Unthinking privatisation leaves much mess to be cleaned up

It’s been a week of facing up to the various troubles caused by the fad of governments trying to solve their problems with help from the private sector.

All governments have indulged in the fashion of privatising their businesses and outsourcing the provision of public services to a greater or lesser extent, with varying degrees of success. Victoria was first with the idea of selling off its electricity monopoly, and it’s had its own adventures with private toll roads.

But this week it was NSW’s turn to grapple with the almighty mess it’s made of its toll roads, guided by two visiting Victorians – Professor Allan Fels and Dr David Cousins. There is much for Victorians to learn from the northerners’ travails, as they struggle to keep the schadenfreude off their face.

First, how did this supposed “reform” push get started? Partly, it was ideological – many people believe private businesses are always efficient, whereas governments are always inefficient.

But mainly it was politicians trying to do the impossible – or look like they’d done it. How can the government do more without getting bigger? How can we respond to the voters’ unceasing demand for us to provide more without increasing taxes or adding to government debt?

I know, let’s use “public-private partnerships” to work their magic. This thinking has left Sydney ringed by 13 toll roads, 11 of which are majority-controlled by the ASX-listed giant tolling company Transurban, along with many minority partners.

Toll roads now make up almost half of Sydney’s motorway network. It has more toll roads than any other Australian capital city, which hasn’t stopped it from being the most congested. These toll roads have grown like Topsy, each with differing tolls and rules about how the toll is regularly increased.

Taken together, the toll road system is regarded as inefficient, unfair and lacking transparency.

This week’s final report of Fells’ and Cousins’ independent review found that tolls are higher than they need to be and higher than they should be. Unless something is done, they’ll increase too quickly in coming decades.

Tolls are too high in the sense that they probably encourage trucks to use less suitable roads, and lead to greater congestion on other roads as motorists try to save money. There is no provision for pricing rules set to run for decades to be reviewed to ensure they still make sense.

A toll road contract is a natural monopoly, but not all the contracts were awarded after competitive bidding. Where bidding did occur, contracts weren’t necessarily awarded to the firm offering to charge the lowest toll.

Often, the government set what the toll would be, with the contract awarded to the firm offering to take on the most of the government’s obligation. This was a way of shifting costs that should have been covered by the taxpayer onto motorists, thereby making budgets look better and taxes lower.

Sometimes the cost to motorists was disguised by contracts where the toll started low but rose excessively over time.

All the contracts involved the private firms borrowing the money to pay for the motorway, even though governments can borrow much more cheaply than businesses can. This made government debt look lower, but hid the higher interest costs in higher tolls.

All the contracts involved the company accepting “traffic risk”. When fewer cars use the road than had been predicted, the company’s out of pocket, but when there are more cars than predicted, the company makes a windfall gain.

By now, windfall gains are common, and the companies are cleaning up. But this is an unnecessary burden on motorists. Why? Because companies have to be paid to take on the risk, whereas governments are much better at bearing such risks. They can spread any costs over millions of taxpayers so that they become trivial.

The system of tolls is biased against motorists who live in the outer western suburbs, and biased in favour of those in better-off northern suburbs using long-established, government-owned toll roads crossing Sydney Harbour.

For some years NSW governments have sought to reduce this unfairness by paying subsidies to western suburbs motorists with excessive weekly toll bills. This makes the system less unfair by adding a cost to taxpayers with no loss to the toll companies. They actually benefit because more motorists can now afford to pay their high prices.

The Minns Labor government has vowed to bite the bullet and renegotiate the contracts. This week’s final report recommends that it replace the hodgepodge array of tolls with a uniform system where the price is based on distance travelled, with those travelling longer distances charged less per kilometre.

The Harbour Bridge and Harbour Tunnel tolls would be included in the pricing mechanism, so that northern suburbs motorists paid more, while western suburbs motorists paid less.

The government says it will compensate the toll companies for losses from changes to their contract arrangements, but would transfer “traffic risk” and its windfall gains to the government. This would help cover lower tolls in the west.

Transurban has belatedly agreed to renegotiate, but proposes setting the toll on a different basis, suggesting the negotiations may be long and hard. But getting agreement from all Transurban’s many minor partners could take an eternity. The government wants a deal by Christmas.

To this end, the report recommends that the NSW government take back control of tolls by setting up a state-owned entity, NSW Motorways. Its changes to tolling arrangements would be overseen by the NSW Independent Pricing and Regulatory Tribunal. The new entity should look for opportunities to add competition to the system, especially for any new roads.

The existence of the new tolling entity would allow the government to act should it take Transurban and its many partners too long to agree to a satisfactory deal.

