I have posted recently on congestion externalities and traffic accident externalities. I want to finish this series of posts with some comments on externalities associated with doing damage to roads. They are among the most interesting transport externalities in [...]]]>

I have posted recently on congestion externalities and traffic accident externalities. I want to finish this series of posts with some comments on externalities associated with doing damage to roads. They are among the most interesting transport externalities in Australia and the basis for proposed reforms of the Australian road freight system.  These reforms might eventually lead to changes in the way all road travel occurs in this country.Roads involve significant capital and ongoing maintenance and operational costs.  A significant fraction of road damage can be attributed to road freight transport (‘trucks’) although this damage can be reduced by investing in more durable roads.  Road user charges can be designed as two-part tariff or toll to capture such capital and maintenance costs. The fixed component of the charge should capture the costs of providing access to roads, a cost that will be shared by non-freight vehicles plus a specific charge that reflects any additional investment in durability to reduce road damages. The variable part of the toll should reflect ongoing maintenance costs that can be attributed to heavy vehicles – defined here to be vehicles with weight exceeding 4.5 tonnes.  

Cost recovery is a desirable feature of charging for road capital and maintenance costs but, in itself, is insufficient to ensure efficient use of roads by trucks since such charging will be averaged over roads with different durabilities and operational costs.  What is most important is that freight vehicles bear the specific costs of using particular types of roads so they are induced to make choices which are cost-efficient in the sense of making efficient value-of-travel versus road damage tradeoffs.  

While economic theory is often negative in endorsing hypothecation arguments that would favour spending taxes and charges related to road transport on roads alone there are road supply-side efficiency arguments for doing just that.  Road supplies and road capacity and durability investments need to be related to the economic benefits that such roads do or can be anticipated to yield.  There should be incentives to deliver roads of appropriate capacity and durability where they are highly valued. A useful signal for this is the aggregated user charges such roads can be expected to generate.

Background. Roads are among Australia’s most important capital assets. Their capital value is high – if unmeasured – given their role in enabling light vehicle traffic and freight transportation over Australia’s vast land area. Moreover, the costs of building roads and maintaining roads are a substantial part of public sector budgets.  Total Australian public expenditure on roads in 2005/06 was $9.3b of which Commonwealth spending was $4.2b, State spending was $2.6b and local government spending was $2b. A residual of $0.5b came from non-public contributions.  Revenues associated with road use are even larger than these costs. Thus expenditures on roads were more than met by fuel excises of $9.6b, Fringe Benefits Tax of $1.8b, GST of $4b, Vehicle registration charges of $3.5b, Stamp Duty of $1.9b, licence fees of $0.3b and tolls of $0.8b.  Total taxes and charges for 2005/06 were $16.3b which exceeded costs by 75 per cent (BITRE, 2008).  

Split-ups by expenditure type – capital, maintenance and other operational costs – an economically interesting split – suggest that more than half of total road expenditures in Australia are devoted to maintenance (Naidu, 2009).

Ownership of Australian roads is spread across state, territory and local governments but their provision is partly financed by the Commonwealth particularly via fuel excises.

Road freight transport is of particular importance in the Australian economy now and is expected to continue to grow strongly.   Inter-regional freight movements between major intercity origin-destination pairs is expected to grow at 3.3 per cent annually over the next 25 years (BITRE, 2009) which is faster than general vehicle traffic.

As is well known road use involves incur congestion externality costs because motorists do not account for the effects of their travels on the travel times of other motorists.  Road use also involves road maintenance externality costs if motorists do not pay for the effects of the damage their vehicle causes to roads on the travel costs of other road users.

