Average cost of traffic congestion, current and projected (source: BITRE)

The CEO of South Australia’s Department of Planning, Transport and Infrastructure, Mr Rod Hook, is reported to have said the only way the state will get any money from the Federal Government for new freeways is if it imposes a toll on users.

Unlike Sydney, Melbourne and Brisbane, Adelaide doesn’t have any tolled roads (neither does Perth). According to a report in Adelaide Now:

Mr Hook said this week South Australia could no longer to afford to ignore tolls as a funding source for new roads. He said the Federal Government had warned SA it would not pay for future roads unless the state also had private-sector funding through toll roads.

However Federal Transport Minister Anthony Albanese says this simply isn’t true. The Australian says a spokesman for Mr Albanese claimed last week:

Neither the minister nor his department has expressed those alleged views to the South Australian government…..Under our constitutional arrangements, only state governments have the power to impose tolls on roads within their jurisdictions, including on the national highways.

Mr Albanese might say that, but I can understand how Mr Hook gets the impression tolling is a prerequisite for Federal funding. The funding guidelines issued last month by Mr Albanese’s own bureaucrats in Infrastructure Australia suggest otherwise.

They indicate the Australian Government is unlikely to support urban road projects unless they “provide for tolling/charging to recover the costs of the project(s), and send signals that will influence demand”.

The newly released report of The Infrastructure Finance Working Group, chaired by Treasury, supports that view:

Governments should implement targeted measures such as user charges to enhance price signals to better balance supply and demand, and to increase the funding available for infrastructure investment

This seems especially pertinent given Infrastructure Australia has chosen to list the Working Group’s report on its web site under the Guidelines for applications for funding.

Of course Infrastructure Australia has got it right – if we are going to have freeways in the first place (and that’s another debate) then they should be tolled. The Executive Director of the Sydney Business Chamber, Patricia Forsythe, agrees.

She’s reported to have said the O’Farrell Government should have scrapped the former governments M4/M5 cashback scheme, which enables motorists to claim back the cost of tolls. According to Ms Forsythe:

The Cashback Scheme continues to be an incentive for commuters to drive on Sydney’s already congested motorways and is the wrong approach if we are serious about reducing congestion

The argument for tolls is straightforward. They provide the ultimate test for the relevance of a project: are users prepared to pay the full cost of providing and operating the facility? If they are, the project is not only warranted in financial terms (there’s still the tricky issue of negative externalities though) but generates a cash revenue stream.

Indeed, as the Infrastructure finance Working Group is keen to point out, the private sector can fund it instead of state governments who’re reluctant because they’re concerned about tarnishing their credit ratings. Without a private investor it probably won’t get built. And if the estimates are wrong, the private investors are the ones who take a bath.

This is what has happened with a number of privately financed transport projects in Australia. That list includes the Clem7 road tunnel in Brisbane, the Cross City tunnel in Sydney and both the Brisbane and Sydney airport rail services.

Tolling new roads also means state governments can reserve their spending for projects like public transport facilities that don’t usually generate the sorts of returns attractive to the private sector. Another benefit is tolls effectively price road space (albeit imperfectly) and thus moderate demand for both the new facility and related parts of the overall network.

The report of the Infrastructure finance Working Group is interesting in its own right. As well as advocating greater use of user-pays charges, it urges the Federal Government to make infrastructure grants conditional on the states’ implementing initiatives like tolling and asset sales.

It also recommends governments privatise more assets and/or use availability charges. Perhaps that’s not surprising when six out of nine members are drawn from the private sector and work in industries that stand to benefit directly from government investment in infrastructure.

These are important issues worth discussing another time. So is the possibility that tolls should capture the cost of negative externalities.

For the moment though I want to digress a little and mention the Working Group’s contention that transport projects yield high economic benefits:

The dividends economies can gain from infrastructure investment are unequivocal. Analysis undertaken by the Bureau of Infrastructure, Transport and Regional Economics (BITRE) found that current Australian Government investment in Australia’s highways, interstate rail network and urban public transport systems will deliver a return of $2.65 on every $1 now being invested.

This assertion contradicts the finding in the Grattan Institute’s new report, Game changers: economic reform priorities for Australia. As I discussed last week, the Institute analysed Infrastructure Australia’s current project portfolio and estimated the aggregate Benefit Cost Ratio as a much more modest 1.5. That’s a $1.50 return on each $1 invested, or $0.50 net.

The discrepancy might be due to differences in the time frame, the mix of projects, or something else. I looked up the reference the Working Group provided for the BITRE research. Turns out it’s a press release by Anthony Albanese! It mentions “new data” compiled by BITRE but doesn’t even give a reference to it! I do hope the Working Group applied itself a little harder to the rest of the report.