2 November 2020

Land Transport Market Reform Steering Committee Secretariat

The Department of Infrastructure, Transport, Regional Development and Communications

Via email: hvrr@infrastructure.gov.au

Dear Steering Committee

Heavy vehicle road reform consultation paper

Thank you for the opportunity to provide a submission in response to the Heavy Vehicle Road Reform Consultation Paper – ‘Proposed changes to the way heavy vehicle charges are set and invested’.

The ALRTA position is explained in the attached submission, including 17 recommendations.

If you wish to arrange a meeting to discuss the attached submission, please contact the ALRTA Executive Director, Mathew Munro, on (02) 6247 5434 or mathew@alrta.org.au

Yours sincerely

Scott McDonaldNational President

Submission to

HEAVY VEHICLE ROAD REFORM CONSULTATION PAPER – Proposed changes to the way heavy vehicle charges are set and invested

2 November 2020

1.0Introduction

The Australian Livestock and Rural Transporter’s Association (ALRTA) is pleased to offer this submission in response to the Heavy Vehicle Road Reform (HVRR) Consultation Paper.

The ALRTA is the peak body representing road transport businesses servicing the agricultural supply chain. We are a federation of six state associations including:

· Livestock, Bulk and Rural Carriers Association of New South Wales

· Livestock and Rural Transporters Association of Victoria

· Livestock and Rural Transporters Association of South Australia

· Livestock and Rural Transporters Association of Western Australia

· Livestock and Rural Transporters Association of Queensland

· Livestock Transporters Association of Tasmania

Together our associations represent over 700 transport businesses including owner-drivers, small fleet operators and large fleet operators.

2.0ALRTA Participation in the Consultation Process

ALRTA National Council first considered the HVRR Consultation Paper in July 2020. ALRTA Secretariat has met with the Federal Department of Infrastructure, Transport, Regional Development and Communications on several occasions, including:

· 6 August 2020;

· 12 August 2020;

· 26 August 2020; and

· 1 October 2020;

ALRTA National Council again considered the HVRR Consultation Paper on 23 October 2020 and agreed a general position.

ALRTA Secretariat subsequently participated in a joint meeting between the Department of Treasury and Department of Infrastructure, Transport, Regional Development and Communications on 26 October 2020. While ALRTA representation verbally articulated the agreed ALRTA National Council position, it was agreed that ALRTA would also lodge a formal written submission by 2 November 2020.

3.0General Comments

The current PAYGO Charging system is problematic and unlikely to be sustainable over the longer term. Heavy vehicle charging reform is therefore necessary.

However, this could take the form of improvements to the PAYGO model or more fundamental reform such as that proposed in the HVRR initiative. From an industry perspective, it matters less which reform path is taken, and more that a desirable outcome is achieved.

A desirable outcome would greatly improve accountability and transparency, be efficient and predictable, deliver fair outcomes for all stakeholders and be sustainable both in terms of the regulatory function and the road asset itself.

There is some merit in the proposals contained in the HVRR Consultation Paper. However, the proposals fall short of stakeholder expectations, largely due to the obvious resistance from State and Territory Governments to relinquishing sovereignty over decisions at every level. Without change in this area, the HVRR proposals are no better than the current PAYGO system under which recommendations are developed within the administrative sphere but decisions are made in the political sphere.

ALRTA is gravely concerned that governments have previously reneged promises to hypothecate road related taxes for road related spending in favour of directing these monies towards consolidated revenues. In addition, ALRTA considers that hypothecation is unlikely to produce significantly improved heavy vehicle road investment because on average just 22 percent of expenditure could be sourced from hypothecated funds. In the absence of full market reform, treasuries will still need to find 78 percent of road costs from consolidated funds.

Further, ALRTA is opposed to any move to a forward looking cost base until governments are willing to adopt truly independent price determinations and industry has some confidence in other aspects of the proposed reforms, including workable service level standards and scrutiny of expenditure plans. Industry has not been provided with any detail about how a forward looking cost model would work and it would be premature to progress this extremely complex and unnecessary element until such time as this has occurred.

The current reform proposals also do not include direct user charging. Without workable price signalling and some level of choice for industry participants, an economic market for road services is impossible.

