The Coalition’s roads to nowhere

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Macro Business: The Coalition’s roads to nowhere. Posted by Unconventional Economist in Australian budget. July 31, 2014. by Leith van Onselen

Business groups have taken aim at the Abbott Government’s road funding fetish, arguing that Australia’s dilapidated rail freight network is in desperate need of upgrading and is hampering the nation’s export competitiveness.

From The AFR:

Grain exporters are becoming increasingly frustrated with Australia’s poor freight rail networks, claiming lack of investment in rail infrastructure, which has reduced haulage loads and created track congestion, is forcing more grain onto trucks…

GrainCorp’s supply chain manager, Matthew Warrington, told an industry conference in Melbourne on Tuesday railing grain to ports for export on the east coast of Australia now cost $10 a tonne more than in Western ­Australia, and $20 a tonne more than Canada.

A decade ago, 90 per cent of grain exported by GrainCorp arrived at ports by train but today only 10 per cent does, creating some 44,000 extra truck ­journeys annually.

Agricultural companies say farmers would transport more commodities by rail if networks were better.

It is true that Australia’s freight railways have suffered from decades of neglect. Supply chain costs make up a major component of total cost in marketing Australian products overseas, and the decline in rail freight competitiveness, therefore, weighs directly on both productivity and Australia’s export competitiveness.

Whether investing a significant amount of taxpayer funds into freight rail is the best use of taxpayer funds is a moot point. Arrangements would obviously need to be put into place to ensure that the costs of such investment doesn’t fall entirely on the taxpayer, whereas the lion’s share of the benefits flow to private firms (e.g. producers and private above-rail operators). Setting access charges at an appropriate level to both recoup the cost of the investment, while still providing rail operators and exporters with net benefits would be key to ensuring its success.

What the above does highlight, however, is the need for rigorous cost-benefit analysis of alternative uses of scarce taxpayer funds, to ensure that investment takes place only on projects that provide the biggest pay-offs to the economy and society as a whole.

This is where the Abbott Government’s infrastructure policy falls down. By biasing roads over rail, the Coalition is in effect “picking winners” and not basing investment on objective cost-benefit criteria that chooses individual projects on merit, rather than mode.

On a related matter, there may also merit in introducing genuine mass-distance-location charging for road freight (explained here), so that trucks are charged based on their weight, distance traveled and the roads they used. Such charges are already used for rail freight, and reforms along these lines could help to create a more level playing, and remove distortions on modal choice that promote the over use of road freight at the expense of rail..

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