Transurban : Road Pricing in Australia: Turning Theory into Practice

ROAD PRICING IN AUSTRALIA:

TURNING THEORY INTO PRACTICE

Australia's current model for funding the construction, maintenance and operation of road infrastructure is reaching breaking point. The model, which is largely based on collecting revenue from petrol excise, vehicle registrations and licence fees, no longer generates sufficient revenue to meet our current expenditure requirements let alone address the estimated $770 billion infrastructure backlog. The consequence is the capacity of our road networks is not keeping pace with the growth of our cities. More practical discussion

is needed that looks at the problems arising from the current road-funding model including how revenue is collected, as well as broader issues of fairness and equity. The pressures facing governments are mounting

and will be compounded with advancements in technology in cars. The need for this debate is pressing.

Current congestion levels in Sydney, Melbourne and Brisbane now rival those of the largest cities in North America
and Europe. With massive population growth forecasted over the next
35 years, congestion will increasingly impact the liveability, productivity
and competitiveness of our cities.
At a time when we should be developing and building resilience into our transport networks to futureproof our roads, we are bound to a century-old funding model, that is not only unsustainable,

but is also inequitable.
Revenue from fuel excise is in decline as we move to more fuel-efficient cars.
To counter this drop in revenue, the state governments which are responsible for the roads have increased the cost of vehicle registrations and licence fees. Additional funds are also sought from other sources. While not directly traceable, these sources are likely to include GST distributions, council rates and land stamp duty, suggesting
non-drivers subsidise those who drive.
With all three levels of government involved in the collection of revenue
and/or the delivery of roads, the system is complex and opaque with road users largely unaware of the contribution they make to fund the roads they drive on. This means Australians are unlikely to appreciate the inherent inequities of the current system and the growing need for a solution.
While reform may take many years, we must begin the conversation now and start taking practical steps in the right direction.

The funding gap

In 2012-13, spending by governments and the private sector on roads outstripped revenues from road-related taxes, charges and tolls by approximately $6.6 billion.

The shortfall has been on the rise since

2005-061.

Half of public road budgets are spent on the maintenance and renewal of existing roads2, suggesting the current funding shortfall is being driven equally by maintenance of the existing road network and projects that are expanding the footprint of the network. Increasing the number of new projects would stretch the current funding model further.

$30 B

$25 B

$20 B

$15 B

$10 B

$5 B

$0 B

1. Bureau of Infrastructure, Transport and Regional Economics, Australian Infrastructure

Statistics Yearbook

2. Infrastructure Partnerships Australia, Road Maintenance: Options for Reform, September 2011, p. 7

Expenditure

Revenue

TUCC003_160315

"Road pricing provides a direct link between the entity delivering the roads and where the funding comes from."

The alternative-

road pricing

Road pricing or user pays has been presented by many experts and policy makers as the most likely solution to address the shortfalls of the current system. Through this approach drivers pay directly, through a usage charge, for their share of the cost of building, maintaining, and operating the roads they drive on.
Road pricing provides a direct link between the entity responsible for delivering roads and where the funding comes from. It also removes the inequitable subsidy from non-drivers to drivers. Developed to its full potential, a road price could also target congestion on roads or include coordinated pricing with other modes of transport, such

as public transport.
Advancement in technology has made the implementation of road-pricing
systems feasible. In particular, the growing availability and falling costs of mobile data, machine-to-machine communication and GPS-enabled devices have created the possibility of replacing inequitable and inefficient proxies for consumption, such
as fuel excise and vehicle registration, with actual consumption.
Today, there are a number of road pricing models being trialled or in use overseas. The design of these solutions is unique to each region, fitting their particular social, economic and political landscape.
However, despite extensive research, road pricing in Australia has remained theoretical. But as the challenges of funding shortfalls, traffic congestion and social perception of pricing inequity grow, so will the impetus for change.

Fuel excise is failing on several fronts

While the amount of fuel excise a driver pays will be a function of how much they drive, it is an indirect and inherently unfair relationship. As older vehicles generally consume more fuel, drivers who can only afford older vehicles will pay more excise per kilometre than those who can buy newer, more fuel efficient cars.