Heavy vehicles and road damage. Roads are capital investments which deteriorate over time and which require maintenance.  The weather and climate contribute to road damage but deterioration due to heavy vehicle use is often emphasised.  In fact however Paterson (1986) estimates that as much as 60 per cent of UK road damage is due to the weather. With respect to heavy vehicles, tests carried out in the 1950s by the American Association of State Highway and Transportation Officials (the AASHO Road Test, Bridle and Porter, 2002) it was claimed, on the basis of experimental testing, that the effective damage done to the road was proportional to the 4th power of a vehicle’s axle weight. The gross axle weight rating is the maximum distributed weight that may be supported by an axle – the central shaft that connects rotating wheels of a road vehicle. Gross axle weights can be distinguished by the location of an axle on a vehicle – the vehicle front or rear for example.

The AASHO results, although subject to very important qualifications – they were very site-specific – however remain a highly cited work on the incidence of road damages.  The study has led to an extensive literature that links road damages to road use and which, at core, emphasize the role of heavy vehicles.  For example, a tractor-trailer weighing 36.3t with 3.6t on the steer axle and 16.3t on both of the tandem axle groups can be expected to do 7,800 times more damage than a passenger vehicle with 0.9t on each axle. Thus, to a good approximation, almost all damage done to roads by vehicle use is caused by heavy vehicles.

Australia has the largest and heaviest road-legal vehicles in the world, with some configurations topping out at close to 200 tonnes and with many between 80-120 tonnes. Two-trailer roadtrains or ‘doubles’ are allowed in most of Australia outside of urban areas. Three trailer road trains (‘triples’) and ABQuads  operate in western NSW and Queensland, South Australia, Western Australia and the Northern Territory with the last three states also allowing AB-Quads (3.5 trailers).  For the most part these vehicles are restricted to non-urban areas. Darwin is the only capital city in the world that will allow triples and quads to within 1 km of its CBD. Victoria and Tasmania do not allow the operation of roadtrains on any of their roads, with the exception of one operator in Victoria which has special permission to run triples between the Ford Plant in Geelong and a plant in Broasdmeadows.  

Road trains are used for transporting livestock, fuel, mineral ores and general freight. They are a cost-effective mode of freight transport which plays a significant part in the economic development of remote areas. Strict regulations on licensing, registration, weights and experience apply to all operators of road trains throughout Australia.  

On the basis of ‘fourth power’ reasoning the issue of the durability of Australian roads and the use of roads by heavy vehicles is an important one.

Pavements are designed for an expected service or design life. In some countries the standard design life is 40 years for new bitumen and concrete pavement. Maintenance is considered in the whole life cost of the road with service at 10, 20 and 30 year milestones.

Roads can be and are designed for a variety of lives (8-, 15-, 30-, and 60-year designs). When pavement lasts longer then its intended life, it may have been ‘overbuilt’, and the original capital costs may have been too high. When a pavement fails before its intended design life, the owner may have excessive repair and rehabilitation costs. Some concrete pavements built since the 1950s have significantly outlived their intended design lives while others have required excessively frequent and expensive maintenance.

Virtually all roads require some form of maintenance before they come to the end of their service life. Pro-active agencies can continually monitor road conditions and apply preventive maintenance treatments as needed to prolong the lifespan of their roads. Technically advanced agencies monitor the road network surface condition with sophisticated equipment – such as laser/inertial profilometers – instruments used to identify surface roughness, curvature, rutting and so on. These measurements are fed into a ‘pavement management system’ which recommends using engineering criteria the best maintenance or construction treatment to correct the damage that has occurred.

Road Pricing and Investment.  In competitive markets individual producers adjust their outputs so short-run marginal production costs equal market price.  Total revenues cover total costs and provide a rent to cover the cost of fixed factors such as machines and buildings.  If rents exceed costs of providing fixed input services then entrepreneurs have incentives to acquire more fixed inputs.  If enough entrepreneurs do this then price will fall until rents just cover fixed input costs. The market will then be in long-run equilibrium and no firm will have a unilateral incentive to expand output.

