Why don’t they do it in the road?

Business Spectator: Why don’t they do it in the road? by Alan Kohler (28 July 2014)

On Friday Treasurer Joe Hockey had a constructive meeting with NSW Premier, Mike Baird, and his Treasurer Andrew Constance, plus super funds, industry groups and investment managers, to talk about how super funds might be encouraged to invest in infrastructure.

Well, constructive for some. It was actually the prelude to a gang-bang: Joe Hockey is about to be screwed.

Here’s a quote of the press release issued by Hockey afterwards: “We discussed ways that state and territory governments can help mitigate project risk…”

The funds got burnt with the Brisbane airport toll road by the investment banks that flogged them the project with inflated traffic projections, so now they want the government — read, taxpayers — to “mitigate” their risk.

Joe Hockey needs to run a mile from this and stop exploring “improvements to the current regulatory settings, that could encourage greater involvement in this type of infrastructure by superannuation funds,” as his press release put it on Friday afternoon.

Yes, Australia’s super funds should be investing in roads, but only because they are the right long-term assets for retirement savers, and they have done proper due diligence on them, not because they are getting their risk “mitigated” by the taxpayers.

The whole problem with road funding in Australia is too much government involvement and not enough private rigour.

This has been spelt out in caustic detail in a draft report on the subject prepared by the government’s own body, Infrastructure Australia. It was sent out for consultation but then hastily pulled back by the acting co-ordinator John Fitzgerald, who said he hadn’t read it.

Unhappily for him, it was leaked and has been uploaded onto the website of the ➡  Yarra Campaign for Action on Transport, which is campaigning against Melbourne’s east-west tunnel, among other things.

As soon as you start reading this report, you can see why the acting co-ordinator, filling in for Michael Deegan who has been sent on “extended leave” by the new Coalition government, has tried to pull the report back. It’s not often you read a government report with the word “hideously” in it.

Here’s the arresting heading on one of the chapters: “Australia’s nearly $20 billion dollar annual road spend can only be described as hideously inefficient.”

The executive summary of the report says: “Australia has a true gambler’s addiction to roads: the money spent is not a rational investment. Governments assume that major improvement is just around the corner, if they could just spend more.”

The problem, of course, lies in that fact the roads are controlled by state and local governments and their monopoly agencies and there is no market discipline brought to bear.

“It is ironic that as long ago as 2007 the Council of Australian Governments Road Reform Project was begun. This multi-million dollar process has been led mostly by road agencies themselves; it has deliberated largely outside of public view. On the evidence available, it has achieved nothing, other than to reject outright some of the pillars of Australia’s competition principles.

“Roads continue to be untouched by the National Competition Reforms that drove productivity and reshaped the Australian economy through the 1990s.

“There is no oversight of road spending patterns, or of outcomes for the money spent. There is in fact no national information available whatsoever on the condition of Australia’s road asset.” Hot stuff.

The draft report, which IA quickly and unsuccessfully attempted to hide from public view, has the answer as well as the problem, and it’s not to “mitigate the risk” so that private capital might invest in roads.

First, there needs to be consistent reporting of national road assets along with some national standards for roads.

In 2005 the Productivity Commission asked that a collection of national road data be carried out because it would improve the “robustness … of cost allocation”. Nothing was done.

In 2010 the Commonwealth Government argued to the Australian Rural Roads Group that Australia’s many hundreds of local governments would never be able to report on the 600,000km for which they were responsible. All too hard.

In 2012-13 Infrastructure Australia carried out a pilot study with councils in northern NSW and southern Queensland to get consolidated and consistent data on 13,000km of roads in their shires. It was done in three months at no cost. Conclusion: it can be done.

Says the IA draft report: “This pilot suggests strongly that Australia can develop consistent national minimum standards for its different classes of roads; this in turn would allow Australia to report on the actual state of the road network against these standards — and begin resolving the greatest areas of shortcoming with targeted funding.”

The road agencies, needless to say, are against it.

The solution for getting private investment involved in existing roads is to charge freight operators for using them.

“The advent of cheap and deployable ‘track and toll’ software, when married to a modern truck’s own sophisticated Global Positioning System technology, allows for road freight operators to be excludable at point of use.

“They can be tracked and tolled on a user-pays basis to fund private road investments where the user sees value in paying for such outcomes. This would give better levels of heavy vehicle access to those paying, while those who chose not to pay would remain paying current charges but would not gain access to the more productive vehicle.”

In other words, the bigger the truck and the smaller the road, the more it would cost the freight company.

IA argues that this would result in “brownfields” investments in freight networks, which would immediately lift manufacturing and agricultural productivity.

Road agencies have argued that private investment would cause a loss of control of “their” network. With some “excellent” exceptions, there seems to be no interest from road agencies in seeing private investment in the network.

To be fair, Joe Hockey and the super funds on Friday were largely talking about “greenfields” investment in infrastructure, but that is simply never going to solve the poor state of existing roads, or the fact that roads are effectively subsidised at the expense of rail freight.

All that would do is exacerbate the issue identified in the title of the IA draft report: “Spend more, waste more. Australia’s roads in 2014: moving beyond gambling.”

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