Date created: 28 November 1996 Last modified: 18 November 1997 Maintained by: John QuigginJohn Quiggin
October 19, 1995
Private toll roads have been one of the Carr government's biggest problems. The report of the EPAC Committee of Inquiry into private infrastructure, released yesterday, confirms what has long been obvious to anyone who looked at the problem objectively. The BOOT (Build, Own, Operate and Transfer) approach to road construction, in which the private firm building the road is rewarded with the right to collect a toll, is expensive and inefficient. The community is better served by publicly owned roads, financed by general taxation on road users in the form of petrol taxes and registration charges.
Before the last election, Labor promised to abolish the tolls and continue development of the road system. Unfortunately, Labor also promised not to raise taxes. Except under the suspension of disbelief associated with an election campaign, it was obvious to anyone who cared to consider the question that at least one of these promises must be broken. As theEPAC Report confirms, the government has chosen the worst of the three possibilities.
Tolls are an inefficient and inequitable method of financing road construction. They are inefficient because they discourage the use of new, relatively safe and uncongested roads. To avoid the toll on newly constructed motorways, motorists use older suburban roads, accepting longer travel times for themselves, generating greater air and noise pollution and creating accident risks both for themselves and for people living in the areas through which they drive.
Tolls are inequitable because they require people living in the areas that have historically had the worst roads to pay for an improvement. Meanwhile, people living in the politically influential areas that have always had good roads, pay nothing. In Sydney, for example, it is the people of the Western suburbs who have been hardest hit by tolls. In the country, a National Party rort led to the inland New England Highway getting National Highway status at the expense of the more heavily-used Pacific Highway. Instead of rectifying this injustice, it is now suggested that the unfortunate users of the coast road should be forced to pay a toll to finance improvements to the Pacific Highway, while still contributing through their taxes to the maintenance and upgrading of the inland route. The arbitrary nature of toll funding simply compounds old injustices. Finally, tolls are rarely sufficient to finance the construction of a new road without some form of government subvention. This is because the effects of a new road are felt across the entire network, and cannot be captured simply by a toll on users of that particular road.
The problem is made worse when the toll road is constructed, as in NSW, under a BOOT scheme. The high rates of return demanded by private equity holders drastically increase the cost of the road. The risk associated with projected toll revenue can be borne very efficiently by the government, as owner of the entire network. As Mr. Kennett is discovering with the Citylink fiasco in Melbourne, private road owners will seek to pass the risk back to government, demand massive subsidies, or both.
In some cases, as with the M4 in Sydney, the government subsidy has taken the form of an actual bailout. More generally, the Carr government's negotiations with the road companies have revealed a reliance on exploitation of the tax laws. It appears that one reason the government was unable simply to pay the road companies the capitalised value of the toll revenue was that this would have resulted in the loss of tax benefits that can be exploited under current arrangements. Hence, the toll companies demanded more compensation. This underlines the point that it would have been cheaper in the long run to have held competitive tenders for the construction of the roads and to have financed them through general road user charges rather than specific tolls.
It may be impossible to unscramble the omelette of existing toll road deals. However, there can now be no doubt that these deals have imposed massive losses on taxpayers, and have benefited no-one but the entrepreneurs who set them up. The Carr government should commit itself to financing any expansion of road construction through general taxes on all road users rather than through artificial and costly toll road deals.
More generally, governments at all levels need to face up to the fact that they can only deliver the services people demand if they accept the responsibility for raising taxes. Financial manipulations such as privatisation and pseudo-private infrastructure deals may massage the accounts for a while, but, in the end, they can only make the problems worse.John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.
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