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Treasury’s interesting position on road pricing

The National State of Infrastructure Report was released by Treasury’s Infrastructure Unit a few weeks back, and makes for some quite interesting and amusing reading in relation to transport. I’ll leave what’s said about transport in Auckland to another post (basically it seems like they’re suggesting Auckland needs a whole pile more motorway but aren’t quite sure where they’ll go), but perhaps one of the most amusing parts of the document is in relation to road pricing.

One would think that Treasury, being a bunch of purist neoliberal economists, would love the concept of road pricing. And on the one hands it seems they do:

There is near consensus among economists that managing demand and optimising our transport networks through some form of more targeted road pricing should be part of the transport programme for Auckland, especially considering the forecast increase in congestion over the medium/long term. However, road users are deeply suspicious of road pricing, especially in the form of tolls and cordon fees, such as used in Singapore and London. In fact, managing demand on our roads using road pricing seems to be an issue with the widest gap between economists and the motoring public. This is despite the large scale of road pricing tools that we already have – Fuel Excise Duty (FED) and Road User Charges (RUC) – although these do not accurately reflect all the full costs imposed on road users. For example, motorists pay the same regardless of whether they travel at peak times or off-peak. Implementing a more comprehensive and detailed road pricing regime would have a number of key benefits.

I get the feeling there’s some interesting politics behind this section. Interesting because we’re in a rather bizarre situation of Auckland Council – with a ‘left-leaning’ Mayor, being keen to investigate revenue mechanisms which include road pricing while there’s a centre-right government who are running away from the idea utterly terrified. This gets reflected even more in the next paragraph:

On the other hand, public reaction to the general concept of targeted road pricing is usually negative, often coming from a fairness perspective. Cordon pricing in London has been seen as being very effective at pricing poorer people from the suburbs off the roads, while enabling richer central city dwellers to move around more freely. The high cost of bringing a car into the city may deprive lower-income people of important options, particularly when public transport does not provide the flexibility that a car can provide. A further concern is often a lack of trust that government will use the revenue raised for the purposes advised.

I’m not sure whether we see too many “lower income” people driving their cars into the CBD these days, due to the cost of parking. So that’s perhaps a bit of a red herring issue in terms of a road pricing scheme structured as a cordon around the CBD. It’s probably a more reasonable concern for wider schemes.

 Considering this discord, it is often difficult to know where to start and how to progress the debate in a positive manner. Fundamentally, the challenge is to understand how the current network is being used and determine whether this use is as effective and efficient as it can be. Knowing this demand, and ensuring the network is being used as optimally as possible, provides clarity and robustness around what future investment will be required and when.

Oh the pain! This is just so hard!

I think that if road pricing was proposed as analternativeto existing transport revenue sources – rather than in addition to them – most of the opposition to it would disappear. If people had the choice between a road pricing scheme that varied the amount they paid by time of day or particular road used while significantly reducing petrol taxes or rates, we could have an interesting discussion around how it compares to these other transport funding mechanisms and whether it would deliver better transport outcomes while raising the same amount of revenue.

The big problem in all the debates about road pricing is that it’s always put forward as a revenue raising tool, when it fact it’s actually a market-based demand management tool which prices the roads to ensure a better match between demand and supply: just like we price bread, computers and Ferraris to get the most efficient outcomes. Of course there will be the potential for adverse social impacts of a road pricing scheme, but that’s just the same as the adverse effects of current rating schemes or the unfairness of someone having to pay the same to use the roads when they only drive around at the weekend as someone who makes long trips during peak times and helps contribute to the traffic jams around Auckland.

I’m not quite sure why Treasury don’t understand this. Or maybe they do, but it’s politics getting in the way?

20 comments to Treasury’s interesting position on road pricing

  • JohnP

    I haven’t read the paper, but I’d be very surprised if Treasury were proposing to use targeted road pricing in addition to existing transport revenue sources. I mean, sure the existing methods would remain but they would be scaled back as new revenue comes on board from road pricing. The whole point of these schemes is to try to internalise the externalities of congestion, so I can’t imagine Treasury would want it used as a way to generate revenue for spending on, say, the education system.

    Is that really what they are proposing? If so, is there a quote from the paper that shows this?

    • Bbc

      I think they would like this extra funding source to help pay for the roads of national insignificance which have obliterated the existing budget. They wouldn’t do anything as sensible as using it to help pay the health budget which at present subsidises much of the externalised health costs of car dominated transport.

