be allocated withgreater fairness, e ciency andtransparency and measured for itsongoing contribu on to improvingoutcomes.

Priori sa on of funds againstobjec ve standards and actualcondi on assessments is essen al

to any real e ciency of expenditure;this is especially so given the greatcomplexity and scale of the roadasset across Australia. The absenceof these features in the current roadssystem leaves individual communi esand industry with no ability to makea valid case for their road upgradeover anybody elses. This damaging

feature of the road system hasalso been noted by the AustralianTrucking Associa on 8. It is also aregular feature of local and state andterritory government complaints overfederal road funding alloca ons.

Highway funding, for example, isnot predicated on any na onally-accepted standard related to thecurrent quality of that highway,to a safety ra ng or to tra c ow

levels. In the absence of objec veand transparent measures,highway funding can only becomea poli cised compe on forscarce funds. Base engineeringdata are available but this doesnot place strict condi ons onspending pa erns. Success o encomes only through poten allyexpensive lobbying or the pot-luck

of a poli cal seats relevance: noone community has any ability ofknowing whether their highwayupgrade is more deserving thanthat of another community. This

problem is probably insoluble in theabsence of measuring roads againstna onal standards for di erentroad categories and funding the

biggest shor alls rst.

Impacts: local roads appear to bethe canary in the mine

While all three levels of governmentshare responsibility for roadfunding, Australias more than 550local governments responsiblefor around two thirds of the totalna onal network - are unable to levydirect charges or taxes to recoup

their expenditure on roads.

Several exhaus ve reports andinquiries have been held into theproblem of local road funding. Allnote the problem, but none dealwith the incredibly ine cient andunaccountable road spending systemthat lies at the heart of the problem.Nothing changes.

How road funds

are spent nowAustralias nearly $20 billion dollar annualroad spend can only be described as hideouslyine cient.


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9. See also Are Councils Sustainable? nal report of the Independent Inquiry into the Financial Sustainability of NSW Local Government (2006)10. See p. 51-52 of Infrastructure Australia Report to COAG Communicang the Impera ve for Ac on (2011)11. Allen Consul ng Group for Infrastructure Australia Op ons for improving the integra on of road governance in Australia: the role of local government

(2009)

The rst e ects of an ine cientand increasingly unsustainableroad funding system will be felt inregional, rural and remote localroads, whose councils do not receivesu cient internal revenue streams(such as land ra ng, development,parking fees etc) to cover the costof both maintaining inherited

assets and delivering on new roadspending ambi ons. This lack ofrevenue is compounded by the factthat over me, local governmentservice delivery expecta ons andtheir associated budget pressureshave expanded very considerablybeyond roads, rates and rubbish toincorporate a broader array of costlysocial services. The case for roadspending e ciency reform could notbe stronger in these places 9.

Necessity has driven innova vethinking in local roads: aconsiderable body of work hasemerged from local governmentbodies such as the Australian RuralRoads Group rela ng to how theroad asset could become moree cient through asset managementand funding-to-outcomes as well

as how local community andmarket intent could drive more

produc ve road planning andinvestment 10. However, there isli le indica on that any of thisthinking has been embraced byroad agencies. The AustralianRural Roads Group advises thatit has been told informally by the

commonwealth agency that suchma ers are unlikely to be priori es for government .

The subsidiarity principle turned onits head

Public policy in Australias federa onprofesses to adhere to thesubsidiarity principle whereverpossible. This holds that thingsthat can be done by small and

uncomplicated organisa ons or jurisdic ons should never be givento larger and more complicatedones.

But in roads, the reverse logicapplies 11 : the greatest funds andmandate lie with the highest levelof government, which is the mostremoved from the road asset itself

and is the least responsive tocommunity and market demandsfor its future use and shape. Thefederal infrastructure and transportagency in Canberra spent over $7.3billion in nancial year 2011-12 , yetby its own admission it cannot claimto know the actual condi on of anypiece of road in the country and

does not measure road performanceand funding against any na onalbenchmark standards whatsoever.

By contrast, lower levels ofgovernment especially some localgovernments and smaller stateand territory governments - retainengineering personnel who generallydo manage and know their roadnetworks in mately. While in someplaces this asset informa on is

recorded, nowhere are mandatorycondi on reports linked tobudgets, which could drive reliableimprovements against referencestandards. The people closest to theproblem who would be the bestpartners for innova ve and market-driven solu ons hold the leastcontrol.


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12. Access Economics and Municipal Associa on of Victoria research as summarised in Price Waterhouse Coopers report (2006) Na onal FinancialSustainability Study of Local Government report prepared for the Australian Local Government Associa on Table E.2 p. 11.

