How far New Zealand's land transport funding system has fallen. Part 3: What could fix it?

To establish how to fix the land transport funding system you first need to define the objectives of the system, and what outcomes are sought.  At present the system largely leaves this to the Minister of the day, but should funding for maintenance of the road network be politicised? It is in multiple jurisdictions, such as virtually all US states and the UK (and effectively now, NZ), and it is a disaster. Indeed look at other infrastructure sectors and what role do Ministers have in deciding where capital investments are made?

For airports and ports, this is left pretty much entirely up to the Boards of the respective airport and port companies to decide, representing their shareholders (which for airports are typically a mix of private and public owners, and for ports are almost entirely regional council owned).  In both cases as well, airport and port companies finance capital investment from borrowing, and recover the costs of that investment from usage fees of their customers (airlines, shipping companies, but also for airports, retail concessionaires, car park users and other users).  It wasn't always that way.  Ports used to be Harbour Boards which were elected. Major airports as authorities couldn't raise capital readily, hence why Wellington Airport had a reconfigured De Havilland aircraft factory as its major airport terminal from 1959 until 2000, as central government and Wellington City Council pointed to each other as being to blame for not funding a new terminal.

For other sectors, such as electricity, again generation, transmission, distribution and retail is all commercialised, with pricing a mix of market driven for competitive sectors (generation and retail) and regulatory oversight (for transmission and distribution) as natural monopoly sectors. Once more, it is expected that consumers will pay for capital investment which is paid for by debt.  Again, this has served consumers well, balancing out the risk of gold-plating capital investments with the risk of underinvestment in maintenance and renewals.

Water is quite different. With the exception of Watercare Services (and that is for fresh and wastewater not stormwater), the sector is characterised by a great deal of underinvestment in maintenance and renewals, because territorial authorities are responsible. While some water services are corporatised within the bounds of territorial authority ownership, they are limited in their capacity to borrow, and although they may price use, most do not.  With direct political control of investment, as has been the case for many decades, New Zealand is reaping an enormous backlog of renewals, and the effects are seen with raw sewage emerging on some streets or unsafe drinking water.  Leaving aside the merits or otherwise of the Three Waters proposals, behind them is abject failure of having political direction in capital investment and renewals in water, and ever moreso, a lack of link between how water is paid for (which more often than not is through rates, not user charges) and the use of revenue raised for this.  

So political direction over day-to-day, core spending on the road network is unlikely to deliver and sustain the levels of maintenance and renewals needed that should be utterly uncontroversial. In fact, the system should encourage optimising the amount of spending on maintenance and renewals over the long term, so funding is available for capital improvements.  This is exactly why the system was reformed in 1993, because as Finance Minister, Ruth Richardson's first budget in 1991 slashed funding to Transit New Zealand, as the land transport funding agency, which saw maintenance spending cut significantly (and capital spending cut almost to nothing).  The effect of this was to generate a maintenance deficit that took several years to reverse, so from 1993 Transit New Zealand was guaranteed 97% of the funding it received the previous year, to acknowledge that most spending was, at the time, maintenance (and there was no hypothecation of road user taxes at the time).

Beyond maintenance and renewals, the system should enable efficient investments in improvements to the network that represent clear benefits to those paying for them, which ought to reflect not just benefits monetised in travel time savings and reduced fatalities and serious injury accidents, but also user preferences overall.  For example, in the 1990s it was very clear that road users wanted more passing lanes on rural highways, because one of the biggest issues was having journey times frustrated by significantly slower vehicles (and the risks a few motorists would take to overtake where it was not safe, risking not only them, but innocent people travelling the opposite way). The system should reflect those preferences and should seek to lower the costs of using the network, costs seen in travel times, fuel used and most importantly, from accidents, which don't only hurt those directly involved, but affect the resilience of the network due to closures.

