Options for the Future Land Transport Pricing Study

Foreword

Our National roading system is our country's largest transport asset.
Ensuring that an effective system is in place to cope with our current and
future needs, in an effective and business like manner, is one of the
government's most important goals.

The Land Transport Pricing Study (LPTS) Plays the key role in helping us to
achieve this goal. The LPTS has now reached a crucial stage. Following the
extensive work of the last three years we are now in a position to move
forward.

This paper, Land Transport Pricing Study: Options for the Future, builds on
the decision documents released as part of the land transport pricing study, and
the comprehensive response from the public submission process. It puts forward a
range of options for a future pricing and regulatory framework for New Zealand's
roading system.

The purpose of this paper is to seek your views on the appropriate direction
for the future.

The government will be making decisions on the appropriate long-term
framework for roading in late 1997. It is essential that we have a comprehensive
input from the transport sector and the wider community into these
decisions.

I therefore ask you to take the time to read , and carefully consider, this
paper. Then, please make a submission. In making your submission, I would ask
that you consentrate on our options for moving forward.

I look forward to recieving your views.

Rt Hon Jenny Shipley

Introduction

This paper, Land Transport Pricing Study: Options for the Future, is part of
the wide-ranging review undertaken as part of the Land Transport Pricing Study.
The paper:

• Outlines the work to date
• reviews the issues raised in the consultation and submission process
• sets out a range of options for a future pricing and regulatory framework
  for New Zealand's roading system.

The purpose of the paper is to stimulate further debate about how the roading
system is priced, managed, and funded in the future. It is essential that the
transport sector, and the wider community, have the opportunity to participate
in that debate. The Government intends making initial decisions about the
appropriate long-term pricing and regulatory framework for roading in late 1997.

Problems with the Current System

Traffic Growth

The roading system has, in recent years, come under increasing pressure from
traffic growth. Traffic on the State Highways has increased by an average of
3.9% per annum over the last decade. On some parts of the road network,
increases have been higher, and this has resulted in significant congestion at
peak times.

Growth in certain sectors of the economy, particularly in the tourism,
forestry, and the dairy industries, is putting increasing demands upon the
roading network. Growth and change have, in turn, put considerable pressure on
the funding for roads, both for new construction and for maintenance.

Funding

The Government's commitment to fund projects with a benefit/cost ratio of 4.5
by the end of 1996/97 and 4.0 by the end of 1997/98 has been partially funded
from the surplus remaining in the Land Transport Fund, but this is not
sustainable after 1997/98. Increases in revenue for the National Roads Fund
(which may mean increased charges for road use) will be required if all projects
that meet the benefit/cost ratio of 4.0 are to be funded beyond 1997/98.

Safety and Environment

Traffic growth has also highlighted a number of key safety and environmental
issues. Population and traffic growth, urban expansion and development
pressures, together with a growing awareness of the environmental and safety
impacts of vehicle use, are now changing the focus of our roading system.

LTPS Discussion Papers

To date, the Land Transport Pricing Study has included the release of the
following discussion papers for public comment and submission:

• The Cost of Roading Infrastructure
• Roading as an Economic Good
• Environmental Externalities
• Safety Externalities
• National Traffic Database.

Consultations and Submissions

The Ministry of Transport invited public comment and submissions on the five
discussion papers listed above. The closing date for submissions on all five
discussion papers was 30 August 1996.

During the period between the release of the first discussion paper and the
close of submissions, the Ministry of Transport carried out two rounds of formal
presentations on the Land Transport Pricing Study.

A summary of each of the 146 submissions received by the Ministry is
contained in a companion report, Land Transport Pricing Study: Summary of
Submissions. A copy of the report is available from the Ministry of Transport on
request.

Main Issues

This paper reviews the main issues raised by the Land Transport Pricing Study
and the submission and consultation processes. Examination of the issues is
required to develop policies to correctly price land transport infrastructure,
so that there is an efficient level of investment reflecting economic and
environmental costs and benefits.

The paper contains discussion of the main issues, recognising that it has
simply not been possible to address all of the outstanding matters. The Ministry
of Transport is satisfied, however, that the principal issues arising from the
Study and consultations have been addressed.