A long-run optimal road network can be described in the same way. The appropriate congestion toll is the difference between the marginal cost of a trip and the variable cost born by a marginal traveler. If charges to all travelers are kept by a road authority this congestion toll serves as a rent on society’s fixed investment in road capacity. Then, as originally pointed out by Mohring and Harwitz (1962), with constant returns to scale and infinitely durable roads, congestion toll revenues would exactly cover capital costs for a road network of long-run optimal size, one for which the cost of the last unit of capacity just equals the present value of the user benefits it will afford by reducing present and future congestion levels. 

This work has been extended in various ways.  First Keeler and Small (1977) showed that optimal congestion tolls would equal costs of land acquisition, periodic replacement of roads and non-traffic related repair costs if there were constant returns to scale in each of these component costs.

This does not however address the issue of maintenance costs that depend on usage. This raises complications because congestion and road damage are caused by different vehicle characteristics.  Congestion is proportional to the area a vehicle occupies, measured in PCUs (passenger car units) whereas damages are related to the axle load measured in ESAs, (equivalent standard axles).  Maintenance costs depend on cumulative ESAs while congestion costs depend on road capacity and traffic flow.

In a seminal paper Newbery (1989) considers congestion and road damage costs in a road investment and pricing model where road designers can invest in pavement strength (‘durability’) in order to reduce the damages that heavy vehicles cause on roads.  The analysis shows that all capital and a large fraction of maintenance costs should be allocated as congestion costs on a PCU basis.

With constant returns to scale in road construction for roads of given durability and with strictly constant returns to road use in the sense that heavy vehicles distribute themselves uniformly over a road’s width, Newbery shows that the optimal road user charge (congestion plus road damage charge) will recover all road costs (maintenance and interest on capital) irrespective of economies of scale in road construction.

Even with constant returns to scale in road construction heavy vehicles spend a higher fraction of their time in the slow lane compared to other lanes.  In this case the optimal road user charges will recover more than the total road costs.  In the extreme case where heavy vehicles cause all road damage, and only use the slow lane, the charges will recover all overheads (including interest on capital) plus twice the total costs of road maintenance.

It is worth mentioning that if road use is non-rival then there is no case for apportioning the capital cost of a road to road users.  Jules Dupuit realized this in 1844 in relation to pricing access to a bridge.  Then adding an additional user adds nothing to costs so that marginal social cost is zero so no charge should be levied on the road.  However optimally constructed roads from the viewpoint of optimizing the sum of capital and travel time costs will not have infinite durability and – unless there are minimum scale indivisibilities – will not be subject to zero congestion so that generally rivalry will not obtain. Charges should then be levied to capture such costs and access should not be supplied at zero cost.

Road durability. Other authors have examined the issue of investing in road durability carefully using an economic rather than engineering approach: See Small and Winston, 1988).  With higher capital cost investment in road durability, typically measured by thickness, roads last longer. For example they need costly resurfacing less frequently.  On typical high volume interstate highways in the US net savings from reduced resurfacings lead to a possible saving of 40 per cent of the present value of resurfacing costs. Crucially road user charges that are related to damage caused will be lower the greater is investment in road durability.

Small and Winston reject the AASHO estimates of the relation between damages and axle load and the ‘fourth power’ law in favor of a ‘third power’ law.  They also confirm a less sensitive relationship between pavement life and pavement thickness. They claim AASHO have overstated the lifetimes of thick pavements. Moreover, optimal pavement durability seems higher than that computed using AASHO damage relationships.  Equivalently, many roads designed using default thicknesses undersupply durability partly because of specification difficulties in the AASHO approach and partly simply because of overreliance on engineering models.

With the correctly installed durability Small and Winston show that user costs fall substantially.  Indeed there is even dramatic confirmation of the trucking industry claim that, at least on high-volume roads, trucks would not be particularly damaging if pavements were designed optimally.  Charges on six lane urban interstate roads in the US were less than one cent per ESA mile.  In this event trucks still pay most for road damage costs though these payments are for capital rather than maintenance costs.

Installing optimal durability means that efficient damage-related road charges will not cover the long-run costs of pavement construction and maintenance. Thus there is still a role for fixed fees such as license and registration charges in addition to lower variable charges.  If marginal cost pricing was accompanied by investment in optimal durability then high-volume roads would have user charges much lower than current fuel taxes.