As long as the funding system is dependent on what are essentially taxes on distance travelled, fuel used and vehicle ownership (RUC, FED and MVR) to raise revenue, and with such charges set nationally, then it is understandable that there will be an appetite for Ministerial direction as to overall strategy.  However, if that is likely to result in undermining efficient spending on the network (much of the useful spending is on small to medium scale projects costing <$50 million), it is preferable that funding to expand or enhance the network beyond what users are prepared to pay, comes directly and transparently from general taxation funding.  This would be subsidising capital expansion of the network, but it is worth noting that almost all capital spending on Kiwirail is exactly of this nature. Kiwirail is basically unable to raise revenue from its customers to the extent needed to significantly upgrade most of its network. If Ministers wish to use general tax money to subsidise enhancing the rail network, then it is reasonable to expect them to do it to the road network, although there ought to be a high standard of transparency as to the net benefit of such spending, to ensure taxpayers are not having their money shredded on poor quality spending, which they may prefer spent on other sectors, or simply returned to them in tax cuts.

While there are likely to be many options to reform the system, there are some characteristics of a better system that ought to be elements of any reform. Reform should reflect where the revenue comes from, how funding is allocated and how infrastructure is managed, so my thoughts are categorised along those lines.

Pricing

Perhaps the biggest limitation of the current system is it doesn't enable pricing to vary in ways that can manage congestion, encourage more efficient vehicle use of the network and equally as importantly, send signals about whether future spending should be directed, based on demand.  No country has implemented a nationwide road pricing scheme that does this (although Singapore's Electronic Road Pricing system operates an excellent congestion pricing scheme that effectively manages congestion on the routes it operates on).

While New Zealand's existing Road User Charge (RUC) system is much more sophisticated than most road charging systems around the world (including Australia, the UK and most US states), half the vehicle fleet will still be on Fuel Excise Duty (FED) for some time. While together they form a useful system for user pays in the National Land Transport Fund (NLTF), the funding system should evolve towards pricing, set not by politicians, but by road managers, with suitable regulatory oversight. A system that requires Cabinet decisions on pricing is completely incapable of being responsive to changes in behaviour, and local conditions. Most other pricing elements in transport are not subject to such centralised control, so a goal should be to move towards better pricing over the next decade or so.

In the short term this should mean enabling more tolling and congestion pricing for major cities and reform of RUC to better accommodate a significant growth in the number of light vehicles. This should be led by an agency dedicated to charging road users and spending their funds on their behalf, with an interest both in efficient revenue collection and sending appropriate price signals. Longer term the system should accommodate road manager setting prices directly, and offering a range of options to motorists as to how they want to pay for road use. This has to mean pricing varying by location, whether by region, road type or demand, and time of day. 

Related to this is the role of ratepayer funding of local roads, including cycleways and footpaths. The Shipley Government proposed replacing ratepayer funding with full funding from RUC and FED, so that motorised road users paid for all roads (although not footpaths). Another option would be to replace general rates funding with fees charged for connecting private property to local roads (whether garages, driveways or car parks) and footpaths, supplemented by revenue from parking or leasing out road space for other purposes (e.g. outdoor restaurant or properties bought for future road expansion).  In any case, the current system limits the scale and scope of local road improvements, and should be reviewed.

Track User Charges charged by Kiwirail for use of its infrastructure should not go to the National Land Transport Fund, only to be returned to Kiwirail. These should be subjected to appropriate regulatory oversight and transparency, if only to ensure Kiwirail doesn't discriminate against potential rail-based competitors, but there is no reason to blend rail and road user revenues.  If Government wants to subsidise rail, it should do so much more transparently and directly.  Kiwirail should set Track User Charges with regulatory oversight, and if it is not structurally separated between infrastructure and service provider, it should be subject to robust information disclosure requirements supervised by either the funding agency or the Commerce Commission (as is done for airports).

Finally, given current political commitments to several large road and public transport capital projects, Crown funding for projects that are not able to be supported or financed from the NLTF (after maintenance and spending on higher net benefit capital projects) should be entirely separate.  The funding system should prioritise maintenance, operations and the highest value capital projects first, which might include some politically identified projects anyway, but if not, then the funding system should clearly identify how much money has to come from general taxation to support politically determined projects.  There is alway the risk that such projects get cancelled after changes in Government policy, but this should not undermine maintenance or other capital spending supported by road user revenue.

Related to pricing of road users, is pricing of public transport users.  There should be a clear basis for the proportions of cost recovery expected from public transport users through fares, the proportion to be supported by road users (because public transport can benefit road users in specific circumstances), the proportion to be supported by local ratepayers (recognising that property owners may benefit from public transport services) and any funding from general taxpayers (for social based policies, like concessionary fares). Road users should pay for road user benefits. Passengers should pay for private benefits, and anything else should be transparently paying for either social policy (targeted subsidies) or advancing urban form and property development (rates).

