The land transport system has a book value of approximately $60 billion. Central government invests $3.4 billion each year in the land transport system through the National Land Transport Fund (NLTF). To this, local government contributes another $1.4 billion each year. This includes money to cover the costs of regulating the system, maintaining the asset base, improving the level of service and adding to that asset base.
We have a clear process to agree the overall scale and focus of that investment in the Government Position Statement on Land Transport (the GPS), which the Government produces every three years. The NZ Transport Agency runs and manages the state highway system and works closely with the regions to agree how to invest the money allocated for local networks to achieve the Government’s goals for the land transport system. Local authorities contribute roughly half of the costs of the investment in local roads.
The revenue to cover the costs for investment in land transport is primarily raised through taxes on users of motorised vehicles and through local rates. Central government makes additional contributions from general tax.
This is an elegant system that subtly balances a wide range of interests. It has also proved to be an effective system under which New Zealand has seen a significant reduction in road fatalities, a significant increase in capacity on the network, and a significant increase in public transport use.
However, this is a relatively new system. Our initial experience is at a point where the performance of the system can be reviewed and improved.
Recognising this fact, and reflecting the importance of seeking continuous improvement in delivering public services, this project set out to explore the following key questions:
- What is the right framework to decide the right overall level of investment?
- What is the right approach to decide how much to invest in each category, for example local roads versus state highways, new infrastructure versus maintenance?
- What should land transport revenues cover and by what mechanism?
- What are the pros and cons of different approaches to collection of revenues?
How should we set the overall amount to invest in the land transport system?
Each GPS sets a 10 year forward forecast for the quantum of investment under the NLTF. This is used as the starting point for the assessment of future investment needs. The forward path is tested by a range of measures including a comparison of New Zealand’s level of investment relative to other OECD countries and the baseline increases with expected GDP growth and forecasts for inflation.
This set of tests allows us to consider the affordability of the forward programme of investment. This is a good base model, but it does not include an assessment of whether this is the right level of investment to achieve our economic and social goals, our needs.
So there is a risk with the current approach that we might under or over invest in the land transport system. The pressures to over invest include a forward path in the GPS which assumes an inflationary increase in out years, and the timing of the GPS which is set immediately before an election creating pressure on the incumbent Government to make investments over and above the current forward path. This creates pressure to follow a cycle of accumulating growth of expenditure on transport.
The risks of underinvestment arise because of increasing expectations about service levels and population growth (mainly in metropolitan areas). These pressures to the system may not be met simply with inflation based increases, especially as construction cost pressures move faster than inflation. The project explored different options to test the overall level of investment in land transport, to help improve our framework to decide the right level of investment to achieve our goals.
The project considered different approaches to setting a funding band. An effective approach would be based on both affordability and need. We concluded that we could seek improvements to current practice by:
- improving our access to relevant data, in particular on need, such as:
- asset conditions and whole of life costs
- demand forecasts and system use and performance
- road and road service user willingness to pay.
- improving our ability to analyse data, such as:
- using network outcomes to define measures that inform the setting of service level expectations
- using asset and demand data and benefit-cost calculations to identify investment and disinvestment options
- using OECD, GDP, and other aggregate data to establish benchmarks for the total level.
- constructing a framework to ensure systematic and repeatable integration of the improvements in data and analytical method.
What should land transport revenues cover?
Money collected from motorists is ring fenced (hypothecated) for use on land transport and related activities. While the different laws that enable these revenues to be raised place no limits on what the funds can then be used for, hypothecating them to the road system creates an implicit social contract between motorists and freight operators on the one hand and the state’s investors on the other.
This combination of a dedicated pool of funds and flexibility around how they are invested is a good approach. It ensures that investment in the system is not subject to the uncertainty of having to bid for money from a central pot each year or each term of government. At the same time it allows funding to be moved around to meet the highest priority needs of the network as a whole, putting every dollar to work as it comes in.
Under the Land Transport Management Act 2003, the range of legitimate things to fund extends beyond just those activities that generate the majority of the revenue for the system. Nevertheless the project concluded that the general principles inferred from this ‘social contract’ for use of revenue ypothecated from road users are:
- most of the revenue should be spent on roads: operating and maintaining them, and capital investment (rebuilding and/or upgrading existing roads and building new ones)
- the revenue should cover related services whose costs are caused by road use, such as the road enforcement aspect of police costs, safety programs, and NZ Transport Agency overhead costs
- the revenue should contribute to services that result in lower road congestion than would otherwise occur, to the benefit of road users (public transport and bike lanes)
- the revenue should not be used for activities unrelated to road use.
How should we raise revenue for the land transport system?
The project considered whether the current revenue tools would provide a sustainable source of revenue for investment in land transport given improvements in vehicle efficiency and forecasts for demand and levels of investment. Figure 4 compares forecast NLTF revenue to expenditure over the next 35 years.
The main conclusions were:
- central government’s existing revenue tools are able to cope with foreseeable changes for about the next 10-15 years
- we need indicators to monitor these changes.
However, revenue sustainability is just one objective. Revenue systems can support other objectives, for example, by helping to reveal users’ willingness-to-pay for infrastructure we might improve the efficiency of investment. Revenue tools that charge people for where and when they used infrastructure, such as universal network charging, would reveal more about user demand for infrastructure than existing tools do.
In the project we identified a list of six criteria for revenue tools:
- revenue sustainability
- collection costs
- economic efficiency
- distributional equity
- environmental sustainability.
The project assessed a variety of revenue tools against these criteria. We used this assessment to identify which tools could best meet different sets of objectives decision makers could have for the transport revenue system.
Overall, the main conclusions reached were:
- the fact that we can raise more revenue does not mean we should
- we have a window of opportunity to think carefully, not just about the next generation of central government revenue tools, but also the needs of local government and the role that pricing tools can play in bringing about the transport outcomes New Zealand wants.
What to do next?
The main findings of the project suggest a number of avenues for further work by the Ministry. Each of these speaks to an aspect of core business and core capability. Consequently, the issue is not whether to pursue these, but when and at what pace. The Ministry will be tackling this as it develops its work programme for 2015 and beyond.
- Scoping approaches to set an investment band for land transport [PDF, 1.2 MB]
- Review of international transport planning and funding frameworks [PDF, 5.5 MB]
- Uses of hypothecated revenue [PDF, 1.6 MB]
- Revenue tools for transport [PDF, 991 KB]
- Assessment of revenue tools [PDF, 1.3 MB]
- The sustainability of current transport revenue tools model and report [PDF, 921 KB]
- Summary of stakeholder engagement and findings [PDF, 1.1 MB]
- Optimal funding [PDF, 1 MB]
These papers are presented not as policy, but with a view to inform and stimulate wider debate.
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