Most other items of governmentbudgets moved on from thisextremely costly and uncertain

approach when principles ofeconomic e ciency replaced publicgood objec ves through compe onreform. But in the unreformed roadsector, the road agencies consistentposi on appears to be we needmore money instead of we need todemonstrate some e ciency in ouralloca on of resources.

Under these arrangements, poli calsuccess in roads is likely to be

reduced increasingly to simplyoutspending ones poli cal rivals- regardless of how ine cient orine ec ve these spending pa ernsmight be. This is not the fault ofelected o cials: it is a er all almostthe only metric of performanceavailable to them.

Looking ahead, this situa on is likelyto worsen in direct propor on to thelevel of public dissa sfac on in the

quality of roads: as voter frustra onincreases, governments withoutbe er solu ons available will feelcompelled to spend more and more,but this does nothing to resolvetaxpayers sense of e ciency,value for money or equity in roadspending.

There are various es mates ofthe theore cal maintenance andcapital debt in roads: realis c

gures would run into the tens ofbillions annually, as a minimum(most formal es mates of local roadmaintenance debt alone runs toseveral billion dollars annually 12 ).

However, even if an accurate grossshor all gure were known, muchof this debt may be academic: whatis more important than worrying

about an impossibly large quantumof technical underfunding is thatthe most important road problems

are funded rst and that maximume ciencies are extracted from thecurrent roads budget.

This is not happening. This breeds public dissa sfac on and ine cientgovernment reac ons. Giventhat Australias roads are alreadyunsustainable under currentarrangements, con nuing to thinkthat spending more will solve the problem would be a highly scally-

imprudent approach to take.

Con nuing to provide funds to roadagencies and local governmentswithout any expecta on whateverthat the condi on of their roadswill be measured over me and

funded to outcomes encouragesand extremely ine cient system to

perpetuate i tself.

Where is this

leading?Road funding is to Infrastructure Australiasknowledge the largest example in Australia of abudget item that remains a pure input system,not an outcome system: all that can be measuredis what was spent, not what the expendituremight have achieved.


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13. The posi ve impacts of direc ng the bulk of freight ow away from the wider public are well established in a study of the (best prac ce) Alameda railfreight corridor that links Los Angeles with its ports: Michael Futch Examining the Spa al Distribu on of Externali es: Freight Rail Tra c and Home Valuesin Los Angeles University of California San Diego (2011); see also Urbis for Infrastructure Australia Urbis Valua ons - Report on Historic Land Value Growthin East Coast Capital Ci es (2013)

A Na onal FreightNetwork

Australia has no plan for freight.

The Na onal Freight Network/ Strategy was commissioned in2009 by the then-Minister forInfrastructure to resolve this.

It is o en remarked that freightdoes not vote. Hence, freightma ers are usually the last in line tobe funded by road budgets, behindthe other two road func ons: public

transport and passenger vehiclemovement (although commitmentsto freight appear to have increasedin recent years).

Given the funding shortage anda burgeoning freight task, privatecapital is a logical t for fundingmany freight aspects of roads.

But where should private capitalinvest?

No physical map exists of themost important roads and railfor the na onal freight task. TheNa onal Freight Network/Strategy a empted to x this oversight. Itsought agreement on a core physicalnetwork for freight being the big,obvious highways and rail lines ofgreatest economic and strategicsigni cance which linked the majorci es and ports.

The intent was to open this networkto private access and investmentinterest, including co- nancing ofimprovements with governments,poten ally via declara on under theCompe on and Consumer Act (2010) .In rail, such access and improvementarrangements are already available; asimilar process was envisaged for keyroad freight routes.

This network would also beprotected from encroachment fromalterna ve use so that Australias

freight arteries remained as openand e cient as possible - andpreferably separated from othermotorists as far as possible. Thiswould see Australia apply principlesof least cost nancial and economicpathways for freight; it promised farreaching posi ve consequences foramenity and land values 13, especiallyin major ci es where freight routesto ports are major centres of roadconges on.

The Freight Network was aboutpu ng more freight in less places,to everybodys bene t.

In over two years of consulta on,industry was comfortable with thisconcept and agreed with the roughnetwork proposed. Speci cally,industry advised Infrastructure

Infrastructure

Australias roadresearch andanalysis 2008-14Aspects of the road system most per nent to reformhave been examined by Infrastructure Australia - andsome solu ons advanced - over several years, workingwith road and transport agencies, central agencies,local government, the road freight and wider transportsector, freight and public transport users, private capital

investors in infrastructure and the academic community.

A brief colla on of the key analysis and ndings follows.Some annota on is provided (where relevant) on howthese e orts have been received by road agencies.


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14. Allen Consul ng Group for Infrastructure Australia Developing a Na onal Freight Network Strategy: Perspec ves of Freight Network Customers (2010)

Australia that the tradi onal(agency) model (for freight

planning) may lead to iner a,and hamper improvements to the

freight network 14.