Fuel excise is presently charged at $0.386 per litre. As vehicles are becoming more fuel efficient, the amount that drivers are contributing to funding roads on a per kilometre basis is falling. To counteract this, annual charges, like vehicle registration, are increasing and creating inequities for those vehicle owners who drive infrequently.

Registration $ per vehicle Excise per kilometre

$350

$0.05

$300

$250

$200

$150

$100

$50

$0

$0.04

$0.03

$0.02

$0.01

$0.0

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Barriers and solutions

Implementing a new road-pricing system in Australia is no small task and realistically would take years to realise, particularly given the varying needs of
a broad range of stakeholders including, most importantly, the community. However, reforming the current system is not insurmountable; and solutions for the complexities can be found.

Community acceptance

Community acceptance is critical to the implementation of any major reform.
Independent research commissioned by Transurban indicated that 98 per cent of respondents were concerned about traffic congestion and ranked this issue to be their second highest priority behind the quality and cost of health care. Interestingly, the research also showed that twice as many Australians favoured a user pay system for funding road
infrastructure over a flat-fee arrangement.

Despite this, there are significant threshold issues that a first-generation
road-pricing system will need to satisfy to win the support of road users, including:

>Transparency-prices need to be easily understood by all road users, as does the hypothecation of funding to transport infrastructure

>Privacy concerns-technology and data usage must comply with both privacy laws and user expectations

>System reliability-technology and billing systems must work reliably and have in-built error protection

>Fairness-disadvantaged groups must be protected and choice/flexibility provided to users, and

>Tangible benefits-individuals and the community must be shown the advantages of road pricing over the existing model.

The groups of individuals, particularly vulnerable groups, that will be impacted by a new road-pricing regime must be identified and consulted with, so proportionate protections and policy settings can be developed. For instance,
governments could include targeted wealth transfers or, while less desirable, cross-subsidies. An evolving road-pricing system will flexibly recalibrate these measures to address any new
inequities or social objectives that arise in the future.
Similarly, the level of service (i.e. quality of road and travel times) that road users, voters and taxpayers expect the road network to deliver also needs to be identified. This will ensure investment and pricing decisions will promote the achievement of defined objectives.
Raising awareness about the issues inherent in the current road-funding system is vital to educating the community and increasing the acceptability of road pricing as well as improving the quality of discussion about the objectives and design of a new regime. In addition, undertaking a pilot
program that tests technology and pricing options in real-world conditions would go far in identifying the simplicity, privacy
and reliability requirements of users.

Advocating for road pricing

Road pricing models have been advocated for repeatedly in government-endorsed reviews.

"Importantly, greater use of cost- reflective pricing linked to road provision holds the prospect of both more efficient use of road

infrastructure as well as more efficient investment based on clearly identified demands… Reform of road pricing and provision should be a priority."3

-Harper Review

Draft Report 2014

"The Australian Government should actively encourage State and Territory Governments to undertake pilot studies on how vehicle telematics could be

used for distance and location charging of cars and other light vehicles…The pilot studies should be designed to inform future consideration of a shift to direct road user charging for cars and other light vehicles, with the revenue hypothecated to roads."4

-Productivity Commission Public Infrastructure Inquiry Report 2014

"Governments should analyse the potential network-wide benefits and costs of introducing variable congestion pricing… Beyond that, new technologies may further enable wider application of road pricing."5

-Henry Review

Final Report 2009

3. Harper Review, Competition Policy Review Draft

Report, September 2014, pp. 135-136.

4. Productivity Commission, Public Infrastructure- Productivity Commission Inquiry Report No. 71, May 2014, p. 43

5. Henry Review, Australia's future tax system- Report to the Treasurer, December 2009, p. 92

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Political alignment

The current funding and delivery model for roads spreads across local, state and federal governments and includes the private sector. This is largely due to complexities created by the Australian Constitution which, through its silence, broadly apportions the responsibility for building and maintaining roads to the state governments, while allowing for the collection of fuel excise to be collected by the Federal Government.
Further complication is inevitable when local councils are given the responsibility of building and maintaining some roads.
As a result, reform to the existing funding model and introduction of road pricing

will require:

>agreement from the federal and all state governments, or

>a state government to implement a form of road pricing on its own, which risks users being double taxed through fuel excise and a road price.