  • swan

    Totally agree with your last paragraphs. Treasury must understand that the one and only way to sell road pricing is to make it revenue neutral. To say “it gets a negative reaction” is disingenuous. If you coupled it with 40c less a litre at the pump it may get a much better reception.

  • One thing that never seems to come up in these discussions is whether the goal of road pricing is to raise revenue, or to manage demand. Is it about charging people more to use busy roads, or is it about pricing people off roads at peak times? A scheme that is good at one will probably be quite poor at the other.

    • Greg N

      Nick – interesting point.

      In the UK, the so-called Congestion Charge, pretends to do both, but in effect, as Treasury points out, effectively prices poor people off the roads at peak times, but at the same time, as London roads, and the Tube are effectively the only options for moving around – so the nett effect is that the charging people more to use busy roads/tubes is really what it boils down to.

      But how about this?

      If the purpose of these charges is to “moderate” demand and flatten existing peaks, then a cordon or targeted road pricing scheme can work as you get the charges in place once the congestion starts to be a problem.
      However, what if you want pro-actively prevent congestion on a road – what pricing mechanism can you use to do to that – road pricing won’t work that well – who will accept paying increased charges for a currently uncongested road to make changes to try and keep it that way? And even if the motoring public did,how long before the politicians start meddling?

      This is the same issue at heart as the local body reform and local body rates in general, which is what is currently being discussed in Parliament.

      Basically – how it comes down to much can you “pre-fund” your developments, versus post-fund the developments (roads, rail, PT infrastructure etc).

      i.e. do you use a fuel tax or similar general tax to try and smooth the cost over a longer time and try prevent congestion in advance, or do you let the congestion happen and simply then put a road price in to try and reduce the usage so that congestion doesn’t occur?

      Both options have merits and issues, and I think this is what Treasury are struggling with.
      It seems in NZ you need a mixture of both, you can’t have just one or the other.

      But if Treasury can’t decide, what hope have we for politicians to decide except on the basis of local pork barrel politics?
      Which is how I guess we got the “RoNS to ruin” i nthe first place right?

  • Mr Anderson

    I think what most people object to is being taxed more for transport, not an objection to road pricing per se.

    • Greg N

      I’d clarify that further and say the most people object to be “visibly” taxed more for transport.

      Its the visible part they disagree with.

      Most of us pay for transport in all sorts of ways (check your Rates bill for the transport charges if you live Auckland to see what I mean), as well as fuel taxes, vehicle registration, road user charges, parking – the list goes on and on.

      The problem has been that these funds are raised and spent invisibly (to most people anyway) – so when yet another tax is discussed they rightly object as they don’t see the benefits of the current regime so simply see it as yet another example of “user pays” when you pay even if you don’t use.

      What is needed is way more transparency about funding and spending for all transport costs.

      Road pricing is supposed to be that, but invariably the CAPEX and OPEX of the road pricing scheme is responsible for some 60-75% plus of the road price charge – so the actual amount that able to be used for its intended purpose is very small compared to the actual money paid.

      Thats one argument for the current (invisible) transport tax schemes – they raise money relatively efficiently as they leverage a “tax at source” process.

      However, as Treasury points out, there is a deep suspicion (rightly held I think), that these taxes are not always used for the purposes claimed so there is always going to be resistance to whatever is proposed.

      The only answer seems to be more transparency all round.

  • Feijoa

    How about the housing affordability angle – take all roading costs off ratepayers and replace by pricing scheme. Fairer and kill 2 birds with one stone?

    • JohnP

      I don’t think we’d want to do this exactly – at least, we wouldn’t want to make it so that all road-related revenue is derived from congestion charges. Because it costs money to build and maintain roads even if they’re not congested.

      If a road pricing scheme could be designed to be economical and politically viable (tough ask), it could form a part of overall transport revenue. The aim is to internalise the externalities of congestion, and at the moment we don’t do this at all that I can see.

      However, it does seem a bit odd that part of the costs of the transport network are paid out of council rates. At the moment, much of the funding comes from fuel taxes, which is a “user pays” system administered by the government, with some money going back to councils to pay for local roads. I would have thought it’d be better if enough money was collected through fuel taxes, etc so that councils didn’t have to dip into their general rates revenue to pay for roads, which is part of what you’re saying.

      Does anyone know what the rationale is behind the current system?