4.0Roads as a Critical Service

Roads provide an important social and economic service by connecting people with jobs and goods with markets (Productivity Commission 2017). When used in conjunction with associated transport modes, travel times decrease, minimising freight costs and improving access to education, health care and personal services. Good roads improve quality of life and reduce the cost of living.

Road corridors have also become fundamentally important in urban architecture, providing the basic footprint for orderly provision of housing, industrial and recreational zones and conduits for critical services such as water, gas, electricity and sewage.

In Australia, roads are the most commonly used form of transport and the single largest government infrastructure expenditure item (Productivity Commission 2017). Australia has around 873,400km of public roads of which only 356,000km is sealed. This indicates to ALRTA that the road asset remains immature with further investment required to improve road service standards.

Accidents occurring on roads are a significant safety concern. In the 12 months preceding September 2020, there were 1,107 road deaths and 39,404 people admitted to hospital with road crash injuries (BITRE Statistical Summary 2020).

For these reasons, all Australians have a stake in funding and building better roads.

5.0Revenue Raising and Road Expenditure

While there are a range of dedicated or incidental taxes and charges relating to motor vehicle usage at the Federal, State, Territory and Local Government levels (Table 1), all of these monies are directed towards consolidated revenues. Thus, governments must weigh decisions to fund road services against competing priorities such as health, education or defence.

Charging Type

Revenue Raised ($b)

Fuel Exercise (Australian Government)

11.0

Vehicle Registration (State & Territory Government)

5.6

Driver Licence Fees (State & Territory Government)

0.5

Other Taxes (stamp duty, luxury car tax, GST, FBT etc)

9.2

Parking fees and fines (Local Government)

0.1

Total Fees and Charges (All Government)

26.4

Table 1: Motor vehicle related taxes and charges. Source: BITRE (2016).

A significant vertical fiscal imbalance is evident in Table 1. Federal Government taxes and changes account for more than 50% of the total road related revenue raised, while Local Governments are unable to raise revenue except by way of minor parking fees and fines.

Road related revenues flow from the Federal Government to State, Territory and Local Governments via grant programs (Department of Infrastructure, Transport, Regional Development and Communications 2020). These include:

· National Partnership Agreement: Covers projects of national strategic importance delivered under the National Land Transport Act 2014.

· Financial Assistance Grants: Local Councils receive a fixed funding share adjusted to compensate for inflation and population growth. Overseen by grants commission.

· Roads to Recovery Program: Distributed accounting for population and road length. Grants are tied to expenditure, planning and reporting. Overseen by grants commission.

· Black Spot Program.

· Bridges Renewal Program.

· Heavy Vehicle Safety and Productivity Program.

· Infrastructure Investment Response to COVID-19.

Additionally, State Governments provide various grants to Local Governments.

6.0Road Service Delivery Challenges

There are several pressing challenges affecting road service delivery, including:

· Total kilometres travelled is increasing at three times the rate of population growth;

· Liquid fuel efficiency is continually improving; and

· Rapidly developing electric vehicles are not subject to fuel tax.

Together, these factors cause a long-term structural decline in road-related government revenues as shown in Figure 1.

Figure 1: Road-related revenue and expenditure 2003-04 to 2014-15. Source: BITRE (2016).

Under these revenue projections it would seem difficult for governments to justify increasing or even maintaining road expenditure. Indeed, it is evident that road expenditure peaked in 2008-19 and then declined in real terms.

Arguably, the complex method of taxation and allocation of grant funding is itself highly problematic. The lack of hypothecation of road revenues provides governments absolute discretion in road funding decisions. The Australian tradition of electing governments of different political persuasions at the Federal and State levels all too often results in politicised road funding decisions. Political imperatives associated with periodic election cycles (at any one time it seems at least one Australian Government is approaching an election) overshadows a more rational approach of spending money on road services that more closely match the needs of citizens and industry.

At the road user level, there are only weak pricing signals influencing road asset usage. Paradoxically, once vehicle maintenance and travel times are factored in, it is cheaper to use a more expensive high quality road (e.g. sealed highway) than it is to use a less expensive poor quality road (e.g. unsealed dirt road). Thus, the cost of road usage in no way reflects the service level that road users receive.

Given the continually growing freight task, structural budget pressures, inefficient grant funding model, politicisation of infrastructure decisions and lack of market signals, it is unlikely that the current road service provision model is sustainable over the longer term.