Funding

Long term the funding system should mean road managers charging customers directly and maintaining and developing road networks by being responsive to the needs of users. This also includes maintaining and developing alternatives to roads, in the form of efficient public transport, cycling and walking infrastructure and freight alternatives such as rail and sea freight, with the emphasis being on efficiency.  Maintaining and developing such projects should be based on a robust appraisal of the likelihood to attract traffic from the roads, reducing congestion and other externalities. 

This means applying principles of economic efficiency to reducing travel times, improving trip reliability, improving access and reducing negative externalities (particularly reducing fatal and serious injury accidents, but also reducing environmental impacts). By applying economic efficiency it means that revenue from road users is directed first to activities that mean the network is efficiently maintained, and improvements have net benefits to users and society as a whole. Until road pricing enables road managers to be funded directly from customers, the funding system should buy road services on behalf of motorists based on proposals from road managers. 

To enable this, the funder should be separate from road managers, so that the funder can manage the NLTF prudently and audit the performance of road managers in managing maintenance. This should also include funding, as appropriate, large scale renewals and long-term performance-based maintenance contracts if they minimise life-cycle costs and optimise performance for road users (minimising potholes and maintenance requirements).  This should be outside any political direction or interference. Similarly, the system should allocate remaining NLTF funds on the basis of economic appraisal that values what road users value, being travel time savings, reducing fatal and serious crashes, improved trip reliability and lower vehicle operating costs.  This should be driven by road managers seeking to enhance their networks for their customers.  Output classes defined by the funding agency for road maintenance and capital improvements, and then funding of alternatives to roads for public transport, cycling, walking and other modes if they generate net savings for those paying into the NLTF.

A long standing flaw in the current funding system is the insufficient use of debt financing to spread the cost of capital projects across their depreciated life. While PAYGO is a suitable tool for funding maintenance and operating subsidies, finance should be the tool for most capital investment. To enable this either the funding agency should be empowered to borrow against future road user revenue, or road managers should be structured to enable them to do so (which would require the funder to guarantee a flow of revenue to the road manager). For Crown funded projects, this will mean the Crown providing the cashflow for such projects.

The end result should be that (leaving aside how the local share, if any, of local projects is funded) road managers, and public transport authorities are funded from the NLTF for activities that deliver the greatest benefits to road users.  For activities beyond the capacity of the NLTF to fund, the Crown can step in to inject funding for specific categories of projects, which would not push aside the priorities of the system more generally. The Minister could not defer or cancel road or public transport projects or maintenance to redirect funds to a pet capital project, but could only seek funding for a pet project from the standard budgetary process. That keeps funding transparently separate from the core land transport funding system. It means that network maintenance cannot be neglected, nor can long-planned for, high-value capital projects be deferred out of political whim (though they may be deferred due to cost-escalation or if changing demands reduce the net benefit of such a project). 

If National or Labour are elected and want to build project A or B, and these are not already provided for in the NLTF, the choices would be to either check with the funder as to whether increases in existing motoring taxes would make such a project fundable (along with many others), or to simply grant general taxpayer funding for such an activity (taking advice from the funder and the relevant infrastructure manager as to its impacts on other projects). Of course a similar option is available to local authorities who want to fund projects outside the NLTF altogether, with ratepayers' funds.

In short, it partially returns the system back to where it was pre-2008, but with clarity and transiency between what is Crown funded and what is not.  Ministers may choose to fund more, but they could do cancel projects that the road manager wants, that is assessed as being efficient and a good use of NLTF funds by the funding agency. 

Finally, Kiwirail should be taken out of the NLTF land transport funding system, as an infrastructure provider. Although there should be transparency and oversight of Track User Charges, there is no clear public policy reason why Kiwirail should be paying Track User Charges into the NLTF and then receive funding back from it. Where Kiwirail should be, is where road manager ought to be in the medium to longer term. It sets charges for users of its infrastructure, with regulatory oversight, and receives revenue from them to maintain and develop its network.  If Ministers want to fund greater levels of capital investment, or to subsidise maintenance, it should come directly from general taxation, and be an explicit subsidy. It may be preferable to simply subsidise services and include the full cost of infrastructure maintenance and upgrades through such subsidies, so Kiwirail could not submit proposals for capital projects without assessing the expected revenue from customers to pay off debt accrued for such projects.  The NLTF funder could have a role as economic regulator of Kiwirail, or such a function could go to the Commerce Commission.

