Your funding model won't cut it, Henry tells trucking industry

Date: 05.05.2010

Treasury boss demolishes argument for fuel-based scheme and pushes for comprehensive charging model

By Brad Gardner | May 5, 2010

Treasury Secretary Ken Henry has dismissed an industry push for a fuel-based registration scheme, instead favouring a comprehensive charging model that reflects the real cost of a truck on society.

Henry’s wide-ranging review of Australia’s taxation system—released on May 2—rejects the use of the fuel excise as a means of recouping costs from road expenditure.

The stance is in direct opposition to the Australian Trucking Association (ATA), which wants registration fees slashed in return for a higher fuel excise. It argues the change will create a simpler policy for collecting taxes while better reflecting road use.

But because the fuel excise is levied at a flat rate, Henry says it fails to account for the real impact individual vehicle combinations have.

"For example, while fuel tax marginally reduces road use, it has a relatively trivial impact on spillover costs such as congestion or road damage that depend on where and when the vehicles travel," the review states.

"…the costs of urban congestion (which vary according to location and time of day) as well as the costs of road-wear caused by heavy vehicles (which vary according to the mass, distance and location of travel) cannot be efficiently priced through a fuel tax."

The review advocates a targeted pricing system that measures the true cost of a heavy vehicle: the distance it travels, its location and the weight of the load.

Trucks will be fitted with GPS tracking devices in a move the review says will ensure governments recoup the total cost of each heavy vehicle.

"Charges for road-wear would be based on the actual loaded weight of a truck and vary according to the particular roads on which it travels," the review states.

Depending on which jurisdiction the vehicle is travelling in will depend on which level of government receives the money.

Henry also dismisses the continuation of a fuel-based scheme because more efficient larger vehicles doing fewer trips, such as B-doubles, will not pay as much as other combinations.

"While fuel use increases with the mass of the load being carried, it does so at a decreasing rate due to economies of scale in vehicle size," the review says.

"If fuel-based charges alone were used to pay for road-wear they would over-recover costs at the low end of the range of heavy vehicles and under-recover at the high end."

Australian Livestock Transporters Association (ALTA) Executive Director Philip Halton says the points raised in the review jeopardises a fuel-based model.

"There are some good arguments in favour of a fuel-based charging scheme, but this report makes it clear that it will be very, very hard to sell the idea to government," he says.

The review says a targeted pricing method will end cross-subsidisation because all operators will pay their individual costs rather than an industry-wide levy like registration or fuel excise. The fuel tax and stamp duties will be abolished.

Under Henry’s plan, the money will be used for maintenance costs attributable to the truck and road owners will be bound by an asset management plan to maintain the roads.

The review does, however, point out the financial cost of the proposed scheme due to fitting each truck with a GPS device.

For companies such as primary producers that may use the road less than dedicated transport companies, Henry proposes a separate system to a monitoring tool.

"It may be better to establish a compliance regime based on self-assessment of distance travelled, licensed rather than actual mass, and a reasonable estimation of the types of roads travelled," the review says.

A sub-group of the Council of Australian Governments (COAG) is currently looking at the development of a new road charge scheme and is due to report in December next year.

Henry wants this work fast-tracked so a mass-distance-location system can be established sooner.

DON’T FORGET CONGESTION CHARGES
But the scheme is one part of proposed changes to the tax system.

Similar to cities like London that have congestion charges, Henry wants peak-hour pricing implemented in major cities, on tolled roads and other congested parts of the road network.

If his proposal is accepted, a charge will be introduced that varies according to the time of day.

"In practice, this means a variable tax that rises at peak periods, falls away as usage falls, and zero when there is no congestion," the review says.

Trucking operators may face a significant bill under Henry’s scheme because he wants the fee determined based on the vehicle’s size.

"For example, a motorbike takes up significantly less space on the road than an articulated truck and would be charged accordingly," the review states.

Similar to the argument against the fuel tax, the review says existing fees do not account for the full impact road users have, such as causing traffic delays, damaging the road and polluting.

"Because costs are not priced directly, road users have little incentive to take them into account," the review states.

"Road prices that reflect congestion, road-wear and environmental costs would give road both the information and the incentive to reduce the trips that are most costly to society."

The review argues a congestion tax will lead to fewer delays during peak time, shorter travel trips and less pollution because demand on the road network will reduce.

The review also suggests running dedicated express lanes where people pay a premium to use them. It says this will benefit those who are in a hurry and are willing to pay to get to their destination on time.

However, it rejects using the fuel excise to reduce congestion.

"To have much effect on congestion, fuel tax would need to be set at a high rate that would significantly over-tax drivers on uncongested roads," it states.

ADDITIONAL FEES MAY BE NECESSARY
However, the review says additional charges may be necessary until mass-distance-location monitoring technology becomes widespread.

It argues governments may need to impose a network access charge such as a registration fee or a variable charge.

While recommending the abolishment of the fuel tax, the review also says it may be kept as a simple variable charge where direct road pricing will not work.