7.0Reform Proposals

In June 2020, the Federal Department of Infrastructure, Transport, Regional Development and Communications released a public consultation paper titled ‘Proposed changes to the way heavy vehicle charges are set and invested’. The paper proposed four key reforms:

1. Road service level standards: This proposal involves the establishment of agreed road categories based on the level of service provided by the road (safety, reliability and access). Each road would be assessed against the standards and allocated a current rating and a target rating.

2. Expenditure planning and recoverable cost determination: Each State and Territory Government would be required to develop an expenditure plan in consultation with heavy vehicle industry stakeholders. An independent assessor would consider the plans and determine the proportion of total expenditure recoverable via heavy vehicle charges.

3. Independent setting of heavy vehicle charges: An independent body would calculate the total charges recoverable from heavy vehicles and recommend to governments registration and RUC to apply to heavy vehicles in future years. Charges would be based on a forward looking rather than a backward looking cost base.

4. Hypothecation: All revenue collected would be hypothecated to future road spending.

8.0Analysis of The Reform Proposals

8.1Transparency, Democracy and Accountability

Bovens (2007) asserts that accountability can include any mechanism that makes powerful institutions responsive to their particular publics. The establishment of service level standards will provide all stakeholders with a far clearer view of the current road asset, as well as a democratic opportunity to influence the classification of roads.

Similarly, an expectation that governments will consult with industry stakeholders in the development of expenditure plans and subject these to independent scrutiny will improve transparency and democracy in line with the observation of Davis (2003) that governments inclined towards new public management principles are increasingly taking action to increase trust in public administration by engaging citizens and other stakeholders.

However, when it comes to independent price setting, there is no commitment to provide stakeholders with detail concerning the assumptions, modelling, calculations or recommendations. Democracy could certainly be enhanced if the independent regulator published this information for industry consideration and comment prior to a final Ministerial recommendation being made.

Although it is unclear if the independent regulator has any role in oversighting the distribution of funds to governments via a hypothecated road fund, it should be relatively straight forward to account for charges and spending and to maintain an ‘overs and unders’ account to ensure the correct amount of revenue was collected over time.

It is clear that one of the primary intentions of the reforms is to enshrine multi-level governance in the decision making process that includes all three levels of government, industry and an independent scrutineer. Daniell and Kay advise that this approach can assist governments managing issues across boundaries to achieve positive public policy outcomes in a complex environment. However, while the package of reform proposals has merit in terms of improving transparency and democracy, governments appear unwilling to commit to binding service level standards, a regulator empowered to reject expenditure plans or a regulator empowered to make independent charging decisions that must be adopted. Such an outcome falls far short of Kettl’s (2103) proposition to allow citizens to determine policy choices and service mixes.

Christiansen and Laegreid (2013) and Dubnik (2014) describe three types of accountability including political, administrative and managerial. Under the proposed reforms, governments will remain politically accountable, but steadfastly refuse to be administratively or managerially accountable to an independent regulator.

8.2Responsible Management Practices

Laash & Conaway (2015) define responsible management practices as comprising three parts: sustainability, responsibility and ethics.

Assessing and improving road asset condition will potentially improve the sustainability of the aging road network. However, difficult ethical considerations will arise if current road use exceeds capability. In such cases, governments will need to consider revoking road access, placing economic and social pressures on reliant stakeholders.

The proposed reforms have potential to improve the sustainability of road service provision and the associated revenue base. Firstly, independent scrutiny of expenditure plans will deliver a measure of impartiality for industry stakeholders.

Secondly, moving away from a purely political decision making process has potential to improve fairness for road users and taxpayers.

And lastly, establishment of a hypothecated road expenditure fund will improve the sustainability of road funding into future years. Matching revenues with expenditures will in theory also produce a fairer system for stakeholders outside the ‘road sphere’ because it will reduce the potential for cross-subsidisation of other government services funded via consolidated revenues. For example, it will not be necessary to reduce policing to increase road spending.

Governments do however have a community service obligation to provide at least a minimum level of road service via consolidated revenues (for social reasons) and the proposed reforms do not make it clear whether this component will be deducted from proposed heavy vehicle charges.

It is also necessary for governments to consider ‘price pathing’ mechanisms to smooth changes to charges over time as part of the HVRR process and as part of the separate PAYGO review. Sudden changes in charging levels in can have a devastating impact on transport business, especially when long-term forward contracting is involved.