Main Findings

Costs and Pricing

New Zealand road charges are based on attributable costs with no
consideration of benefit. The cost-recovery regime is not based on efficient
pricing principles. Charges are largely based on average, not marginal, costs.

Network Properties

The implication of road network properties needs to be clarified. For
efficient pricing, road users in one area may be required to pay for access to
another area. There needs to be a clear understanding of the way in which
lightly used rural roads contribute to the overall network throughout New
Zealand.

New Zealand Road Charges

The cost allocation model used to set road charges was last fully reviewed in
1984. There is concern that the current distribution of charges may now be
inefficient.

Financial Accounts

A consistent set of financial accounts for the country's roading network is
lacking.

Maintenance

There is an inadequate understanding of economic depreciation. In particular,
there is limited knowledge concerning the extent and the treatment of optimal
and deferred maintenance. Maintenance strategies are still evolving.

Compatibility with Tax Policy

Given the amount of concern expressed in submissions about the
appropriateness of the current system of fuel excise, which separates revenues
into dedicated and non-dedicated excise, the regime should be reviewed.

Rates Funding

There are limitations in the use of rates as a mechanism for funding roads.
The existing system of funding State Highways and local roads is inconsistent.
The justification for the use of rating revenue for roading purposes is weak.

National Traffic Database

The potential value of the National Traffic Database for transport policy
development is not fully realised. The issue now is how far the data and
analysis should be refined.

Environmental Impacts

The environmental impacts of transport are now better understood, and a
related work programme is under way. This will enable evaluation of possible
classes of policy instruments to reduce significant environmental impacts.

Safety-Related Expenditure

The analysis suggests there is no basis for introducing safety externality
charges at present. Any further work in the area of road safety should have a
much broader focus than simply quantifying externalities.

Congestion

There is no coherent basis from which to develop policies to cope with higher
traffic volumes. Road congestion, particularly in a number of urban areas, is
one of the major challenges facing the transport sector.

Private-Sector Involvement

Policies to involve the private sector in the provision, management and
funding of roads are inadequate. Limiting the involvement of the private sector
may work against greater efficiency.

Funding of New Roading

There are difficulties with the present arrangements for funding new roading
works. In particular, these include the short time-cycles within which capital
funding decisions are handled, compared to the long life of roading assets, and
the associated problems of funding capital works in preparation for anticipated
demand.

Direct User-Provider Link

There are inadequate incentives for existing institutions to adopt technology
and systems that would enable the establishment of a more direct link between
road users and providers. It is difficult to explore opportunities to use
resources more efficiently because information on local and client needs and
preferences is not readily observable.

The Way Forward

The issues raised by the Land Transport Pricing Study and the consultation
process are both far-reaching and complex. Their nature probably limits the
extent to which the current system of funding, ownership, and management of
roading can be made more responsive to the diverse and continually changing
requirements of New Zealand society.

The Options

The paper presents a number of options that build on the main findings of the
Land Transport Pricing Study and consultation process. The work is the first
step towards the development of policy recommendations.

Status Quo: Do Nothing

The Status Quo option represents the do-nothing scenario. It involves
retaining existing charging mechanisms and the basic cost allocation principles.
The Status Quo option would be supported if:

• moving towards an alternative regime is considered too risky given the
  present state of knowledge
• a case has not been made that the existing system is sufficiently inadequate
  to warrant reform
• costs associated with other options outweigh benefits.

The following table presents forecast revenue for the National Roads Account
based on existing charges. The table shows the achievable benefit/cost ratio in
each year. It assumes no change in charges and the complete use of the surplus
from the old Land Transport Fund.

The increased benefit/cost ratios for 1998/99 and 1999/2000 are temporary,
and reflect the flow-on effects of commitments from the previous two
years.

	1996/97	1997/98	1998/99	1999/2000
Forecast Revenue ($million)	724	763	795	827
Achievable Benefit/Cost Ratio	4.5	4.0	6.0	7.0

Roading revenues for 1998/99 onwards will need to be raised if the
Government's present policy of benefit/cost ratio cut-off of 4.0 is to be
maintained after 1997/98.

