Network charging the right option

Traffic on Auckland's Northern Motorway makes its way home. Photo / Paul Estcourt.

In early 2009 the transport infrastructure industry applauded vigorously when Government announced its commitment to significantly advancing, within 10 years, the seven Roads of National Significance.

These were identified as the most essential routes from a nationwide perspective to reduce congestion, improve safety and support economic growth.

But the combined impacts of lower-than-expected income into the land transport fund, together with increasing costs for Christchurch earthquakes has meant substantial completion by 2020 is not now possible.

What's more, while the seven roads are key to lifting New Zealand's long-term economic development, funding this $9.3 billion investment programme from annual revenues into the land transport fund has had a serious adverse impact on capital and maintenance funding for other nationally important projects and local roads.

Add on the looming funding deficit for new investment in Auckland and it's clear that urgent action is needed to address the ever-growing transport funding deficit.

The current situation is a direct result of two fundamental problems with the nation's approach to transport funding. The first problem is that we are trying to fund 100-year capital investments like the Roads of National Significance on a "pay as you go" basis, using annual revenues into the land transport fund. It's like trying to build a house, board by board or brick by brick out of the week's pay packet rather than getting a mortgage.

The second problem is that we're simply not paying enough for the transport system that we need. The choice now before the Government is whether it should continue to defer investment in projects that are known to have positive economic, social and safety benefits, or find an alternative way to finance and fund the planned investment programme, thereby giving further stimulus to the economy and providing the platform for future growth.

Shifting away from "pay as you go" funding of major projects to Crown or private debt, or an appropriate mix of the two, provides an obvious solution to the near-term financing problem. Debt financing makes economic sense for projects if the net benefit of early investment is greater than the cost of the project plus the cost of debt.

Public Private Partnerships (PPPs) can incentivise better value for money outcomes and reduce pressure on short-term capital budgets through the use of private finance. PPPs drive value when the benefits from private sector whole of life cost management, innovation and optimum risk transfer exceed the additional costs of private debt over the cost of public debt.

Unfortunately, the many reasons for considering PPP procurement are not well understood in New Zealand. Part of the challenge is that PPPs for roads are often incorrectly understood as being synonymous with toll roads. In Canada, PPPs are called "performance-based infrastructure" (PBI) - a much more appropriate description. In non-tolled PPPs, service payments are made by the Government to the operator for keeping the road available for use. If the operator fails to meet levels of service, for example, when a project is not completed on time, or closes unexpectedly for maintenance, the Government does not pay its full obligation.

The private sector uses the service payments to repay principle, interest and equity returns, carrying the risk that that they will not suffer deductions for under-performance.

Regardless of whether or not public or private debt is used to fund long-term capital investment, new revenue sources will be needed to repay those loans.

Partial selldown of state-owned assets is one possibility. This makes sense if the returns from transport investment are better than the return from existing investments.

But using asset sales to fund transport projects potentially means investment in other nationally important infrastructure such as irrigation, schools and hospitals is reduced. It also does nothing to improve efficiency in road use that direct user charges achieve.

Raising petrol excise, road user charges, local authority rates (including targeted rates and tax increment financing) and development levies, are slightly more "user pays" in their approach. But despite generally having low costs of collection, these methods still do almost nothing to manage the use of key transport corridors during periods of peak traffic demand.

Consequently, roads that are jammed at 9am or 5.30pm are comparatively empty little more than half an hour later.

Of wider long-term concern, improving fuel efficiency is steadily reducing the amount of revenue per kilometre driven. Consequently there will be even less revenue into the transport fund into the future despite demand for road space continuing to rise, especially in Auckland.

For these reasons, world focus is increasingly turning to direct pricing of roads, either through electronic road user charging or tolls to more effectively manage demand and raise revenue.

While cordon tolling, similar to that used in London and Stockholm and Singapore, has been suggested as a means to curb demand, this option is not tenable in Auckland. Unlike these densely populated cities with excellent public transport systems, Auckland is a low-density city with diverse trip origins and destinations, and limited public transport alternatives.

Being primarily a demand management tool, cordon tolls raise significantly less capital. They can also have broader effects inside and outside the cordon from a land use, transport mobility and equity perspective.

For these reasons, and others, network pricing is the way to go. With almost one million vehicles per day on the Auckland motorway network, significant revenue can be raised at comparatively low levels of tolls. Assuming traffic diversion of up to 20 per cent or more, variable priced tolls will positively change travel behaviour and raise hundreds of millions in additional revenue per annum.

This could be used to offset further increases or even reductions in existing fuel taxes, if this was considered desirable - another form of tax switch.

Network charging will require a change to the Land Transport Management Act to allow tolls on existing roads. But this makes much more sense anyway.

Provided a free non-tolled option is always available, there is no inherent logic in a law that only allows tolls on new roads when pricing the wider network would have much better traffic management benefits.

Even more nonsensical is the way the current law is applied where residents in Orewa, Tauranga or Wellington are expected to pay tolls on their new roads while those with new roads in Auckland, Christchurch or the Waikato are not. It would be far more rational to charge tolls on a network basis thereby optimising traffic flows on congested corridors and then use the funds raised to invest in transport projects with the highest overall benefit to road users.

Polling undertaken by the New Zealand Council for Infrastructure Development signals that there is willingness to pay a low level variable toll in the range of $2 to $3 on the Auckland motorway system provided (a) tolling helps ease congestion enabling a faster trip and (b) the funds raised are used to invest in future transport improvements that will contribute positively to the future development of the city and (c) the message is conveyed simply.

Changing the way New Zealand finances and funds transport infrastructure provides a real opportunity for the Government to realise its vision to lift economic performance through timely investment in productive infrastructure.

That goal will not be met by continuing to defer investments that will stimulate growth. Nor will it be achieved by tinkering around the edge with inconsequential revenue raising schemes.

If the Government is serious about investment in New Zealand's productive infrastructure as a platform for economic growth, the shift to new methods of both financing and funding transport investment should be made, sooner rather than later.