8.3Efficiency and Effectiveness

In line with new public management principles (Halligan & Sadlier 2011), the primary aim of the HVRR is to marketise road services where feasible because it is thought this will better match the road services provided by governments with the services demanded by industry and citizens. Brennan, Himmelweit and Szebehely (2012) note that there are two types of benefits that can potentially flow from this approach:

1. Customers are empowered by exercising consumer sovereignty; and

2. The quality of services should improve, and costs should decrease.

However, for these benefits to be realised, consumers must be able to assess the services and costs, plus be able to make choices about the services they use.

Certainly, understanding the current state of the road asset is essential for efficient planning and service provision. ALRTA asserts that the following aspects should be considered when determining road service level:

· Access.

· Safety.

· Quality of pavement (life of the road); a long term view, good quality and less maintenance.

· A decent surface / road comfort and noise level.

· The road should not unnecessarily increase maintenance or reduce life of trucks/trailers.

· Use of accredited road building contractors (so that roads are built to a good standard in the first place).

It is expected that earmarking funds for road expenditure will be relatively efficient given that these funds will be collected from just two sources - vehicle registrations and the road user charge.

However, decision making processes may become less efficient if governments are forced to consult with industry and submit all plans for independent assessment and determination of recommended charges. While, there will also be some cost in the establishment and maintenance of a new independent assessor, this must be balanced against the prospect of providing roads that improve safety and freight efficiency sooner than would otherwise be the case. In this regard, it will be less costly to have one single national regulator than to have a new regulator established in each jurisdiction. Establishing multiple independent regulators will also dramatically increase the likelihood of multiple differing decisions being made which will unnecessarily increase complexity, reduce certainty and raise questions of equity when these decisions impact on charges or infrastructure quality.

There appear to be four fundamental flaws in the reform proposals that will greatly undermine their effectiveness.

Firstly, the proposed service levels, scrutiny of expenditure plans and charging recommendations will not be ‘binding’ on participating governments. All of these reforms rely heavily on the willingness of governments to cooperate in good faith and accept criticism or recommendations from an independent body.

Secondly, in a partial market, it cannot be certain that hypothecation of revenue will result in improved government investment decisions. Current heavy vehicle charges account for just 22% of total road taxes and charges. In order to fund new road infrastructure, governments must still seek 78% of funding from consolidated revenues.

Thirdly, governments have previously reneged on promises to hypothecate road related taxes. In 1982, governments applied a surcharge of $0.01 per litre of petrol and diesel (later $0.02) hypothecated for road development. Subsequent passage of the Land Transport Development Act 1988 abolished the surcharge and allowed governments freedom to determine the level of excise set aside for road development, effectively ending hypothecation.

Lastly, given that governments are monopoly providers of road services, road users cannot exercise consumer sovereignty by assessing relative costs and making choices about the services they use. Road users must accept the road services provided or not use the road at all, which is generally not a commercially viable option. It is however possible for governments to move to a direct charging model under which road users pay a charge based on vehicle characteristics and the service level of the road used.

9.0Comments on a Forward Looking Cost Base

In 2014, the NTC discovered flaws in the PAYGO model and recommended that Ministers decrease registration charges by 6.3% and the fuel levy by 1.14cpl from 1 July 2014. Instead, Ministers agreed to freeze total charges for two years to allow revenue and expenditure to realign. When this did not occur, another two-year freeze was implemented.

Just when a realignment of revenue and expenditure was finally within reach, Ministers subtly changed the nature of the charging freeze to increase the amount of revenue over-recovered by $41m compared with a continuation of the freeze.

It should come as no surprise that road transport operators have become deeply suspicious of the prospect of an inherently more complex forward-looking cost base (FLCB) - especially when this is proposed at an early stage of the reform process rather than being the final step after the concepts of independent decision-making, scrutiny, hypothecation and direct user charging have been implemented and proven to be workable.

More fundamentally, a FLCB will not benefit the road transport sector unless it is accompanied by true supply-side reform that delivers better road infrastructure more efficiently. It is debatable whether or not this is even possible in a partial market that does not include the largest road user group – light vehicles.