Some agencies did not receive the proposal well: some jurisdic onscould not even agree that many of

Australias most freight intensivehighways should be on the network.

The Na onal Freight NetworkStrategy as conceived ul matelymet with support from ministers,but was subsequently rejectedarbitrarily by the Commonwealthroad agency, which currently holdssole funding and planning authority

over much of the proposed freight network; it advised thatit would instead be preparing itsown na onal freight network

presumably to be sole-taxpayer- funded. No such proposed networkhas emerged since.

Australia s ll has no published

pipeline of prospec ve privateor co- nanced freight arteries toa ract pa ent capital.

In contrast, the currentdepartmental spending network variously known as the Auslinkor Na on Building network doesnot appear to be a network at allas much as a plan for spending

money, largely on roads, in various places. Evidence of this lies in somany roads of unques onablena onal signi cance not being onthe network: for example, theTullamarine Highway betweenMelbourne and its airport; theSydney Harbour Bridge; the road tothe Port of Newcastle (the worlds

largest coal export port) and theroad to Williamtown airbase,Newcastle, home of the Australian Air Forces fast-jet capability.

N

MELBOURNE

Mildura

Ballarat

Shepparton

SaleGeelong

CANBERRA

WollongongSYDNEYCootamundra

Narrandera

ParkesNarromine

Moree

Broken Hill

Newcastle

Toowoomba BRISBANE

Gladstone

Townsville

Cairns

Mount Isa

Longreach

Port AugustaCeduna

ADELAIDE

LauncestonBurnie

HOBART

Katherine

DARWIN

Tennant Creek

Alice Springs

PERTH Fremantle

Bunbury

Meekatharra

Eucla

Newman

Port Hedland

BroomeFitzroy Crossing

Halls Creek

Kununurra

Tamworth

Bell Bay

Whyalla

Bendigo

Road Links

Rail Links

Proposed Inland Railway 0 200 400Kilometres

Hastings

Dampier

Oakajee

Rockhampton

Gold Coast

Albury

Wodonga

Onslow

Port Kembla

Abbot Pt

Hay Pt

Esperance

Kalgoorlie

Goulburn

Portland

Geraldton

Dubbo

Table 2: Proposed Na onal Land Freight Network: open to private or co- nancing with government for be er accessand improvement, planned and protected for maximum produc vity and safety


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19. See the SA Government approach to simple deed arrangements for private investment in public roads in Juturna COAG Road Freight Incremental PricingTrials Prospects for A More Commercial Focus In Reform a report for Infrastructure Australia (2011) pp. 19-2020. See also Infrastructure Australia Private Financing Op ons for Upgrades in the M5 and F3M2 Corridors in Sydney (2012)21. Infrastructure Australia Private Financing Op ons for Upgrades in the M5 and F3M2 Corridors in Sydney (2012)

In 2011 Infrastructure Australiaexamined some extremely prac callocal solu ons to private roadinvestment. In South Australia, simpledeed arrangements between thestate and mining companies allowedthe la er to upgrade public roads forsafe and sustainable heavy mine-haulopera ons which would otherwise beimpossible (and which it might not befair to expect the taxpayer to fund).

Only those miners paying a chargecould access the bene ts, but theroads were not closed to any othergeneral users and in some cases theminer paid for extra amenity suchas rest bays to accommodate othermotorists during delays 19.

Similar approaches - nego a ng private investment on public roads, for private gain - were observed inWestern Australia and the Northern

Territory, but these approacheshave not been formalised na onallyand there was no wider appe te forthis approach observable in otheragencies.

Between 2011 and 2012 ,Infrastructure Australia carried outa detailed independent assessmentof the proposed road upgrades to

the vital M5 and F2-M3 orbital roadnetworks in Sydney and was askedto examine a New South Wales roadagency plan for upgrades to theM5. It noted in its feedback to theroad agency that Port Botany wasfast approaching its planning limitsfor shipping containers and a veryhigh priority for any freeway/tollwayupgrade was for a freight link to bebuilt between Port Botany and a

future Moorebank intermodal site.

Not only did the road agencys M5East expansion project not addressPort Botany tra c and a dedicated

freight link to ease port conges on,its container trade forecast at PortBotany was just over one thirdof realis c expecta ons. As such,the M5 project as an enabler ofPort Botany conges on reduc onand economic growth one of the

most na onally-signi cant projectsimaginable - was very seriouslyunder scoped 20 .

The M5-Botany link o ered highly prospec ve private nancingopportuni es 21. As men onedabove, these were the sort of

projects that Infrastructure Australia envisaged being iden ed

by agencies as a result of theNa onal Ports Strategy: easy produc vity gains with good private nancing creden als and low patronage r isks, given the patronswere commercial freight operators.No such work was ever pursued.