It is important to note that this finding is contingent on roads having optimally installed durability.  If durability is undersupplied, as it may be on substantial parts of the Australian road network, then variable user charges will still have an important role to play.

Road pricing and road supply reforms.  In Australia policies governing charging for vehicle usage of roads have been part of a continuing reform process since 1991 when the National Road Transport Commission (NTC) was set up by the Commonwealth in 1991 to implement a reform program and to determine pricing regimes for heavy vehicles.  Following a request from the Council of Australian Governments (COAG) the Productivity Commission (2006) (PC) presented a report which dealt with road and rail freight pricing in Australia and which has led to a recent round of proposed pricing reforms.  Although set up partly to address competitive neutrality concerns arising from the fact that rail freight services alone pay on a commercial basis for their infrastructure, the PC determined that such neutrality concerns were not significant.  Indeed road and rail were seen more as complements than substitutes which meant that to a substantial degree their efficient provision could be analyzed separately. There were however inefficiencies in road pricing that needed to be resolved and inefficiencies in the way capital and maintenance investments in roads were managed.

The PC argued that heavy vehicles were paying the road damage and access costs that could reasonably be attributed to them so that cost-recovery was not an issue. Moreover, with recent NTC reforms cross-subsidies between vehicles have been subsequently eliminated. Indeed the levies that are imposed are derived on a PAYGO basis (pay-as-you-go) with costs recouped via registration charges and a fuel excise that reflected their weight on the basis of historical costs imposed. The common levies are imposed only on heavy vehicles – for light vehicles charges vary by jurisdiction.  Concern was that these costs were averaged over different types of roads and hence did not reflect the actual costs incurred when journeys were made on particular roads.  The averaging across road types suppressed an essential factor influencing how vehicles do damage to roads.  What are needed here are charges that are related to distance travelled on roads of differing durability and the mass carried – in short mass-distance-location charges.

One specific efficiency-promoting reform has been the proposal to admit heavy vehicles to less durable roads provided that they pay an ‘incremental price’ that reflects the damage to the road caused by the incremental mass above current maximum weight limits.  This would be effected by GPS technology currently used by trucking companies to monitor vehicle movements for fleet management purposes which make it possible to charge on the basis of time, distance and location of travel as well as tare weight.  Currently however it is not feasible to charge on the basis of loaded weight. 

Vehicle telematic technologies based on GPS principles are becoming available which will enable road managers to price road use on the basis of time of journey, distance travelled, type of road and loaded axle load weight.  These technologies can potentially be developed to capture all of the externalities generated by both light and heavy transport usage of roads of varying durability and which are subject to differential substance and congestion-based externality costs (Ochieng et al, 2008).  With plausible technological optimism and with an adequate data base determining how road damages can be related to types of heavy vehicle use, pricing of vehicle-induced road damages on a mass-distance-location basis should become feasible over the next few years.

What remains to be determined is how such revenues should be disbursed to road construction authorities in different jurisdictions so that there are efficient road supply responses in terms of constructing new roads or expanding old ones by investing appropriately in their capacity and durability characteristics.

The COAG Agenda.  COAG is committed to a Road Reform Plan designed to improve the effectiveness of Australian road planning procedures.  The general intention is to link revenues from road use with better decision-making procedures by road providers.  The core issue is that road planning issues in Australia are frequently undertaken on the basis of engineering considerations alone given some exogenous budget.

Ideally road providers should face incentives to provide roads with optimal durability and capacity which provides a competitive rate of return on capital invested.  This will be the case if road providers can feasibly design a road which recovers its capital and maintenance costs together with a competitive return on capital invested by charging road users the capital costs of the roads used as well as maintenance, congestion and operational costs incurred.  Provided providers know that this will happen they can draw on local and international capital markets to supply desired road funding for efficient road designs. 

