Benefit 2: Increased efficiency from better governance through pricing and independent price and/or economic regulation By publicly highlighting where road managers may be able to reduce costs or improve the efficiency of their investments, the IPR has the potential to place a level of public scrutiny on expenditure proposals (and past expenditure) that does not currently exist. Scrutiny will be assisted by comparative benchmarking of expenditure across states and territories, will be supported by new data and analytical systems. Existing scrutiny of maintenance expenditure is constrained by a lack of robust benchmarking information. A more formal industry consultation process has the potential to alter investment priorities and service levels. The benefits of IPR scrutiny of expenditure may be limited because the following existing processes already provide a level of scrutiny: existing internal government budget processes; Infrastructure Australia evaluation processes for expenditure submissions; and BITRE benchmarking on road construction costs and key cost drivers (BITRE 2018). Some governments have existing freight industry consultation forums, which partly provide existing formal user input mechanisms. Benefit 3: Better quality roads, leading to lower vehicle operating costs A customer service charter may result in some roads receiving a higher level of service than they would have otherwise receive. The customer service charter applies only to key freight routes, although those routes make up a significant proportion of arterial roads. Without reforms to road funding, committed service levels may be set conservatively. Benefit 4: More efficient pricing, leading to lower vehicle operating costs A road user charge (RUC) that is set at a higher to reflect more efficient pricing will not exceed the current fuel excise level. It is unclear whether there are any limitations. Scenario 2 provides a more definitive result, in that the benefits are likely to be greater than costs under both reform options. This is because if Reform options A and B are rejected there is likely to be a delay in moving towards end-state reform, and it does not need to be a very long delay for the benefits to be greater than the costs. A delay of only 2 months is likely to be more than sufficient to justify moving ahead with either reform option. However, it is important to note that Scenario 2 assumes further reform towards the end-state reform.
Drawing on some initial discussions with the Australian Government and state and territory governments, the key potential types of benefits are summarised in Table 3 and Table 4. which illustrate the link between the reform components and the intermediate and final outcomes that could potentially flow from the reforms. Potential benefits that apply to both Reform option A and Reform option B 3 lists potential benefits that apply to both reform options. Table 3: Potential benefits that apply to both Reform option A and Reform option B Reform component Intermediate outcome outcome Forward-looking cost estimate Improvement in forward planning of capital expenditure and maintenance programs Lower maintenance costs, as maintenance works are more aligned with an optimal lifecycle approach. The maintenance cost savings are likely to enable additional thereby increasing overall service levels for road users. Improvement in asset management capability and systems Improved overall service levels and hence lower vehicle operating costs for road users, as it may encourage capital expenditure allocation to projects in a way that achieves greater long-term benefits for heavy vehicle road users. Greater stability for heavy vehicle road users compared to a PAYGO approach Greater productivity for road users, as it may encourage new vehicle investment even when capital expenditure on roads is lumpy. Lower adjustment costs for heavy vehicle road users, as they are less likely to change vehicle configurations. The IPR determines prices in law More transparent, predictable and charges for heavy vehicle road users Greater confidence by the transport industry in the charge-setting process, as it enables more a more transparent and predictable process. State/territory governments able to transition to new charges between regulatory periods Greater price stability for heavy vehicle road users Lower adjustment costs for heavy vehicle road users. More sustainable charging system, as it allows for a transition period. Enhanced independent scrutiny of expenditure categorisation Heavy vehicle charges better reflect expenditures More cost-reflective charges, may act to more encourage more efficient road use. Forward-looking cost base Under the proposed new regulatory framework for Reform options A and B, an FLCB involves road managers articulating to the IPR their forward plans for investment in maintenance and capacity expansion across all of the roads that they manage. As part of this process, road
Potential benefits that only to Reform option B Table 4 lists potential benefits that apply only to Reform option B. Table 4: Potential benefits that apply only to Reform option B Reform components Intermediate outcome Final outcome Additional scrutiny and transparency of capacity expansion expenditure decisions Comparative benchmarking analysis across governments may indicate potential for improvements in decision-making Road managers more accountable for investment decisions Greater net benefits, which result from governments selecting capacity expansion projects that have relatively higher benefit–cost ratios. Development of comparative datasets on capacity expansion Additional scrutiny and transparency of road maintenance expenditure decisions Comparative benchmarking analysis of maintenance costs and levels of service across governments may highlight areas for improvement Road managers more accountable for investment decisions maintenance costs because there is a drive for greater efficiency from benchmarking. Development of comparative datasets on maintenance activities, road use and levels of service Improved levels of service and hence lower vehicle operating costs on some key routes by better targeted maintenance works. Regulator able to alter the mix of RUC and registration charges (but revenue neutral for governments) RUC may increase to align more closely with efficient price structures Lower combined maintenance and vehicle operating costs, as road users may choose vehicle types and usage levels that more closely reflect the costs that are incurred by usage. Lower financing costs, as road users do not have to finance up-front registration costs. Customer service charter for key freight routes Enhanced focus on customer expectations of road management Performance assessment by IPR indicates that there is scope for improvement in levels of service to meet the customer service charter Improved levels of service and hence lower vehicle operating costs on some key routes from targeted capacity expansion or maintenance expenditures. Formal mechanism for user input into pricing determinations and service levels (e.g. expert panel) and have regard to the advice of the expert panel Forward expenditure plans are influenced by road user input on priority areas for capacity expansion and/or improved levels of service Greater net benefits from road investments by better targeting capacity expansion and maintenance activities to high-need areas.