In early 2012 the InfrastructureAustralia council commissionedanalysis that suggested a lack of

B-triple truck-trailer access tothe Hume Highway had cost theAustralian economy many hundredsof millions of dollars in the 17years since these vehicles had rstbecome available on some othercomparable routes in Australia ;the B-triple carries around 30%more freight than the B-double, asit tows an extra trailer. It thereforelessens the cost of road freight andcarbon emissions signi cantly and

reduces labour shortage pressures intrucking companies.

Infrastructure Australiarecommended a commercial pilotof user-pays B-triple access to theHume Highway between Melbourneand Sydney; it commissioned a drastructure to this end and organised for key linehaul trucking par es to


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engage with the road agencies inques on. The Victorian and NewSouth Wales road agencies then tookresponsibility for the project. Nocommercial project has materialisedsince.

In 2012 Infrastructure Australiafound that the last few metresof a road into one of Australiasmost important transport facili es,

Chullora rail terminal, Sydney,was not permi ed access by thestates maximum trailer weights,yet the state road agency was noteven aware of the problem ithad provided a maximum weightsroad network virtually to the doorof this facility but had le the localgovernment to its own devices onlinking the facility to this network.

It was found that since the heavy

trailer weight network had beenintroduced several years earlier,underweight trucks accessingChullora had cost around $22 millionin lost freight produc vity dueto underweight containers beingplaced on interstate trains. A localgovernment upgrade to allow theright truck access would cost just$350,000 . Infrastructure Australia

considered the Chullora problemof na onal signi cance, so it took adirect role in brokering a resolu onbetween the state, local and federalgovernments, trucking operators andthe terminal operator.

Ini ally, state and federal roadagencies were reluctant to fund asolu on. A er several nego a onsinto a simple two-way funding

injec on just over $170,000 each to x the local governments problem road to the terminal, theconcern expressed was that thismight set a precedent.

In 2013, agreement was nallyreached and the local councilcommenced works ahead ofreceiving these funds. However the

funds from the higher governmentswere s ll not forthcoming. In the

mean me, Infrastructure Australiahad o ered to fund the balance ofthe upgrade from its own budget tomove things along, but was warnedthat such ac on would be illegal.

The problem was nally resolved,but only a er a net loss in

produc vity of perhaps over $30million dollars. Infrastructure

Australia has observed similar freight bo lenecks una ended toin a great many places na onwide.Private capital would be far moreresponsive in resolving thesesitua ons, given the cost bene tinvolved, but it lacks an authorityto deal.

In 2013 , studies examined whetherroad upgrades that would allow

access to much bigger trucks for alarge scale farming region in north-west New South Wales could be paidfor by the farmers themselves, in theform of a user levy that would seethe road upgraded to accommodatethe much more e cient trucks.Results suggested that this approachwould fund the road in ques onsupgrade and even with the cost ofthis upgrade included, local farmersstood to enjoy a net transport

produc vity gain of over 60% oncurrent vehicles .

Infrastructure Australia is now pursuing its own full commercial pilot project in northern NewSouth Wales to present to relevantministers and prospec ve nanciers

for private or co- nancing later in2014.


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These trials con rmed a number ofthings to Infrastructure Australia:

There appears to be a readyamount of extremely highbene t-cost projects wai ng tobe privately- nanced in roadfreight infrastructure, with

produc vity gains from suchprojects likely to run into thebillions of dollars if such projectswere pursued na onwide: a erall, a handful of random casestudies by Infrastructure Australiahad uncovered plausible netproduc vity gains worth hundredsof millions of dollars.

Many smaller projects (muchsmaller than private urban toll

roads) can bring nancial returnsto the investor and produc veeconomic outcomes to partsof the road network that tendto be overlooked under solepublic funding models. This isespecially true for cash-poorrural road networks which exertli le poli cal in uence butnevertheless are being expected

to carry a very signi cantagriculture and mining task.

The only reliable way to nde cient projects is to haveindustry itself iden fy them.

Road agencies, being public

sector, lack an entrepreneurialskillset: in par cular, they have apoor sense of value proposi onwhich prevents them fromiden fying high net presentvalue/rate of return projects.The limita ons of the publicnancing model (ie access to onlyscarce public funds) is a majorbarrier: unlike the public sector,the private sector can considermuch broader capital raising

op ons, given a sense of projectrisk. This is not a cri cism of roadagencies in and of themselves,but it does suggest a very costlymisalignment of their role in themodern road system.

Road agencies do not know howto run trials in the scien c senseof that term, in that they do not

seek to establish a hypothesis,test it and publish the results topromote improvement.