What about funding of public transport, cycling and walking infrastructure?  This could be split into three sources (on top of fare revenue):

• NLTF funding for projects and activities that deliver net benefits to motorised road users, shared with local authorities according to the proportion of such benefits attributable to road users;
• Separate Crown funding for projects that deliver net benefits to the community at large (such as encouraging housing development, or the health benefits of active modes), which may be shared with local authorities depending on the type of project and objective;
• Local authority funding for projects to be funded from ratepayer and other local authority resources for purely local purposes.

Management

Implied in these suggestions is some significant structural reform of the sector. Waka Kotahi/NZTA's existing functions may be divided between two or more entities. Certainly State Highway management should be separated, into a corporate structure as seen in England and Austria.  The funding and regulatory activities may be split or retained in a single entity.

Road (and rail) infrastructure managers should be statutorily required to maintain, plan and develop their networks to be user responsive, economically efficient and to reduce negative externalities within the bounds of the first two principles. They should be encouraged to be innovative in maintenance, design, contracting and operations, and to use technology to improve productivity, efficiency and safety.  For local road managers especially, the system should encourage consolidation of road managers, to achieve not just economies of scale, but a critical mass of capacity, capability and experience in management and contracting.  There should be fewer road managers, but they should be more efficient and dynamic, and the funding system should either incentivise or require establishment of structures that reflect this.  Local government could be encouraged to develop proposals to consolidate road management across regions, to deliver efficiency savings in maintenance and better standards of performance, and enable entities with capacity to borrow against future revenues.  If local government cannot come up with appropriate options within a couple of years, central government should develop them for it.  

As for public transport authorities (mostly regional councils plus Auckland Transport), a major focus should be on planning and contracting the delivery of services to customers. Consideration might be given as to whether regional councils are the right entities to plan and contract for public transport, when many of the less metropolitan ones are primarily water-catchment and rural environmental management agencies.  There needs to be more accountability for performance, more responsiveness to users and better capabilities in contracting, and where relevant, asset management. For example, shouldn't Greater Wellington Regional Council be developing the land over suburban railway stations? If not, should the assets be transferred back to Kiwirail to do this, or to a separate infrastructure management entity? 

Other options?

The old Transfund, Transit model had some major limitations. In particular, it couldn't debt finance major capital projects, it did not incentivise better pricing, and was constrained in its capacity to fund larger projects, but it did ensure greater scrutiny on spending and was less amenable to political redirection of funding away from maintenance.

The Better Transport Better Roads proposal from the late 1990s would have transformed the road sector, by corporatising road management and enabled road companies to contract out of nationally collected motoring taxes. However, it did had significant pushback from local government, and did not have a sufficient strategic vision for how public transport would fit into a future before road pricing was widely introduced.  It was clear that public transport in Auckland and Wellington needed significant capex and it did not sufficiently enable it.  However, it would be entirely possible to reform road funding and management, and maintain public transport funding as part of a separate system.

What isn't a good option is to retain the status quo. Whatever the next government does, it shouldn't simply amend the GPS, it should rather develop a revenue, funding and management structure for roads, and for public transport, that is economically sustainable, and delivers better outcomes for users.  The only economic infrastructure that appears to be worse managed is the water sector, largely because it has for so long been left to local government to do largely what it wanted, with accountability solely vested in local politicians.  

The time for tinkering is over.  New Zealand has had 15 years of highly politically driven land transport funding, and the results have been mixed, and the end state today is a system that is less efficient, less dynamic and financially overstretched.  It's time to take its core (the NLTF) out of the hands of political horse trading, let politicians choose to add funding from general taxes if they so wish, transparently and accountably, and let the system be built primarily by what users pay and want, and only topped up by what politicians get a mandate to add.

Perhaps a National/ACT Government would see a few more major state highways built, or a Labour/Greens Government a few more railways and some light rail, but in neither case should it be at the expense of road maintenance and a long-term programme of efficient capital improvements to the road network, based on road managers developing comprehensive corridor strategies.