The private companies have rights, but they don’t have the right to impose on the people of NSW and their government an unfair and unsustainable arrangement lasting forever and a day.

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Morrison's budget report card: could do a hell of a lot better

When it comes to the relative strengths and weaknesses of the two main parties, polling shows voters’ views are highly stereotyped. For instance, the Liberals, being the party of business, are always better than Labor at handling money, including the budget. But this hardly seems to fit the performance of Scott Morrison and his Treasurer, Josh Frydenberg.

Dr Mike Keating, former top econocrat and a former secretary of the Department of Finance, has delivered a two-part report card in John Menadue’s online public policy journal.

His overall assessment is that the Morrison government is guilty of underfunding essential government services on the one hand, and, on the other, wasting billions on politically high-profile projects.

Keating traces these failures to two sources. First, the government’s undying commitment to Smaller Government, but unwillingness to bring this about by making big cuts in major spending programs, such as defence, age pensions or Medicare.

This is a tacit admission that Smaller Government is an impossible dream. Why? Because it’s simply not acceptable to voters. But this hasn’t stopped Morrison and Frydenberg persisting with the other side of the Smaller Government equation: lower taxes.

The consequence is that they underfund major spending programs, while engaging in penny-pinching where they think they can get away with it. Too often, this ends up as false economy, costing more than it saves.

For instance, Keating says, the Coalition has reimposed staff ceilings. By 2018, this had cut the number of permanent public servants by more the 17,000. But departments now make extensive use of contract labour hire and consultants to get around their staff ceilings, even though it costs more.

Second, Morrison’s determination to win elections exceeds his commitment to businesslike management of taxpayers’ money. He’s secretive, reluctant to be held accountable and unwilling to let public servants insist that legislated procedures be followed.

Apparently, being elected to office means you can ignore unelected officials saying “it’s contrary to the Act, minister”.

Let’s start with Keating’s list of underfunded spending programs. The government has increased aged care funding following the embarrassment of the aged care royal commission, but spent significantly less that all the experts insist is needed to fix the problems.

On childcare, this year’s budget increased funding by $1.7 billion over three years, but this is insufficient to ensure that all those parents – mainly mothers – who’d like to work more have the incentive to do so. This is despite the greater boost to gross domestic product it would cause.

The National Disability Insurance Scheme is clearly underfunded – which is why we have a royal commission that’s likely to recommend additional funds. (I’d add, however, that it’s perfectly possible for underfunding to exist beside wasteful spending on private service-providers costing far more than the state public servants they’ve replaced.)

On universities, the government has recognised the need to provide more student places, but failed to provide sufficient funding. On vocational education and training, the extra funds in this year’s budget were too little, too late. They won’t make up for the 75,000 fall in annual completions of government-funded apprenticeships and traineeships over the four years to 2019.

While housing affordability has worsened dramatically, the government’s done nothing to help. Its modest new assistance to first-home buyers will actually add upward pressure to house prices. What it should be doing is increasing the supply of social housing.

Turning to wasteful highly political, high-profile spending, Keating’s list is headed by the JobKeeper wage subsidy scheme. He acknowledges, as he should, that the scheme was hugely successful in maintaining the link between businesses and their workers, so that the fall in unemployment after last year’s lockdowns ended was truly amazing.

Keating also acknowledges that the scheme was, unavoidably, put together in a hurry. At the start of recessions there’s always a trade-off between getting the money out and spent quickly and making sure it’s well-spent. The longer you spend perfecting the scheme, the less effective your spending is in stopping the economy unravelling. The stitch that wasn’t in time.

Remember, too, that since the objective is to get the money spent and protecting employment, it doesn’t matter much if some people get more than their strict entitlement. In these emergency exercises, it’s too easy to be wise after the event. And the more successful the scheme is in averting disaster, the more smarties there’ll be taking this to mean there was never a problem in the first place, so the money was a complete waste.

But it’s now clear many businesses – small as well as big – ended up getting more assistance than the blow to their profits justified, and many haven’t voluntarily refunded it. Keating criticises the failure to include a clawback mechanism in the scheme and rejects Frydenberg’s claim that including one would have inhibited employers from applying for assistance.

Next, he cites the contract with the French to build 12 conventional submarines. The process that led to the selection of the French sub was “completely flawed”. There was no proper tender, with the contract awarded on the basis only of a concept, not a full design.

Five years later we still didn’t have a full design, but the cost had almost doubled. The government was right to cancel the contract, but the cost to taxpayers will be between $2.5 billion and $4 billion.