ALRTA considers that there is still far too much uncertainty concerning how heavy vehicle charges would be reasonably calculated under a FLCB. Even with an independent decision maker in place, governments may retain control over key costs determinants such as:

· Valuation of the current road asset;

· Rate of depreciation;

· Return on capital;

· Allowable cost inputs;

· Community service obligations; and

· Parameters relating to under/overs accounts.

If this was the case, governments would still largely control heavy vehicle charges with the independent regulator merely applying an agreed methodology using the inputs and co-efficients arbitrarily determined by Treasurers and Road Transport Ministers.

ALRTA is also concerned that shifting to a FLCB will be used as a means of transferring government borrowing costs for infrastructure onto the heavy vehicle sector. As anyone with a mortgage knows, the total costs repayable for a home far exceed the purchase price of the home itself. Currently, only the base asset cost is recoverable under the PAYGO model.

In order to raise funds to build infrastructure, governments have a range of options available including issuing bonds, borrowing, raising taxes, reducing services in other areas or selling public assets. The method under which governments choose to finance the purchase cost of road assets should be an entirely separate consideration and in no way impact the costs payable by heavy vehicle operators.

10.0Transitioning to Direct User Charging

In contrast to light vehicles, heavy vehicles are likely to remain reliant on oil-based fuels for many years to come. During this time, a new regulator could progressively increase the proportion of revenue collected via the RUC as compared with registration fees.

This would have two very significant benefits:

1. The economic shock of a later move to a mass-distance-location style charging system would be greatly reduced; and

2. Governments would have an opportunity to develop and test a revenue sharing formula that could be applied at all later stage of the reform process.

During this period it would also be possible to ‘smooth out’ revenue collection by trialling an over and unders account and exploring the possibility of moving to a ‘partial FLCB’ by including one year of estimated and one year of forecast expenditure.

11.0Conclusion and Recommendations

There are significant problems with the current intergovernmental arrangements for providing road services. Governments at all levels have a long history of politicising funding decisions, which is exacerbated by a vertical fiscal imbalance between the Federal Government and State, Territory and Local Governments that are responsible for providing road services.

There is very little transparency, democracy or accountability in the current road funding decision making process. While the current practice of providing roads as a public good has performed adequately, it is out of step with new public management principles (Halligan & Sadlier 2011) and under threat from technological changes causing a structural decline of the revenue base.

Further, there is no clear link between the road services sought by industry and community stakeholders and the services actually provided by government. At the user level there is a lack of pricing signals necessary for promoting efficient consumption of the road asset base.

The four HVRR reform proposals will each improve transparency, democracy, accountability and responsibility to some degree. However, it is questionable whether or not adding an additional layer of bureaucracy will result in more efficient decision making given that, at all levels, governments refuse to commit to binding service level standards or to give up final decision-making powers on what is built, how it is funded and the charges that will be levied on heavy vehicles.

The restricted application of the reforms to a partial market that does not include light vehicles and the absence of proposals to develop stronger price signals for road users further undermine the chance of success.

In order to address these problems, ALRTA makes 17 key recommendations:

· Recommendation 1: That service level standards consider access, safety, quality of pavement, road comfort (for driver), road noise, impact of truck maintenance and use of accredited road building contractors.

· Recommendation 2: That local roads are included in the HVRR initiative at all levels.

· Recommendation 3: That governments commit to not reducing road access as part of the process for assessing current condition of the road asset.

· Recommendation 4: That governments are compelled to consider road service level targets when developing expenditure plans.

· Recommendation 5: That governments be compelled to consult with stakeholders when developing expenditure plans and that stakeholders be provided with an opportunity to submit comments on the proposed expenditure plan to the independent regulator.

· Recommendation 6: That a single national independent regulator be established rather than multiple state and territory regulators.

· Recommendation 7: That the independent regulator be empowered to modify or reject government expenditure plans on the basis of inaccurate costings, low benefit, inadequate stakeholder consultation or failure to progress service level standards.

· Recommendation 8: That the independent regulator be empowered to set binding registration and RUC charges that governments must apply.

· Recommendation 9: That the independent regulator oversight the collection, holding and distribution of road related revenues to governments based on meeting service level targets contained in agreed expenditure plans.

· Recommendation 10: That the HVRR process explain how community service obligations will be applied, particularly to low-use rural and remote roads.