II. Modified Status Quo

A Modified Status Quo option might retain all existing systems and
structures, but would review the existing pattern of charges to ensure that
revenues are sufficient to fund the Government's commitment to fund projects
with a benefit/cost ratio of 4.5 or higher by the end of 1996/97, 4.0 or higher
by the end of 1997/98, or other long-term target benefit/cost ratios.

The following table presents the revenue required to fund different
benefit/cost ratio cut-offs from the National Roads Account.

Revenue required ($million) Benefit/cost ratio cut-off	1996/97	1997/98	1998/99	1999/2000
5.0	720	766	797	818
4.5	730	788	829	855
4.0	741	816	859	892
3.5	746	836	888	917
3.0	751	844	895	931

The table shows that the forecast revenues in Option I would only be
sufficient to support an on-going benefit/cost ratio cut-off of 5.0.

III. Business Model

A Business Model option might:

• adopt consistent financial accounts for Crown and territorial
  local-authority roading assets
• review the existing pattern of charges to improve efficiency and equity
  outcomes; this might result in a move away from cost allocation towards
  efficient pricing principles, including benefits received, as a basis for
  road-user charges
• review the role of rates funding for roading, with a view to moving away
  from rates funding towards greater user charges; any changes would be expected
  to be fiscally neutral
• examine the feasibility of some form of shadow tolling whereby road funds
  are allocated according to formulae which take into account factors such as
  traffic volumes
• introduce a road management regime that puts all road providers on the same
  legal basis
• involve the private sector more in the provision, management and funding of
  roading services
• replace PAYGO with a capitalisation regime; this would require a move to
  allow borrowing to finance new works
• provide a more coherent basis for evaluating safety policy and expenditure
  designed to improve safety outcomes
• adopt appropriate policies to price or restrain congestion
• adopt appropriate policies to internalise or influence
  externalities.

IV. Commercial Model

A Commercial Model option might:

• transfer Crown road assets to the Balance Sheet of a State-owned enterprise
• transfer territorial local authorities' road assets to local authority
  trading enterprises
• begin the process of replacing existing charging mechanisms with time-,
  weight-, distance-, and location-based charging, while improving the efficiency
  of existing mechanisms
• replace the cost-recovery model with road pricing; implicit in road prices
  would be a return on equity for new works
• replace PAYGO with a capitalisation regime; this would require a move to
  allow borrowing to inhance new works
• introduce a neutral road management regime, which would encompass
  accountability and performance aspects and the pursuit of safety and
  environmental goals
• involve the private sector more in the provision, management and funding of
  roading services
• introduce an appropriate regulatory regime to enable competition and prevent
  monopolist behaviour
• introduce appropriate policies to internalise or influence externalities,
  including congestion (these would only be required if externalities persisted in
  the face of efficient road prices).

V. Commercial Model: Roads New Zealand

A Commercial Model: Roads New Zealand option might:

• transfer territorial local authorities' and Crown road assets to the Balance
  Sheets of a single, or number of, commercial enterprises owned jointly by the
  Crown and territorial local authorities
• begin the process of replacing existing charging mechanisms with time-,
  weight-, distance-, and location-based charging
• replace the cost-recovery model with road pricing; implicit in road prices
  would be a return on equity for new works replace PAYGO with a capitalisation
  regime; this would require a move to allow borrowing to finance new works
• introduce a neutral road management regime, which would encompass
  accountability and performance aspects and the pursuit of safety and
  environmental goals
• involve the private sector more in the provision, management, and funding of
  roading services
• introduce an appropriate regulatory regime to enable competition and prevent
  monopolist behaviour
• introduce appropriate policies to internalise or influence externalities,
  including congestion (these would only be required if externalities persisted in
  the face of efficient road prices).

Conclusion

The Land Transport Pricing Study has now reached a crucial stage. Work to
date has shown that, while incremental changes could be made to improve the
existing system, more fundamental changes would be required to achieve the
benefits which are inherent in a business-like or commercial approach to the
pricing of our roads.

Submissions

Submissions on this paper are invited from all interested parties. It would
be helpful if submissions could focus on the options for the future set out in
the paper. The closing date for submissions is 15 August 1997.

Submissions should be made to:

Land Transport Pricing Study: Options for the Future
Ministry of
Transport
P O Box 5248
Wellesley Street
AUCKLAND
Fax: (09) 379
0073