Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E3. Road transport taxes

E3–6 Institutions to support efficient use and supply of roads

Recommendation 68:

COAG should develop a National Road Transport Agreement to establish objectives, outcomes, outputs and incentives to guide governments in the use and supply of road infrastructure. COAG should nominate a single institution to lead road tax reform, and ensure implementation of this agreement.

Historically, roads have been provided by government departments and local governments, funded from general tax revenue. The main challenge has been to connect sparsely populated regions. Roads have been mostly local public goods — that is, any car or truck can drive on the road and, given low patronage levels, cause negligible inconvenience to others. Given the state of technology, road pricing has been both impractical and inefficient.

These institutional structures may no longer be suitable to meet 21st century challenges. The current system has resulted in large congestion costs, concentrated in Australian capital cities, and has not consistently delivered economically efficient infrastructure to meet future demand.

Other bodies have considered institutional arrangements for road transport, to ensure that demand is met with supply — particularly through ensuring adequate finance. For example, the Productivity Commission (2006) considered a range of institutional structures, ranging from a departmental model based on hypothecated (that is, earmarked) taxes, dedicated road funds, a 'public utility' and privatised models of road infrastructure provision. The Australian Transport Council is currently considering alternative institutional arrangements for road provision.

The reform of road pricing has been slow, as it depends on availability of information upon which to base prices, effective regulation to prevent over-charging, the availability of suitable technology, and community acceptance. Outmoded institutions and a lack of coordination in the construction and maintenance of the road network has meant that different road agencies have had limited incentives to improve the national road network as a whole. Current arrangements give limited scope to finance additional road capacity in the face of congestion, or to build roads more resilient to heavy vehicles.

Information and regulation

The introduction of efficient pricing requires comprehensive information on actual costs. Road prices that aim to reflect social cost would need to be carefully regulated to ensure that they deliver the greatest net benefit for society, rather than generating profit for the road agency. For example, while pricing road-wear is easy in principle, determining the actual cost of different vehicle weights and loads on different types of roads is an empirical question. A road damage charge that exceeds actual costs could be just as harmful to economic efficiency as no charge at all.

Efficient pricing and regulation must be underpinned by empirical data — including information on the condition of existing assets and reliable estimates of marginal costs under different conditions — as well as agreement on the allocation of revenue, attribution methods and assumptions underlying the system. Theoretically sound pricing models may need to be adapted to recognise administrative and compliance costs in the real world.


Institutions are not currently set up to support efficient road pricing, nor efficient investment and operation of roads. Regulation will be necessary to ensure that road agencies do not exploit their market power in setting prices, and to ensure that prices reflect marginal social costs. Institutions will need to be vigilant to adjust prices in response to changing conditions.

Road charging revenues

The road pricing reforms outlined in this section propose that revenue from congestion charges be returned — in the first instance to fund additional investment in transport alternatives — to those affected by the charge. This section also recommends that charges on heavy vehicles for road-wear be allocated to the owners of the roads they drive on. This will only be possible when appropriate reforms have been delivered to the institutional and reporting arrangements applying to road owners, as costs of road-wear vary.

These revenues and their proposed uses form part of a much larger structure of revenues that are spent on roads, including new investments. Some of these other revenues derive from economic charges (such as developer charges or certain investment-related truck charges) and some derive from general government budgets, whether funded from general revenues or from road-related revenues. In turn, the basis of intergovernmental payments for roads also reflects a mixture of economic and non-economic assessments.

A range of difficulties arise in the practical management of these funds. At present, the allocation of road funds is subject to:

  • decision-making on spending and investments by State and local governments;
  • decision-making on specific grant funding and major investment by the Australian government (advised by Infrastructure Australia); and
  • effective re-allocation of grants and other revenues between governments as determined by assessments of relative road revenue and expenditure needs by grants commissions using horizontal fiscal equalisation methods.14

The present combination of these arrangements, some using economic criteria and others using broader fiscal needs analysis, raises issues about equity and incentive effects for jurisdictional decision-making. A considerable amount of further work needs to be done to identify mechanisms that can deliver an appropriate integration of pricing revenues and investments. The outcome will depend on the particular structure that develops for future arrangements.

To the extent that all or most pricing and funding ultimately follows economic criteria, and that those economic criteria reliably allocate funds and investments across national as well as local marketplaces, in future it may be preferable to shift road infrastructure delivery into the public trading enterprise sector rather than the budget-funded general government sector. In this case, funding and spending would no longer be subject to fiscal equalisation.

In the intervening years, when mixed arrangements will continue to apply, governments will need to give ongoing consideration to the most appropriate pathways for developing institutional and funding arrangements that make best use of increasingly efficient pricing mechanisms.

The need for national cooperation

The transport network in Australia spans State boundaries and involves all levels of government. The gains from congestion charging in State capitals, and better pricing for heavy vehicles, would deliver a national productivity dividend. This is a national goal for road reform that should be agreed through COAG.

A National Road Transport Agreement should include:

  1. an agreed model for financing the road network, including the appropriate assignment of revenue from taxes and charges, a reduction of Australian government fuel tax as efficient road pricing is introduced, and adjustments to other taxes and transfers necessary to maintain equity in the overall tax system;
  2. a regulatory framework to ensure that road infrastructure providers' incentives are aligned with those of road users, particularly to prevent over-charging or supply restrictions;
  3. a methodology for identifying and valuing the social purpose components of road funding, to form the basis of an explicit treatment of community service obligations, as well as a consistent methodology for assessing environmental impacts;
  4. nationally consistent arrangements for asset management, including formal asset management plans, down to the local government level, as a condition for receiving revenue from road-specific taxes or charges;
  5. a framework to support commercial agreements between road users and road infrastructure providers, including agreements for the provision and finance of infrastructure to meet specific needs, and for the delivery of guaranteed service standards;
  6. a protocol for the collection, handling and exchange of information from road pricing, as well ensuring personal privacy and interoperability of technical standards;
  7. arrangements to evaluate the efficiency of infrastructure spending by ensuring that major infrastructure projects are subject to post-build evaluations; and
  8. consideration of the broader impacts of road pricing reforms on other transport modes, particularly on public transport (in relation to congestion pricing) and freight rail (in relation to heavy vehicles charges).

Given the scale and complexity of the proposed reforms, a single agency may be required to develop and monitor their implementation. This would involve reporting on road reform strategies and developments, commissioning and evaluating research, funding and evaluating pilot programs, monitoring State entitlements to agreed funding for transport reform, and reporting to governments on whether specific commitments have been met (see Recommendation 68).

There is also a strong argument for leadership from the Australian government, and for it to provide incentives to the States to facilitate road reform. For example, the Australian government could make any funding of state infrastructure contingent on the adoption of pricing policies for roads that are consistent with this Report. It could ensure that economic appraisals of investment projects are made transparent and that the community service obligation component of road spending is identified and funded as such.

Moreover, responsibility for the largest road tax (fuel tax) rests with the Australian government, while responsibility for direct pricing reform will rest predominantly with the State and local governments who actually own the roads. The transition from taxes on roads primarily designed to raise revenue to taxes on roads primarily designed to improve infrastructure use therefore entails a shift from Australian government to State-level taxes in this area. This will require coordination on a clearly defined timetable.

14 The Commonwealth Grants Commission for the States and local government grants commissions for local government grant funding.