· Recommendation 11: That governments expand market reforms to include both heavy and light vehicles to ensure that all road infrastructure can be funded from a single ‘off budget’ revenue source.

· Recommendation 12: That governments fast-track the implementation of complimentary heavy vehicle charging mechanisms that provide clear price signals to road users to maximise the efficiency with which the road asset base is consumed.

· Recommendation 13: That the independent regulator progressively increase the proportion of revenue collected via the RUC as compared with registration fees, and develop and test a revenue sharing formula that could be applied at all later stages of the reform process.

· Recommendation 14: That the HVRR process consider ‘price pathing’ mechanisms.

· Recommendation 15: If implemented at all, a forward looking cost base should be the final stage of the reform after the concepts of independent decision-making, scrutiny, hypothecation and direct user charging have been implemented and proven to be workable.

· Recommendation 16: That the HVRR process explain how co-efficients used in any forward looking cost be will be calculated and which body would be responsible for determining these.

· Recommendation 17: That government infrastructure finance costs, over and above the actual cost of the road asset, are not included in the heavy vehicle cost base.

When applied in combination with the four proposed reforms, it is expected that these recommendations will promote efficient and effective delivery of road services in Australia.

12.0References

12.1Scholarly References

Bovens, M. (2007). Analysing and Assessing Accountability: A Conceptual Framework. European Law Journal, 13(4) 447–468.

Brennan, D., Cass, B., Himmelweit, S., & Szebehely, M. (2012). The marketisation of care: Rationales and consequences in Nordic and liberal care regimes. Journal of European Social Policy, 22(4) 377–391.

Christiansen, T., & Laegreid, P. (2013). Performance and accountability: A theoretical discussion and empirical assessment. Working Paper.

Dubnik, M. J. (2014). Accountability as a cultural key word. In M. Bovens, R.B. Goodin, & T. Shillemans, (eds.) Oxford handbook of public accountability (pp. 24-38). Oxford, UK: Oxford University Press. 

Halligan, J., & Sadlier, C. (2011). The Australian public service system.  In A. Massey (ed.), International handbook on civil service systems (pp. 305-326). Cheltenham, UK: Edward Elgar Publishing Ltd. 

Kettl, D. (2013). Beyond New Public Management: Will governments let citizens and communities determine policy choices and service mixes? In E.A. Lindquist, S. Vincent, & J. Wanna (eds,) Putting Citizens First: Engagement in Policy and Service Delivery for the 21st Century. ANU E Press.

Laash, O. & Conaway, R. (2015). ‘Principles of Responsible Management: Global Sustainability, Responsibility, Ethics. Mason: Cengage.

Multi-level Governance: An Introduction – Katherine A. Daniell and Adrian Kay in Multi-level Governance Conceptual challenges and case studies from Australia Edited by Adrian Kay, Katherine A. Daniell, ANZSOG, ANU Press.

12.2Technical, Statistical and Legal References

Australian Bureau of Infrastructure, Transport and Regional Economics. (2020). Road Trauma Involving Heavy Vehicles. 2018 Statistical Summary. Retrieved from

https://www.bitre.gov.au/publications/ongoing/road-trauma-involving-heavy-vehicles

Australian Bureau of Infrastructure, Transport and Regional Economics. (2016). Australian Infrastructure Statistics Yearbook. Retrieved from https://www.bitre.gov.au/publications/2016/yearbook_2016

Department of Infrastructure, Transport, Regional Development and Communications (2020). Consultation on the proposed changes to the way heavy vehicle charges are set and invested. Retrieved from

https://www.infrastructure.gov.au/roads/heavy/proposed-changes-consultation.aspx

Department of Infrastructure, Transport, Regional Development and Communications (2020). Program Overview. Retrieved from https://investment.infrastructure.gov.au/infrastructure_investment/investment_road_and_rail.aspx

Land Transport Development Act 1988 (Cth)

Productivity Commission. (2017). Funding and Investment for Better Roads, Shifting the Dial: 5 year Productivity Review, Supporting Paper No. 9, Canberra. Retrieved from https://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review-supporting9.pdf

Together We Are Stronger

PO Box 4233, Manuka ACT 2603 ABN: 16 034 545 414

P: 02 6247 5434 F: 02 6247 0476 E: office@alrta.org.au W: www.alrta.org.au

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