As unanimous agreement from all states is unlikely in the near term, alternative and more innovative solutions must
be found.
The creation of a framework that gives state governments the opportunity and financial support to develop their own road-pricing system would assist in the development of an effective outcome.
This would allow each state to address the specific needs of their region, while removing the risk or effects of double
taxation. Further, an environment of
inter-jurisdictional competition would see states learn from each other and increase the pace with which we find a best
practice solution.
To do this, the Federal Government
should investigate how to effectively carve out the existing fuel-excise regime. Temporary incentives and protections could be included to ensure the stability
of the existing fuel-excise system and funding pool as states begin to opt out.

Overseas road-pricing models

REGION PROBLEM DETAIL OUTCOME

Singapore Managing congestion

First implemented in 1975 drivers were charged a flat rate for entering a zone. This has evolved to an electronic flat-rate system. Dynamic pricing is currently being examined.

Shown to reduce traffic congestion and increase public transport usage.

Raises US $50 M per annum.6

London and

Stockholm

Managing congestion in the CBD

First implemented in 2003 (London) and

2007 (Stockholm), drivers are charged for entering a zone.

In the case of Stockholm, traffic reduction has increased over time, as greater numbers shift to public transport.7 Revenue generated goes towards the construction of new roads.8

At present, London uses the revenue raised for investment in the broader transport network, including public transport.9

Virginia, USA Funding road infrastructure and managing congestion

In a Public Private Partnership between the Virginia Department of Transport and Transurban, high-occupancy/toll lanes were added to the I-495 and I-95.

The tolls on these new lanes are dynamically priced. That is, the lanes recover the cost of construction, but also vary, depending on traffic levels, to ensure traffic flows freely.

Europe Road funding Various European countries have implemented road pricing systems that charge heavy vehicles on a usage and mass basis.

These systems were initially implemented to address vehicles paying for fuel in other jurisdictions, thereby not contributing funding to roads through fuel excises.

Lessons learned from operating these systems could be used to develop a road pricing system for passenger vehicles.

Oregon Road funding In mid-2015, the Oregon Department of Transport will commence a third road pricing pilot/trial. Passenger and light commercial vehicles will be charged on a per-mile basis.

With each evolution of the system, ODOT steps closer to implementing a more sustainable road funding model for its entire road and vehicle fleet.

6. http://www.dac.dk/en/dac-cities/sustainable-cities/all-cases/transport/singapore-the-worlds-first-digital-congestion-charging-system/
7. http://www.sciencedirect.com/science/article/pii/S0967070X11001284
8. http://en.wikipedia.org/wiki/Stockholm_congestion_tax#cite_note-alliance-yes-for-congestion-tax-5
9. http://en.wikipedia.org/wiki/London_congestion_charge#Income_and_costs

System design

One of the difficulties with overhauling the current funding model, in favour of road pricing is that the details for such a
system are seen as complex, multifaceted and burdened with irreconcilable objectives. But in order for tangible progress to occur, the focus must shift from what and why things can't be done,
to how they can.
A perfect system may be a worthy ideal, but history has taught us that the most effective systems evolve over time. Designed correctly, a road-pricing system will evolve through scheduled and facilitated revisions, rather than politically driven reform.
User-pays pricing mechanisms for utilities in other Australian industries and overseas have taken an evolutionary approach, involving stepped improvements starting from simpler foundations. In fact, most pricing mechanisms are still evolving.
For example, the forward-looking framework that determines telecommunications prices and service levels on the National Broadband Network is a significant evolution from the rearward-looking framework that regulates Telstra's copper network.

Evolutionary reforms seem overly simplistic in hindsight, but have consistently delivered benefits over the incumbent system before eventually being
replaced by another stepped refinement. Refinements are often responses to changing community needs and new objectives. A current example of this is the slowly building movement for reforming Australia's GST.
To make any progress we must commence real-world testing of different pricing constructs, as soon as possible. Governments, even if reluctant to undertake testing themselves, should establish a framework to support and incentivise industry and other levels of government to do so. Real-world studies and pilots will eventually lead to scaled trials and a first generation of road pricing being implemented.

Potential first generation pricing constructs

A first generation road pricing system will need to offer users more than one pricing construct, with each needing to be easily understood by drivers. User acceptance is dependent on this choice and simplicity.