Benefit 2: Increased efficiency from better governance through pricing and independent and/or economic regulation By publicly highlighting areas where road managers may be able to reduce costs or improve the efficiency of their investments, the IPR has the potential to place a level of public scrutiny on expenditure proposals (and past expenditure) that does not currently exist. Scrutiny will be assisted by comparative benchmarking of expenditure across states and territories, which will be supported by new data and analytical systems. Existing scrutiny of maintenance expenditure is constrained by a lack of robust benchmarking information. A more formal industry consultation process has the potential to alter investment priorities and service levels. The benefits of IPR scrutiny of expenditure may be limited because existing processes already provide a of scrutiny: Internal government processes already examine the prudency and efficiency of expenditures, typically as part of budget approval processes. Infrastructure Australia currently undertakes evaluations on all infrastructure proposals for which funding of more than $100 million is sought from the Australian Government. has begun to publish benchmark data on road construction costs and key cost drivers (BITRE 2018). Some governments have existing freight industry consultation forums, which partly provide existing formal user input mechanisms. Benefit 3: Better quality roads, leading to lower vehicle operating costs A customer service charter may result in some roads receiving a higher level of service than they would otherwise receive. The customer service charter applies only to key freight routes and not to all roads. Key freight routes are likely to make up a significant proportion of total kilometres of arterial roads managed by road managers. Without reforms to road funding involving revenues from road use returning to road managers, the charter may be set at a conservative level that does not result in material gains to road users. Benefit 4: More efficient pricing, leading to lower vehicle operating costs A road user charge (RUC) that is set at a higher level to reflect more efficient pricing will not exceed the current fuel excise level. It is unclear whether there are any limitations. Valuing the size of the contribution to revised benefits
PAYGO submissions to charging determinations continue in the future NTC ongoing assessment costs: FTEs are needed for approximately 18 months to prepare and finalise a charging determination. [PAYGO assessment charging determination: $1,181,000] Current costs of providing NTC with historical expenditure in NTC template. Based on responses from states and territories, estimated to be a total of 127 FTE days for each charging determination (or an average of 16 days per state or territory government). [Current NTC process (expenditure): $101,000] 2020 onwards as a cost every year State/territory government policy staff currently involved in process. Note: We assume this to be $0, as these staff times are likely to be small and are likely to be reassigned to other elements of the reformed processes under reform options A and B. [Not shown in table] Not applicable
PAYGO model is retained, maintained and improved over time Maintenance and continuous improvement of PAYGO. Assume around $50,000 is spent each year between charging determinations on external consultant research to support a methodology review. [Consultants: annual review: $50,000] 1 FTE each year to undertake maintenance and monitoring activities (such as annual adjustments) between determinations. [Maintenance and monitoring: $175,000] 2020 onwards as a yearly cost A formal methodology review of the NTC charging model (e.g. cost allocators, other assumptions, calculation approach) is undertaken; estimated to require 2 NTC FTEs over a 12-month period. [Enhancement cost—formal methodology review every 5 years: $350,000] 2019 onwards as a cost every 5 years Source: Discussions with NTC, information from and territory governments and Marsden Jacob analysis. Key assumptions used to estimate costs under Reform option A Based on interviews and data collected from the ACCC and state and territory governments, the key assumptions used to estimate the costs under Reform option A are set out in Table 14. Table 14 describes the cost and its estimation approach as well as the label and values shown in the Option A cost table (Table 18). It should also be noted that all costs and results have been rounded to the nearest $1,000 to avoid a misperceived level of precision.