Excep ng some excellent butvery limited programs in smaller

jurisdic ons which recognise theneed to allow the private sector

to get on and invest in publicroads where it makes nancial,economic and social sense to doso, most road agencies are u erlyreluctant to allow market-leddevelopment of the network.

Instead, agencies can tendto mimic a market func on:some have established projectsfor nding produc ve freightupgrades, but access to capital

is very limited and no accessand improvement guaranteesare o ered to users under thesearrangements.

What these trials

suggested


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25. Including Australian Rural Roads Group Worth Feeding: Case Studies of Rural Local Road E ciency and Reform of Australias Road Pricing andInvestment System (2011); Allen Consul ng Group for Infrastructure Australia Op ons for improving the integra on of road governance in Australia: therole of local government (2009); Juturna Consul ng for Infrastructure Australia Economic Reform of Australias Road Sector: Precedents, Principles, CaseStudies and Structures (2012);26. Australian Trucking Associa on A Future Strategy For Road Supply and Charging in Australia (2013)27. Deloi e for Infrastructure Australia Financial Impacts Under Poten al Heavy Vehicle Charging Scenarios (2014)

Analysis 25 suggested that a eredapproach might be best forreforming the road network: thatis, rather than trying to implementblanket charging and investmentreform for every road in Australia, itwould be more prac cal to see:

1. a core private investment erdeveloped on the major freightnetworks, where direct pricingof heavy vehicles should beencouraged in preference totaxpayer funding;

2. a way for communi es andbusinesses not on these networksto connect their facili es to acore high produc vity na onalfreight network in a more e cient

way, via a simple and reliableaccess and investment processfor be er road freight, especiallywhen public funds were notavailable or would take too longto solve the problem; and

3. the rest of the road networkadministered as predominantlya community service obliga on,

with funding to be providedagainst measurable na onalstandards for such roads so thatin broad terms funding wouldbe sent rst to areas of mostobjec ve need.

Analysis by the Australian Trucking

Associa on also saw value in someform of ered approach .

The formal road agency reform process rejected a ered approachand instead recommended thatall trucks should pay a charge foraverage road wear by class of road,whatever road they drive on. Thereis no legally-supported mechanism

for private investment.

A er eight years and millions ofdollars, no case studies for actualroads have been produced to showhow this approach would changethe road charges paid by trucks, orwhat e ects new averaged chargesmight have on road freight, itscustomers or the wider economy.

How would a reformed road sectorbe nanced?

Infrastructure Australia alsocommissioned a professional reporton the accoun ng and nancialtransac onal framework that wouldbe required for any reformed road

system, in line with the experienceof other u lity reforms. The reportdrew on expert accoun ng andnancial management adviceto examine what a schedule ofaccounts might look like, howtransac ons would di er fromcurrent funding ows for roads andwhat processes could be used toestablish an e ec ve new systemof accoun ng for a regulated assetbase in roads .

To date, the report has not beentaken up by the formal road reform

process, yet this process itselfhas not advanced any detailed

published work on how this centralma er would be dealt with.

A ered approach to

keep reform of theroad network prac calIn 2009 Infrastructure Australia and the Na onal TransportCommission considered be er ways forward for local roadfunding. This evolved into economic reform of the road networkmore generally.


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28. Infrastructure Australia Na onal Road Asset Repor ng Pilot (2014)29. Produc vity Commission Inquiry into Road and Rail Infrastructure Pricing Report No 41 December 2006 Finding 5.2 and preceding paragraphs pp. 98-9930. See h p://www.infrastructureaustralia.gov.au/publica ons/ les/The_Bingara_Accord.pdf

In 2010 the Commonwealth hadargued to the Australian RuralRoads Group that moving towardsroad asset condi on reports andna onal standards for roads was

unlikely to be feasible, becauseAustralias many hundreds of localgovernments would never be in aposi on to report consistently andwith any degree of professionalismor reliability on the actual condi onof the 600,000 kilometres ofroad network for which they areresponsible.

Infrastructure Australia tested thisthesis in a 2012-13 pilot, working

with several local governments innorthern New South Wales andSouthern Queensland to developsuch reports 28. A consolidated andconsistent view of over 13,000kilometres of local road everyroad in all par cipa ng shires was produced in less than threemonths, at no cost. The innova vemethodology developed for this

assessment work is consistent withinterna onal best prac ce.

This pilot suggests strongly thatAustralia can develop consistent

na onal minimum standards for itsdi erent classes of roads; this in turnwould allow Australia to report onthe actual state of the road networkagainst these standards - and beginresolving the greatest areas ofshortcoming with targeted funding.

The methodology has yet to beembraced by road agencies. It isnoteworthy that as long ago as2005, the Produc vity Commission

noted that collec ng disaggregatedlocal road data would

improve signi cantly therobustness of the cost alloca onmethodology 29 . At the me, itasked that this work be carried out.It appears that nothing was done.