Finally, spending on road and rail infrastructure projects, which was booming long before the pandemic. Keating quotes Grattan Institute research as finding that overall investment has been “poorly directed”.

More than half of federal spending has gone on projects with no published evaluation by Infrastructure Australia, suggesting many are unlikely to be economically justified.

“In short,” Keating concludes, “there is an enormous management problem with the government’s infrastructure program. The projects are much bigger, but often poorly chosen, and poorly planned with massive cost overruns.

“The key reason is that the government announces projects chosen for political reasons.”

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Why more expressways don't fix traffic jams

When Marion Terrill, of the Grattan Institute, set out to find out how much commuting times had worsened in Sydney and Melbourne, she discovered something you’ll find very hard to believe. But it would come as no surprise to transport economists around the world.

Everyone is sure traffic congestion has got much worse in recent years. This is only to be expected since Sydney’s population grew at the annual rate of 1.9 per cent, and Melbourne’s rate grew even faster, at 2.3 per cent, between the censuses of 2011 and 2016.

Both cities have grown much faster than the Australian population overall. People are crowding into our big cities, much to the disapproval of many people already living there.

Why are they piling into already-crowded cities? For reasons economic geographers call “economies of agglomeration”. One way for countries to get richer is for their businesses to pursue economies of scale; another way is for businesses and their workers to pursue the gains from agglomeration – a fancy word for piling things together.

There are three kinds of agglomeration economies. They come from matching (in a big city, people are more likely to find a job, while businesses are more likely to find the particular workers they need; there can be greater specialisation), sharing (less idle capacity in, say, car parks, or waiting around for customers), and learning (more workers for you to see and imitate; knowledge and know-how shared face-to-face).

Sharing, matching and learning can occur in two ways. When a lot of firms in the same industry gather in the same city, or just because a lot of people and firms are located together, making the city large enough to justify, for instance, heart and lung transplant centres.

Of course, along with the great benefits of crowding together go the costs of crowding together - such as feeling terribly crowded.

There are more people per square kilometre living in the centres of our big cities than there were five years ago. Sydney’s population density has increased by 23 per cent – and Melbourne’s by a mere 46 per cent.

And surely more crowding means more traffic congestion. But this is where Terrill and the co-author of her report, Hugh Batrouney, found their first strange fact. Between the last three censuses, from 2006 to 2016, there’s been virtually no change in the distance between where people live and where they work, measured as the crow flies.

Next surprise came from the HILDA survey – household income and labour dynamics in Australia – which, among other things, asks people how long they spend commuting.

In the four surveys between 2004 and 2016, for both Sydney and Melbourne there was no change in the fact that a quarter of workers had one-way commutes lasting no longer than 15 minutes. One half of workers had commutes no longer than 30 minutes.

When you take it up to the experience of three-quarters of workers, there was some increase over the years in Sydney, but only a small increase in Melbourne. Other figures, from Transport for Victoria, tell a similar story.

So, we all think the increasing traffic volume is leading to greater delay and, hence, longer commute times, but the best available actual measures of commute times say they’re little changed.

Find that hard to believe? Well, as I say, few transport economists would. Why not? Because it fits well with what they call “Marchetti’s constant”. Marchetti was an Italian physicist credited with discovering the empirical truth that the average time spent by a person on commuting is about an hour a day – 30 minutes each way.

The amazing truth of this “constant” has been shown by many studies of many cities around the world.

And it fits with another empirical regularity known as the “Lewis-Mogridge position”, formulated by those gents in 1990: “traffic expands to meet the available road space”.

The government notices that traffic is particularly congested on a certain road, so it builds a big new expressway. When it opens, the time taken to get from A to B falls dramatically. But when people realise this, more of them stop travelling to work by public transport and start going by car.

So many people do this that the speed gain disappears within months, even weeks. The time taken to get from A to B goes back to about what it was before the expressway was built.


The only change is that a higher proportion of workers are able to go by car. The traffic jam is often just shifted to another place on the road network.

Getting back to road congestion in Sydney and Melbourne, how can the gap between what we think has happened and what actually happened be explained?

One possible part of the explanation is that although the traffic really is heavier, making trips less pleasant, this doesn’t prolong the time of the trip as much as we think it has.

But the main explanation – both in Oz and in other countries – is that commuters adapt to the greater congestion.

They take evasive action by moving to a job that’s closer to home, or moving to a home that’s closer to the job. Or they stop going by car and start using public transport.

One thing that really has changed with our bigger cities is more crowded trains and buses.

It’s as though each of us has our own internal, unconscious regulator that draws the line at 30 minutes and, when that limit is exceeded, prompts us to take steps to get travel times back down to where they should be.