New expenditure benchmarking information (and supporting) systems built 2021–2022 These estimates are for establishment costs for the regulator: total of $25.2 million over 5 years. [Establishing data standard and systems: Further refinement of standard: starts at $66,667 Governance and supporting systems: $1,000,000 Knowledge and analytics platform: starts at $5,417,000] Establishment to modify IT systems: total of $13.8 million over 5 years. [Establishing data standard and systems: starts at $752,000] 2021, 2025 One-off establishment cost Customer service charter Establishment cost on 0.25 FTE per state and territory. [Customer charter establishment: $350,000] 2019 One-off establishment cost Ongoing Maintaining and operating systems Comparative analytics benchmarking tool: ongoing increases to $5 million per year. [Knowledge & analytics platform, ongoing: starts at $1,667,000] Operating costs to collect additional data: increases to $1.17 million per year. [Collecting additional data: starts at $100,000] Ongoing costs, every year
Ongoing resources to allow additional scrutiny ACCC estimate was 20% of AER Networks Branch (total budget of which is $6–7 million). [Ongoing assessment cost: increased scrutiny: $1,300,000] Assumed to be 0.5 FTEs per state and territory government. [Ongoing resources to allow additional scrutiny: $1,400,000] Ongoing costs, every 2 years Customer service charter Undertaking reviews of road managers’ achieved and committed levels of service, based on 1 week of FTE time per state or territory. [Customer service charter:- $32,000] Any additional maintenance and capital expenditure to improve road quality is included in the benefits component of the analysis. [Customer service charter, ongoing cost: $350,000] Ongoing costs, every year Formal consulting with industry (expert Assumed to be 8 members at $5,000 per member for their time. [Expert panel members’ time: $40,000] Ongoing costs, every 2 years Sources: and territory governments, ACCC and Marsden Jacob analysis. Summary of costs The present value of the costs for each of the options is set out in Table 16. The analysis used an assumed time frame of 20 years and a real discount rate of 7%. 16: Present value of the costs ($ million) Base case Reform option A Reform option B NTC $5.89 $0.00 $0.00
Scenario 2: Further reform is undertaken Assuming that further reform is undertaken Scenario 2, the net benefits of Reform options A and B are examined here with reference to a threshold analysis because of challenges in estimating the gross benefits. Drawing on the benefits analysis in section 5, the net benefits are greater than zero for Reform option A if undertaking the reform avoids a in achieving the end-state reform of 0.02 years (or 6 days) (Table 22). In addition, the net benefits are greater than zero for Reform option B if undertaking the reform avoids a delay in achieving the end-state reform of 0.17 years (62 days). Table 22: Benefit of avoiding delay in achieving end-state reform Delay required for net benefits to be greater than zero Reform option Days Reform option A 0.02 6 Reform option B 0.17 62 Source: Marsden Jacob analysis. Note: Net present value is estimated using a real discount rate of 7%. Sensitivity analysis Discount rates In line with guidance on cost–benefit analysis (DoF 2006; PM&C 2014, 2016), the net present value of the costs is estimated over a 20-year period using discount rates of 3% and 10%, as well as the central case of 7%. These results are set out in Table 23, Table 24 and Table 25. It can be seen that because the discount rate affects the base case as well as each reform option the impact of altering the discount rate is reasonably small. 23: 7% discount rate—present value of the costs ($ million) Base case Reform option A Reform option B NTC $5.89 $0.00 $0.00 IPR $0.00 $10.76 $67.56 State and territory governments $1.07 $5.35 $31.40 Total $6.96 $16.11 $98.97 Increment over base case $9.15 $92.00 Table 24: 3% discount rate—present value of the costs ($ million) Base case Reform option A Reform option B NTC $8.07 $0.00 $0.00 IPR $0.00 $13.59 $95.13 State and territory governments $1.50 $6.93 $43.54
impacts considered The relevant guidance (COAG 2007) requires that a range of other possible impacts be considered when conducting impact analyses, such as: consistency with Australia’s international obligations and relevant internationally accepted standards and practices potential incentive effects and secondary effects compliance and enforcement issues. However, as the proposed reforms relate to amending regulatory frameworks, the reform options appear to have few if any impacts that have not been identified and considered in the previous sections. Evaluation and conclusion Preliminary evaluation of options This Consultation RIS sets out our preliminary evaluation of the reform options and the resulting recommendation. Evaluation of the options against the broader reform program As set out in section 5, Reform options A and B have the potential to go some way towards achieving reform for heavy vehicle charging and investment. Reform option B implements a model that is closer to the end-state reform than does Reform option A. Some key components of Reform option B that are not in Reform option A are: some additional scrutiny of capacity and maintenance expenditure by the IPR; a customer service charter for key freight routes; more formal industry consultation mechanisms; and the ability for the IPR to adjust the mix of RUC and registration charges in contributing to revenues from heavy vehicle charges. However, compared to broader reform of heavy vehicle charging and investment arrangements, some key reform components associated with achieving the end state are not part of Reform options A or B, including: a more comprehensive form of economic regulation that includes the ability of the IPR to disallow expenditure that it does not regard as efficient or prudent; and reforms that involve revenue from roads being returned to road owners. The exclusion of these key components has made valuing the benefits challenging and led to the use of a threshold approach in the cost–benefit analysis.
I: Consultative mechanism The NTC undertakes consultation processes as part of its charging determinations, typically involving formal submissions and workshops with key stakeholders. No change. The IPR is required to establish a formal mechanism or body for user into pricing determinations (e.g. an expert panel) and have regard to the advice of that body. Similar to the NTC’s consultation process, but more formal. Examples are the Australian Energy Regulator’s Consumer Challenge Panel and the United Kingdom’s Transport Forum.