Australia’s current approach to road spending will soon generate up to $20 billion every year in new public sector debt – making it impossible for any new Commonwealth government to benefit from much-needed tax reform and revenue increases. This also cooks the goose of the road freight sector which Australia’s economy relies upon, while the perverse pattern of spending neglects our local road networks thanks to the endless fascination with dubious new motorway mega-projects.
How it came about
Since the first motor spirit tax went onto fuel bowers in the early days of the motor car, Australia has covered its aggregate road expenditure by the level of taxes and charges it places on road users.
Traditionally, far more revenue was raised than was spent on roads, for some very sound reasons. But this changed from financial year 2007-08 onwards: net expenditure on roads rose above the level of fuel tax and vehicle registration fees collected: Australia started creating new contingent liability (i.e. debt) every year to pay for its road spending aspirations.
As outlined earlier, this wasn’t borne of a solid plan to improve the safety and efficiency of the local road network – it was mostly a race to cut ribbons on massive new urban motorways. Nor was all this spending about finding the most efficient solutions to growing big city congestion: the congestion charge regime in Stockholm is the world’s gold standard for a cheap and utterly reliable influence on traffic congestion[i] and Infrastructure Victoria has published compelling research to show a similar charge in Melbourne would reduce traffic to near school holiday levels[ii].
Spurious arguments are advanced by road lobby groups and the transport bureaucracy to justify road debt. Their favourite culprit is dwindling fuel excise. This is not the real culprit, as John Austen explained in a 2018 Pearls post[iii]:
‘The cause of the increasing deficit is road spending. It is not a decline in revenues:
- a decline in excise real revenues of $2.9 billion since the turn of the century was more than offset by an increase in registration charges of $3.3bn;
- total real revenues increased by $0.6bn.
- True, real revenues per capita and per unit of road use (proxies for ‘prices’) declined over this period. However, such a decline might be expected were roads subject to regulation – which, having monopoly characteristics, they should be:
- the decline since 2000 was around 7%;
- this result would be achieved with ‘CPI-x’ price regulation, with ‘x’ at a (modest) 0.5% to account for productivity/efficiency improvements;
- 0.5% is much less than other public service ‘efficiency dividends’ of 1% to 2% pa’.
Instead of highlighting the problem so as to fix it, Canberra’s transport department continues to doctor its annual road revenue and expenditure reports, shandying general taxation revenues with legitimate road revenues (i.e. fuel tax and registration fees) to create the appearance that all is well.
This is an open secret amongst senior transport executives. Instead of addressing the addiction, the same executives seek ways to leverage more road debt out of the taxpayer through direct road pricing – each person paying for each journey per kilometre, with higher charges levied for driving on more expensive assets like…brand new motorways with dubious investment credentials.
They sell this to each fresh new transport minister as ‘road reform’.
A breakdown in public sector fiscal governance, planning and advisory capacity has created the conditions for this problem to emerge.
Since around 2007 the sector has aggrandised itself as the poster child for ‘infrastructure’.
Ask anybody in the sector 15 years ago what the peak forum was and without pause they would have told you ‘the Australian Transport (Minister’s) Council’.
Nowadays, lobby groups (or ‘think tanks’, as they might describe themselves) dominated by corporate infrastructure investors, advisers and road builders are the main game in town: transport, treasury and planning ministers from Canberra and the States now send their most senior public sector executives to sit as board members of such organisations, to learn, presumably, of compelling new (unsolicited) major road projects from the market.
On its face, having senior public officials who are charged with advising on road spending in the public interest sitting on the boards of road industry lobby groups seems a straight breach of public sector codes of practice, yet on the evidence to date, nobody beyond John Menadue seems to mind[iv]. Thus the siren song of ‘invest in more roads’ goes on, louder than ever.
Solutions: just say “no”.
The solution to this mess is for the next Australian treasurer to start saying no to the infrastructure club when they advance their next wonder project.
Leaving this as a matter for the Australian transport minister alone will end in tears – he or she will face too much sector pressure. The matter needs to be mainlined in Treasury via Cabinet under ‘priority budget repair’ from day one of any new Canberra government.
Genuine sector reform, such as partial market competition reform, is optional.
Reducing spending and improving the outcome for local roads is not optional.
A conversation with the general public to explain how they have been deceived by the infrastructure club would help the Treasurer to counter the ‘we’ll all be ruined’ attacks that will surely come from the road lobby as soon as the spending spigot is turned down.
Mandating the right analytical structures will also make it far easier to say no. The Treasurer should take the following steps immediately:
- Analysing all new major urban road proposals against alternatives like congestion charges or public transport solutions will help flush out the big frauds. This work should be published;
- Reviews of early project proposals are tasks for Senate public works committees with subpoena powers: watch boondoggle projects evaporate under that sort of scrutiny;
- All major road projects should conduct ex-post analysis, to see what these much-vaunted efforts delivered, as opposed to what they promised. The results will surely reinforce the need for a change in spending patterns away from bad megaprojects;
- All senior transport, infrastructure, treasury and planning public servants must step down from any board positions they occupy on transport industry lobby groups;
- Most important of all, major road projects in big cities must be analysed as if there were direct road charges for users in place. Anybody will use a road if they think it is free. It’s not free. Theoretical modelling of direct pricing will give a far better sense of whether there is likely to be any rational demand for these assets. The biggest lemons can be avoided before they secure any political traction.
Over time, these strictures will improve project selection and attract the right sort of market investors – patient funds looking for fair returns on projects that are designed in the community interest, and as such represent lower risk.
Some major new motorway and highway projects will certainly still be funded, but they will more likely be the right ones. Over time, the market will benefit from better project selection, with lower risks. Australia will become a better destination for smart patient capital.
The pattern of road spending should also change for the better. More can and should be done in regional Australia and population-heavy outer suburbs; access to opportunity challenges in these places should gain more priority[v].
If the next Treasurer has the courage to do this, he or she will also be doing the transport portfolio a great service. There are plenty of fine public servants in this field who are privately frustrated with how ridiculous the current system is, but who can’t or won’t do anything about it, for fear of reprisal. Why would they, when they see their leaders showing zero interest in better outcomes?
A signal from the commanding heights of the Australian government can turn around this culture for the better, very quickly. This alone ensures higher productivity outcomes.
Once the fiscal fire is out and patterns of road spending are more rational, the Treasurer can weave the budget repair cloth with much greater confidence.
Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. From the late 1990s he spent over a decade in Canberra in several APS executive, Commonwealth government chief of staff and national industry CEO roles across the transport and defence sectors.