There would be nothing preven nga state or territory government

from working with its localgovernments to develop an assetcondi on register for its whole

jurisdic on.

In 2014 Infrastructure Australiaentered into an accord with the

Australian Rural Roads Group whichsought to recognise and reward thevalue of asset repor ng when itaccompanied proposals for priorityroad infrastructure funding fromany jurisdic on 30 .

Road asset condi on

repor ng and thedevelopment ofstandards for roads


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34. Heavy Vehicle Charging and Investment Project Submission to the Produc vity Commission Review of the Na onal Access Regime (2013) p.1635. See Robert Bain Toll Forecasts: Big Numbers Win Prizes (2009)

The cost of private capital isat historic lows and case study

a er case study conducted byInfrastructure Australia hassuggested that targeted investmentin produc ve freight project willsupport payment of e cient usercharges in return for be er roadfreight access.

Unlike toll roads, where the bulkof patronage is passenger vehicles

and where the road in ques onis generally a new or green eldbuild (and therefore patronage isvery hard to predict, contribu ngto a high cost of capital 35), privateinvestment in freight networks on auser-pays basis would only involvethe commercial trucking sector acohort of road users whose demandfor more produc ve roads is farmore reliable than cars. Most privateinvestments in road freight would

involve brown eld upgrades toexis ng infrastructure for be ervehicle access, where patronagerisks would be far more predictablethan in new urban passenger tollroads.

The lack of a pipeline for commercialroad investment is a ma er that was

acted on directly by InfrastructureAustralia in developing a Na onalRoad Freight Network and Strategy in 2011. This network iden edroads with the heaviest freight owsnow and those likely to have themost signi cance in the future. Itproposed that given the prospectsfor commercial investment, thesenetworks should be declared forlegally supported commercial accessand investment.

It is instruc ve that this proposedna onal private or co-investmentnetwork for freight was ac velyresisted and rejected by theCommonwealth road agency, whichat present enjoys sole control overfunding and planning for thesema ers.

01 02 03

Opposing the commercial

access and investmentmodel is the o cial roadreform posi onIn its 2013 submission to the Produc vity Commissions Review of theNa onal Access Regime34, the formal road reform process rejected anysigni cant role for private investment in roads, arguing that:

1. The cost of private nancing is higher than government nancing;

2. Patronage risks would prove a barrier to private investments; and;

3. There is no pipeline of large-scale projects available for privateinvestment to consider.

Infrastructure Australia has deep concerns with each of these arguments:


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36. Bureau of Infrastructure Transport and Regional, Economics Australian Infrastructure Sta s cs Yearbook 2013 see Table T 2.1C p.47 37. Produc vity Commission Inquiry into Road and Rail Freight Infrastructure Pricing Report No 41 2006 p. 248 Loca on-based charging on major freightroutes

In order to improve, one usuallyneeds a sense of what one wantsto achieve. This is lacking in theroads system otherwise far morea en on would be paid to resolvingsome enduring e ciency ques ons:

How do I achieve the op malmix of road and rail to serve the

Australian economy?

How do I get the mix of costly public transport and urban freeway

projects right in the big ci es?

Respec vely, these two ques onshinge upon dealing e ec vely withcompe ve neutrality in road andrail pricing and ensuring that roadconges on and mass transit usertrends are tracked closely ande ec vely.

If achieving e cientroad/rail mix is not amajor reform objec ve,what is?Australia is the 12th largest economyin the world, and one of the mostdependent on freight e ciency,given the wide dispersal of itseconomy across big distances: in2011-12 Australias domes c freight

task of almost 6 billion tonnestravelled almost 600 billion tonne kilometres 36.

Most casual observers wouldpresume that for a freight taskof such magnitude, a coreintercon nental heavy rail freightsector would be the dominantfreight mode as is the case inEurope, Canada, the United Statesand Russia. However, Australiasongoing failure to remove cross

subsidies from the road freightsector in those places where itcompetes directly with commercialrail lies at the heart of seeing greaterinvestment in Australian rail freight.Not resolving this issue known ascompe ve neutrality - has strongpoten al to be keeping freight coststo the Australian economy ar ciallyhigh.

This was raised by the Produc vity

Commissions Review of Road andRail Infrastructure Pricing as longago as 2006, which considereddirect pricing of trucks in only theseplaces (and in return for dieselexcise rebates to these trucks) wouldremove any lingering cross subsidyin this eet and help to promotemore e cient investment choices inroad and rail .

Almost a decade on, Australiasformal road reform process hasrejected this approach, insteadpursuing an averaged charged forall trucks on di erent averagedclasses of roads. This preservesthe likelihood of inherent cross-subsidy to heavy vehicles usingthe most-heavily-engineeredand costly-to-replace networks,leaving commercial rail less thancompe ve - and rendering majornew commercial rail projects almost

impossible.