If the fuel excise is maintained, Henry recommends indexing it to the consumer price index (CPI) and ending fuel tax credits for on-road use.

Henry also wants the fuel tax imposed on all energy sources used for road transport.

Once the monitoring technology is adopted industry-wide, the review says the trucking industry can be exempted from the fuel tax and the access charge.

But trucking operators may face a permanent charge when competing with rail because of the latter’s higher operating costs.

The review says trucks pay less, which may lead to more freight shifting away from rail.

It proposes charging operators a fee on top of road charges if they are directly competing with rail to ensure a modal split between both industries.

MORE EFFICIENT USE OF ROAD ASSETS
In return for a new pricing scheme, the review anticipates road users will benefit from a more efficient road network.

Because local councils are not directly compensated for road use, the review says they try to protect their assets through regulation and restrictive access conditions. Under Henry’s proposal, councils will receive direct funding.

Henry also wants a system set up whereby businesses with specific transport needs can negotiate with road suppliers to deliver new infrastructure such as building a bridge.

"The financial incentives for transport agencies would be more closely aligned with the demands of road users," the review says.

The review suggests imposing an access charge on companies that do not contribute capital to the project to ensure they do not take advantage at the expense of another company.

The charge will run until the full cost of the investment is recovered, the report says.

"Road users with specific needs could enter commercial agreements with road suppliers," the review says.

Henry also recommends all road funding be subjected to transparent and comprehensive cost-benefit analysis to ensure roads are built were needed and effectively maintained.

The review rejects the notion of simply expanding the road network to cope with growth, highlighting the significant cost of acquiring land and digging tunnels.

"New roads, bridges or tunnels built in urban areas are likely to become immediately congested if they are unpriced," the report says.

A NEW PLAYER ON THE BLOCK
If accepted, Henry’s proposal may lead to the creation of a new road agency.

The review calls for the establishment of a national road transport agreement stipulating conditions for managing the road network.

According to the review, the agreement should set a financing model, ensure projects are aligned with those of road users and create a framework to allow commercial deals between governments and road users for specific infrastructure.

Furthermore, it supports an agreement that sets conditions on local governments receiving road-specific taxes or charges.

The review also wants a system for collecting and exchanging information from road pricing to ensure privacy and interoperability, and subjecting major infrastructure projects to post-build evaluations.

"Given the scale and complexity of the proposed reforms, a single agency may be required to develop and monitor their implementation," Henry’s report says.

It also sees a greater role for the federal government by making road funding contingent on states adopting pricing policies in line with the tax review.

WE WANT FUEL-BASED SCHEME: INDUSTRY
Following the Rudd Government’s response to the review, the ATA reiterated its support for a fuel-based model while opposing Henry’s recommendation.

The ATA argues a mass-distance-location scheme will be too expensive and complex.

According to the group, it will cost $1 billion to install monitoring systems and $800 million annually in ongoing costs.

In its submission to the tax review, the ATA recommended setting registration fees for trucks and trailers at $400. In return for the lower fees, the fuel excise will be increased.

An owner-driver representative group, the National Road Freighters Association (NRFA) recommended replacing the current registration charge with a 7 cent fuel levy on trucking operators when they submit their quarterly business activity statements (BAS).

The NRFA says government revenue will increase because the number of litres of diesel used will supersede the income gained from annual registration fees. It also wants a flat $100 fee for all trailers.

Brian McArdle who runs the livestock carrier, McArdle Freight, wants governments to introduce a $500 registration fee for trucks and trailers.
The rest of the costs should come from fuel, he says.

McArdle says a fuel-based approach is fairer because those who use more of the road network will pay through greater use of fuel.

WHERE TO FROM HERE
Although the Rudd Government issued a set of policies it refused to implement from Henry’s list of 138 recommendations, it has made no decision on road charges.

When asked about the proposed reforms, Treasurer Wayne Swan responded: "Well, we are not going to pursue those recommendations at the moment."

The Government has ruled out indexing the fuel excise, but there is support for a system similar to Henry’s proposals.

Late last month Infrastructure Partnerships Australia (IPA) called for a 7.9 cents per kilometre charge for all motorists.

"A per kilometre charge is more equitable because it means heavy vehicles which cause more wear and tear on our roads pay their fair share, while people who use public transport instead of their cars to get to work would pay much less," IPA Executive Director Brendan Lyon says.

The Business Council of Australia last year called for an end to the fuel excise because it did not factor in how far the vehicle travelled and how much fuel it consumed. It recommended accelerating mass-distance-locating charging.

NatRoad Chief Executive Bernie Belacic thinks the Government may have deferred its decision on road charges because COAG has not yet finished looking at the merit of mass-distance-location pricing.

The review anticipates abolishing current charges in favour of a targeted model will be hard.

"The challenge is formidable. It requires coordination across all levels of government," the review states.

"But reform would promote the best investment in and use of our roads, lift national productivity and improve the lives of millions of Australians."