This type of proposal is analogous to a commercialised ‘road fund’ proposals (Gwilliam and Shaizi, 1999). Essential national or regional road agencies are set up as regulated monopolistic public utilities. These institutions would ultimately derive their revenues from road user charges and would be responsible for maintenance and capital investments in their segment of the market whether it was national highways or regional.  Regulation would be essential both to restrict the exercise of monopoly power and to encourage the development of projects with high social value that might require cross subsidies or direct funding by government.  The experience of other countries can be drawn on in coming up with specific road agency designs. For example, an instance of such arrangements is Transit New Zealand (subsequently the NZ Transport Agency) (NZTA, 2009) which monopolistically manages New Zealand’s roads subject to regulation.

The future.  Longer-term efficiency in road use requires pricing of road use by all vehicles to recover the costs they impose. Mass-distance-location pricing might capture the major issues for freight transport but time of travel might be of major concern in addressing road use by passenger motor vehicles in congested urban areas.  The types of technologies developed to account for efficient pricing of roads by trucks can be adapted to deal with specific congestion concerns in urban areas.

We have not touched on the issues of selling such technological fixes to politicians and ultimately to road users.  Ignoring cross subsidies the attractiveness of all such schemes is that they potentially reduce costs of road usage by delivering efficiency gains.  Incremental pricing schemes make this transparent since they offer trucking operators additional freedom of choice to select road transport options at a price.

References

Bureau of Infrastructure, Transport and Regional Economics (BITRE), Public road-related expenditure and revenue in Australia 2008 Update, Australian Government, December 2008  at http://www.bitre.gov.au/publications/94/Files/IS29.pdf (Accessed April, 2009).

Bureau of Infrastructure, Transport and Regional Economics (BITRE), National Road Network Intercity Traffic Projections to 2030, Working Paper 75,  Australian Government, January 2009.

Rob Bridle & John Porter (eds.) The Motorway Achievement: Frontiers of Knowledge and Practice. Thomas Telford. 2002.

J. Dupuit, ‘On the Measurement of the Utility of Public Works’, Annales des Ponts et Chaussées, 1844.

K. Gwilliam & Z. Shalizi, ‘Road Funds, User Charges and Taxes’, The World Bank Research Observer, 14, 2, 1999, 159-185.

H. Mohring & M. Harwitz, Highway Benefits: An Analytical Framework, Evanston, Illinois, Northwestern University Press, 1962, 70-87.

T.E. Keeler & K.A. Small, ‘Optimal Peak-Load Pricing, Investment and Service Levels on Urban Expressways’, Journal of Political Economy, 1977, 85, 1, 1-25.

M. Naidu, ‘Overview of Australian Road access Charging Framework: Tax Review Team’, Mimeographed, National Transport Commission, Melbourne, April 2009.

D. Newbery, ‘Cost Recovery from Optimally Designed Roads’, Economica, 56, 1989, 165-185.

D. Newbery, ‘Road Damage Externalities and Road User Charges’, Econometrica, 56, 2, 1988, 295-316.

New Zealand Transport Agency, Statement of Intent 2008-2011, New Zealand Transport Agency, March 2009,  http://www.nzta.govt.nz/publications/docs/statement-of-intent.pdf, (Accessed April 2009). 

W. Y. Ochieng, R. J. North, Md. A. Quddus & R. B. Noland, Technologies to Measure Indicators for Variable Road User Charging, TRB 2008 Annual Meeting CD Rom, http://payasyoudrive.com.au/Resources/PDF/TechnologiesToMeasureIndicatorsForVariable.pdf (accessed April 2009).

W. D. O. Paterson, ‘Distress Mechanisms, Maintenance and Cost’, Mimeographed, The World Bank, Transportation Department, 1986.

Productivity Commission, Road and Freight Rail Infrastructure Pricing, Melbourne, Commonwealth of Australia 2006.

K.A. Small & C. Winston, ‘Optimal Highway Durability’, American Economic Review, 78, 3, 1988, 560-569.