At the same me, road agenciescon nue to plan and undertakeregular expensive upgrades ofthe highways that are the directcompe tors of major commercial railprojects such as the Inland Rail theplanned north-south rail link on theeast coast of Australia.

It would be hard to imagine a way

in which commercial rail projectscould be further disadvantaged fromobtaining e cient and compe vemarket share in freight.

In turn, this failure to ask and solvethe big and hard ques ons in roadpolicy makes major new commercialinvestments in intercon nental railinfrastructure most unlikely.

The high cost

of status quo torail and to publictransport aspira ons


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38. Infrastructure Australia Urban Transport Strategy (2013)39. Remy Prudhomme, University of Paris, paper for the Annual Bank Conference on Development Economics (2004)

Urban road conges onforecas ng is poor, withsigni cant implica onsIn the case of urban conges on

analysis, governments must makeexpensive choices about how muchscarce taxpayer funding ows tofreeways and other road connec onsversus public transport projects.Infrastructure Australia noted in itsNa onal Urban Transport Strategy that road and public transportprojects are a ma er of balance andrepor ng on performance is vital toge ng that balance right 38.

In the most urbanised na onon earth, ge ng transport rightin Australias ci es is a majorconsidera on for economicperformance in these places. Smartplanning and choices will enlargethe e ec ve size of the labourmarket and of the goods and ideasmarkets, thus increasing produc vityand output 39.

The greatest care should be takenwith analysis and forecas ng, giventhe size of project choices at stake:any inadequacies in analysis riskextremely costly errors.

The Bureau of TransportInfrastructure and RegionalEconomics (BITRE) publishes growthforecasts for tra c conges on incapital ci es.

Its current projec ons were setseveral years ago and assume thaturban conges on in major ci es willcon nue to grow steadily.

In 2010, Infrastructure Australiapointed out to BITRE that thesta s cal approach to theseprojec ons appeared deeply awedand that the assumed steady growthwas not being witnessed in actualconges on results, which insteadsuggested urban conges on levelswere growing at around half or lessthan half the forecast rate:

At the me - and a number of messince - Infrastructure Australiaasked that these forecasts bereviewed and their implica ons forcurrent and planned urban road

projects re-examined. In 2014 - four years later - no such reviewhas taken place. It is not clear toInfrastructure Australia why thishas not been a ended to, althoughrevising forecasts down wouldalmost certainly result in pressureto reduce budgets for urban road

programs.

Accordingly, the road systems awed analy cal assump ons

about ma ers of na onalimportance appear to be giving thewrong impression to governmentsof the rela ve importance of roadconges on (and the need for roadspending) and public transport projects.

Table 3 (above): Road agency urban conges on growth forecasts for the decade to 2011-12 versus actual growth.Source: Infrastructure Australia analysis, using BITRE Working Paper 71 Es ma ng Urban Tra c and Conges on CostTrends for Australian Ci es (2007) and actual sta s cs for same reported by BITRE to 2011-12.

Decade growth in road vehicle kilometres travelled to latest published year

Brisbane Perth AdelaideMelbourneSydney

40%

35%

30%

25%

20%

15%

10%

5%

0%

Forecast Actual


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40. h p://www.austlii.edu.au/cgibin/sinodisp/au/cases/cth/HCA/2014/23.html?stem=0&synonyms=0&query= tle(Williams%20v%20the%20Commonwealth%20and%20Others%20)

In very recent mes, AustraliasHigh Court ruled that at least oneelement of Commonwealth grantfunding provided to Australias stategovernments was uncons tu onal.

The case of Ronald Williams vsthe Commonwealth of Australiaand ORS 40 made an important

judgement rela ng to the ability ofthe Commonwealth to bypass stategovernment legisla ve process inproviding grants.

The judgement in this case wascareful to point out that it hadcon ned its considera on of thisprinciple to the Commonwealthchaplaincy in schools grant program.

However, any strategic assessmentof the road system in Australiawould be incomplete withoutat least recognising that severalsubstan al Commonwealth grantprograms lie in the roads por olio,including Roads to Recovery, theFederal Blackspot Program and localgovernment roads grants.

Wider implica ons of the RonaldWilliams vs the Commonwealth of

Australia and ORS judgement areunclear. Whatever the future has instore, there are founda on charging,

funding, planning and investmentissues in roads that Australia woulddo well to start addressing soonerrather than later.

Horizon

challenges?Perhaps other challenges lie ahead forroads challenges that could force a morefundamental reconsidera on of how theFedera on structures its approach to roadfunding and planning.


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Governments need to considerthe quality of their unsolicited bidprocesses to encourage marketinnova on in road investment. Bestprac ce approaches to unsolicitedbids should protect and reward trulyinnova ve market proposals.