      • Steve D

        It’s just history. It’s been a 50-50 split between central and local government since 1922. The local part has always been from rates, while the central government portion has varied – sometimes it was much less than it took in from petrol taxes, sometimes much more.

        http://www.teara.govt.nz/en/roads/5
        http://www.teara.govt.nz/en/roads/6

      • Feijoa

        Sure, not congestion charge but pricing variable with congestion factor. In my ideal world this would be a replacement for the subsidy paid out of rates, so fuel excise/RUCs remain. I realise my ideal world is rather unlikely with the technical difficulties and political reality of National/Act only choosing free markets when it suits.

  • But also the ideologs of course fail to accept that it is because we have such poor Transit options that we have such trouble exercising elasticity in mode choice but rather: ‘PT does not provide the flexibility that the car does’.

  • Dave

    I cannot understand why politicians and treasury pussy-foot around this issue, seemingly just because of the “Motoring public won’t like it” argument. Since when did governments suddenly become sensitive to “What the public wants” as they have historically savaged other areas of the public economy? Benefit-cuts and health-cuts have never been popular but politicians have forged ahead with these anyway. The recent U-turn on class-sizes (read “education-spending cuts”) only occurred as a result of a massive backlash, long after the policy had been decided-on and was in the process of being implemented. But when it comes to road-pricing (with the exception of a few specific new toll-roads), no-one is supposed to even think about it!

    And likewise with assertions of “pricing the poor off the roads”. I don’t recall hearing this argument from these same economists as a reason against punitive increases in public transport fares? Interesting that the congestion charge in London is cited. The same mayor who introduced this apparently “unpopular” scheme (Ken Livingstone, or “Red Ken”), many years earlier as head of the Greater London Council implemented a highly popular low-fares policy on the city’s public transport which was of significant help to those on limited incomes. However this didn’t sit well with right-wing ideology and a conservative government simply abolished the low-fares scheme along with the whole Greater London Council. No concerns for the poor or “What the public want” there.

    Apparently a majority of Aucklanders want the city rail link built (quickly!). If the government is so concerned to respect what the pubic wants, why is it not delivering on this? The answer must surely be that “What the public wants” is only advanced as an argument when it suits the ideology of the person or political body advocating it.

    • I think the dynamics are a bit deeper than that. Its one thing to get opposition parties and their supporters fighting back but it is something else again to have not only them but likely many of their own supporters opposing it which is what I think would happen with road pricing, even if the overall revenue was neutral. I think that the only chance it really has of happening is for a party to push it knowing it was going to be their last term in office and not caring about the polls.

  • Stu Donovan

    In terms of how road pricing functions I’m not sure comparing it to things like bread is so useful. Hotels/airfares are probably a better example because they exhibit large seasonal variation in demand and price.

  • Well slow down… My only problem with the FED is tat I think it is too low, oh and of course that its being misspent wildly. It’s efficient, it is a disincentive to excessive or wasteful use. Well I guess the other problem is because of a lack of quality alternatives it does tend to be regressive, ie hitting the poor harder, but here Auckland Council is coming to the gov’s rescue in its huge effort to supply that missing mode in Auckland at least. Gov can’t recognise this because they are blinded by ideology.

  • I have been mulling this over and I’ve come to the conclusion that the roads are already priced. We pay in two ways; first through FED and RUC and licenses, tolls, and rates, but then, if we wish to drive at busy times or on popular routes we pay with our time. The second cost varies with load or need, just like fancy road pricing systems, except it is expressed in a different currency.

    Time is a personal and sometimes professional cost. Converting that cost into money is a fraught and imperfect business, especially once we accept, and we should, that for some people and at some times car time is not I unenjoyable nor, particularly wasted.

    So why is congestion not just accepted for what it is? Largely because we have become so impatient and especially when behind the wheel. We expect too much, we expect to never have to pay that bill, that time bill. Whether it really changes the economy as much as the MoT or the dries at Treasury believe, I doubt.

  • London’s congestion charge prices poor people off the roads and loses them flexibility. Eh? Have they actually ever been to London? One reason why the Mayoral election was so fraught was that any extension/ increase in the congestion charge would put the middle classes off who are more likely to vote.

    • But also London, Stockholm, and Singapore all have huge investment in widespread and effective alternative Transit systems and we just don’t. If Treasury real wants any kind of congestion charge then they will first have to vigorously support a transfer of investment away from motorway building and into the Transit system the Council and the people of Auckland want.

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