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Industry views on road user charges

Another retrieved post-hacking post. A letter published in AFR on January 16.

David Prentice and I wrote the report for the Australian Future Tax System Review on the case for applying user charges to Australia’s roads.   The AFR (Tax review: Rudd Cautioned on road user charges’, January 13) forecasts that road user charges to address congestion and road damage costs will be a recommendation of the Review.  I don’t know if this is an accurate guess or not but wish to clarify issues in this article. 

Your report indicates trucking companies support such charging provided the proceeds are used to improve infrastructure.  Rail supports the move as a means of addressing competitive neutrality issues across road and rail sectors – the presumption is that trucks are not paying their way. 

Each of these claims calls for comment.

Hypothecating revenues from a user charge to the area that the charge covers does not in general make much sense but in the present situation it might.  It is important to clarify this issue since otherwise the case for hypothecation might be inappropriately dismissed.

In general public economics argues that revenues from a public charge should be spent where they provide maximum social advantage which need not necessarily involve hypothecation however with respect to roads it might.

First, there is a ‘self-funding’ argument due to Herbert Mohring and others in the 1960s that, with constant returns to scale in road services – so doubling investment in a road doubles its traffic carrying capacity – roads will be self-funding in the sense that congestion and road damage costs are exactly covered by the charges that best internalise externalities. If the road makes a profit with such charges there is a case for expanding the road just as a private firm has incentives to expand if it is making pure economic profits.

This provides a check on whether roads are delivering optimal capacity and whether pricing is appropriate in terms of their observed profitability.  It suggests, for example, that roads can be built without reliance on further taxation and encourages public acceptance of road pricing since this now reflects ‘user pays’.   

It is however often a rather theoretical argument in Australia where roads often must achieve a minimum scale to be effective. 

Second, and more important as part of the Council of Australian Government’s  agenda, there are arguments for tying road expenditures to projected demands for roads to reform the road supply sector. An advantage of commercialising road supply decisions would be to limit the ability of road supply decisions to become political footballs.  Projected revenues from roads are a useful proxy for demand particularly if these revenues reflect the real user costs associated with roads.  Then, for example, a road construction decision with appropriate durability can be undertaken by, if necessary, borrowing against future expected revenues.   The budget for construction is determined by road user needs rather than operating as an arbitrary constraint on road design.

The suggestion that heavy vehicles are not paying their way and therefore that they impose a competitive disadvantage on road is questionable as the  Productivity Commission report Road and Rail Freight Infrastructure Pricing, made clear.

Heavy vehicle road damage costs are recovered  although this cost recovery is highly inefficient. It is recouped through fixed charges – such as registration fees – which do not reflect the actual damages done. An unused truck pays the same fees as one driven 1000 kilometres per day on much less durable roads.  There are efficiency reasons for charging heavy vehicles for the damage they cause but not competitive disadvantage reasons.

With efficient heavy vehicle charging there should be an efficiency dividend that can be shared with the trucking industry.   If trucking firms understand this and, in particular realise that they will not be disadvantaged by a move to a better system, they are more likely to fall behind the reform proposal.

Our report was concerned with demand management of Australia’s roads but supply side issues were also a central concern.  Australia will be better off if road users face the real costs of their road usage.  Australia will also be better off if road supply decisions are based on forecast demands.

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