Numerous case studies suggest thatroad freight operators and investorscan iden fy far more e cient roadsolu ons than bureaucracies.

If freight users are prepared to payan e cient charge for securing thisbe er bo om-line outcome, andprovided the solu ons meet publicsafety and amenity expecta ons,then just as for rail and many otherasset classes in Australia, elected

governments should not standin the way of privately- nancedimprovements. This is the very heartof compe on reform. InfrastructureAustralia has found no compellingreason for opposing its judiciousapplica on to roads.

There should be a high bar placed onreasons for excluding willing privateinvestors from inves ng more in theroad asset.

Private investors should look topartner with road freight operatorsand customers and then engage

directly with local and state orterritory government ministers.The only appropriate role of roadagencies would then be to make asmuch data available as possible tothe prospec ve investor. A regulatorcould then ensure that publicamenity, safety and other relevantma ers have been su cientlyaddressed in any proposal. Theexperience of case studies todate suggests that a great many

developments are likely to exhibitfew safety or technical problemsthat cannot be solved with morefunding.

Declara on of a na onal freightnetwork open to private accessand improvement would help givecapital market sight of a large scalepipeline of mostly brown eld road

projects which exhibit reasonableconstruc on, patronage andtransac onal risks. Australiasmarket-reformed rail access-seeker,pricing and regulatory structuresare of direct relevance and could bebrought to bear on the road networkwithout any di culty. A regulator

would oversee a regulated assetbase of very considerable poten alscale. Suitable regulatory andprobity models are readily availableto accompany such a pipeline andgive long term credibility 41 topa ent investors in such assets.

It is very likely that the advent ofmajor private investments in themonopoly government road assetwould force signi cant structural

reform to take place within roadagencies, with asset condi onreports, standards and someregulatory scru ny of spendingbeing among the likely posi veoutcomes.

How does private

investment begin tocontribute to reform?At present, capital markets have no sense of where they wouldbe permi ed to invest, and would rightly be cau ous that anyunsolicited proposals might be appropriated by road agenciesanxious to deliver such innova ons themselves. That would be ahighly damaging outcome, as it would drive away private capitalfrom the asset and in any event, limited public funds may not beavailable to fund the right solu ons.

41. Dieter Helm, Infrastructure Investment, the Cost of Capital, and Regula on: An Assessment Oxford Review of Economic Policy, 2009, 25:3, pp307326


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There is no grand bureaucra csolu on: small solu ons that workneed to be supported and nurtured,and what we learn from them shouldin me in uence more generalstructural reform of the road systemand its agencies.

There are nevertheless some thingsthat only governments can deliverand which elected leaders shoulddemand as rst steps to lay thegrounds for something be er inroads:

Urban conges on growth levelsneed far more scru ny. Based onrevised analysis, the current mixof urban freeway/tollway andpublic transport projects may

need some review, to ensure thattaxpayers are ge ng the bestresults for their money.

Direct reference prices shouldbe established for at least thehighways that compete directlywith major commercial raillines, with a view to movingtowards this arrangement in

the medium term, to allow fortransi onal e ects. In return,truck operators in these placesmust receive guaranteed servicelevels and a legal right of accessto more produc ve trucks on afair and transparent user-paysbasis. Such access should not be

a discre onary ma er for roadagencies, or quasi-regulatorybodies such as the Na onalHeavy Vehicle Regulator, butshould be enforceable under theCompe on and Consumer Act(2010) via a proper regulator suchas the Australian Compe on andConsumer Commission.

Roads are already men onedexplicitly in Australias

Compe on and Consumer Act2010 as assets accessible by thirdpar es; current technologicaladvances con rm the viability ofthis arrangement in prac ce ieroads are excludable at point ofuse. Road agencies views to thecontrary appear misguided. Acore regulated heavy road freightnetwork could be open to a legal

right of third-party access andinvestment by private investorsby being declared under Part IIIAof the Compe on and Consumer

Act 2010 .

State governments and localgovernments should start working

along the lines men oned abovewith poten al investors in roadinfrastructure to consider whatsort of investments would besustainable and which ones wouldrepresent a be er situa on thanrelying on increasingly scarcepublic funds to address moun ngproduc vity and safety problems.The South Australian governmenthas developed excellent andsimple models and these should

be promulgated so that morefunds ow to this infrastructuresooner.

The Produc vity Commissionshould revisit the status of roadinfrastructure vis--vis AustraliasCompe on Principles.

Government to play its

part but avoid a grandsolu on approachPrevious economic reform advice such as the Henry Tax Review advocated an Intergovernmental Agreement on Road Reform.Given that similar processes have prevailed to date, calling forthis step now would be window dressing.


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industry consultation draft ia roads report 14

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