Examples of the types of pricing constructs that could be tested at first instance include:

PRICE

CONSTRUCT METHOD POSSIBLE VARIATIONS

Cents per km Drivers charged for their actual road usage- cents per km

Trip based Drivers pay a fixed charge per trip with no distance based component

Annual charge Drivers charged annually based on kms travelled

Different rate for short and long trips Different rate for each class of vehicle Type of road (e.g. highway/local) or

general area

Different definitions of 'trip'

Annual charge based on bands

(e.g. 0-5000km)

Congestion Uplift on standard charge for driving at times when there is lots of traffic

Responsive to real-time traffic conditions

Fixed time of day

Discount for travelling when no traffic

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Implementation approach

Common to all major reform projects, is the question of how to ensure that it makes its way from idea to the real-world. To ensure success, an implementation framework needs to be developed
that outlines:

>the timeframe for implementation

>details of community and stakeholder involvement throughout the process

>technology requirements-user interfaces, system reliability and privacy protections

>the sufficient transition period required to allow users to adjust to an introduced system

>commitment to effective communication, and

>performance monitoring and scheduled review of any trial or first- generation road-pricing system.

The Oregon road pricing trial

In response to growing road construction and maintenance obligations and falling revenue from traditional fuel excise, the Oregon Department of Transportation (ODOT) conducted road usage charge pilot programs in 2007 and 2012. Building on this experience, in mid-2015 ODOT will commence OReGO, a trial that includes 5,000 passenger cars and light commercial vehicles.

The 'per mile' rate will be set at 1.5 cents (USD), but there will be several pricing constructs, methods of payment and providers. While details for OReGO are yet to be released, the 2012 pilot tested the following options:

Oregon Department of Transportation, Road Usage Charge Pilot Program 2013 final report, p.17

ODOT's experience with its pilot programs has shown the value of involving drivers and voters in the testing and development phase. While no decision has been made to progress OReGO to the entire fleet of vehicles, it is clear that providing drivers with a choice regarding how they are charged will be fundamental to user acceptability.

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Transurban's Road

Network Pricing Study

In 2015 Transurban is undertaking a Road Network Pricing Study in Melbourne that will trial various user-pays models in
real-world conditions to understand drivers' behaviours and preferences. It will focus on evaluating alternative pricing systems which are simple,
practical and achievable and also serve to test supporting technologies across the road network.
The study will have no impact on the current funding arrangements for existing roads-Transurban's or the broader network. It is designed to insert tangible data into the debate and equip policy- makers with information to work towards real solutions. It will also work to identify potential operational or technical issues and prove that a practical system can be implemented now.
We believe by undertaking exercises such as this, the private sector can play a meaningful and proactive role outside of political timeframes and
perceived agendas.
As we continue to refine our experience and understanding of how road pricing should be implemented, we will openly communicate with government and Australians, and constructively help industry and policy makers reform the way we fund roads.
The current road-funding model is both inequitable and unsustainable and there are tangible benefits for governments, taxpayers and road users alike in moving to a user-pays system.
However, the path to an effective road- pricing system does not lie in theoretical debates. Rather through real-world testing, the engagement and involvement of road users, and an evolutionary approach we can take the first practical steps towards a solution. This approach would help shift the focus from what cannot be done, to what can and ensure the liveability of our cities into the future.

Summary

The current road-funding model is broken and this will have an increasing impact on the liveability of our cities.

> Road pricing has been widely advocated as a viable solution;

> A variety of road-pricing systems are being trialled and in use overseas;

> To make progress towards implementing a first-generation pricing system in Australia,

we need to take practical steps now, including:

− Educating the community about the inequities and unsustainability of the current funding model as well as the benefits and limitations of a road-pricing model

− Establishing the level of service (quality of road and travel times) that drivers, voters and taxpayers expect our road networks to deliver

− Creating a framework that carves out the existing fuel excise regime to allow state governments to independently develop and implement their own form of road pricing

− Commencing real-world testing of different pricing constructs, and

− Setting out an implementation framework that takes road pricing from an idea to a first- generation system; and

> An evolutionary approach to reform will take us from a theoretical debate about the issue to an achievable reality and ensure the continuing liveability of our cities.

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