Terrill and Batrouney are clear on this: in neither city was enough new infrastructure built between 2011 and 2016 to explain why the huge population growth didn’t lengthen commute times.

The government didn’t fix it, you and I did. Which says we ought to be wary of thinking the obvious – and only - solution to greater crowding is greater spending on transport infrastructure.

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Never mind carbon, let’s put a price on bad driving

What would an economist know about road safety? More than you’d think. Certainly, more than the road safety establishment thinks.

Or maybe they just don’t want to disturb the insurance companies’ nice little earner from compulsory third-party car insurance.

The economist in question is Dr Richard Tooth, a consultant with Sapere Research Group, who’s been working for some years on his pet project of using economics to reduce the road toll (with, at one point, some funding from Austroads, the peak body representing road transport agencies).

Over the decades we’ve had much success in using seat belts, random breath testing and safer cars to bring down the road toll.

But we seem to have run out of ideas. The national death toll has started going back up. Last year 1226 people lost their lives on Australia’s roads.

The newly released report of the inquiry into national road safety for the coming decade (which says little about insurance) reminds us that at least another 36,000 people are admitted to hospital each year.

“Often these are life-changing injuries, such as paralysis, brain injuries, amputations or loss of sight,” it says.

Tooth thinks there’s an obvious improvement we could make that wouldn’t cost much more initially, and would actually save money once it started affecting people’s driving habits. It’s to base a driver’s annual motor vehicle insurance premium on how risky their driving is.

Viewed the way economists see things, there are two key problems. As behavioural economists (and social psychologists) have long known, humans tend to be overconfident.

Almost all of us think we’re good drivers, it’s just those other drivers that are causing the problem.

The second problem is that, when we drive badly and cause accidents, we don’t bear the full cost of the damage we do. Economists call the part we don’t pay for ourselves a “negative externality”.

And if someone else is paying, why should we worry? Economists call this “moral hazard”.

Insurance is obviously a good idea, a way of sharing risk. Those people whose house didn’t burn down make a small contribution to the cost of building a new house for the person whose did.

The downside of all insurance, however, is moral hazard. Why should I worry much about ensuring my house doesn’t burn down, it’s insured?

Insurers have ways – usually fairly primitive – of trying to reduce moral hazard. Say, you get a discount on your premium if you have smoke alarms fitted. And on other insurance policies there’s a “deductable”, where you bear the first part of the claim yourself. And, of course, the no-claim bonus.

With car insurance, however, a lot of the cost of accidents is borne by neither the insurance company nor the policy holder. A fair bit is borne by the general taxpayer – the need to maintain many traffic police, ambulances and hospital emergency departments.

But the biggest “cost” is one that’s hard to measure in dollars but is very real: the grief, pain and suffering caused by avoidable deaths and disablement.

Whatever price we put on a human life, it’s safe to assume it would be a whole lot higher than $200,000 – which is what Tooth says is the average cost paid via insurance.

He’s concerned that our system of dividing highly regulated compulsory third-party insurance (which covers injury to people) off from general vehicle insurance (which covers damage to property, plus other things such as theft) makes it hard to give drivers a greater monetary incentive to avoid driving riskily.

With a few exceptions, the state-government run CTP schemes charge people a flat premium that bears no relationship to how carefully they drive. Which, when you think about it (as an economist would), means the schemes effectively tax the low-risk drivers so as to subsidise the high-risk drivers.

That, of course, is the wrong way round if we’re trying to discourage rather than encourage risky driving. And that’s Tooth’s point.

He says we should do what most other advanced countries do and allow insurance companies to offer policies that cover third-party bodily injury in a package with property damage and other risks. The CTP component could remain compulsory and the other components remain voluntary.

This would allow the companies to charge premiums based on the individual’s assessed risk of having an accident, as is happening increasingly in Britain. It would better align insurance companies’ motivation to reduce claims with the community’s desire to reduce road death and injury.

It would mean higher premiums for drivers who were young - or very old. But technological advances have made it possible to assess risk more accurately than just via the driver’s age.

People using “advanced driver assistance systems”, such as autonomous emergency braking, would pay less. Young people driving cars with such assistance systems would get bigger discounts than older drivers.

And then there’s “telematics”, such as onboard devices that record the way a car has been driven – hard braking, swerving and so forth. Such UBI – usage-based insurance – is very big in Britain.

According to Tooth, research shows this can reduce crash risk by at least 20 per cent overall, and by up to 40 per cent among young drivers.

He believes risk-based insurance premiums can influence whether people drive (young people may delay becoming drivers, with ride-sharing apps helping this choice), what they drive (safer cars or cars with added assistance systems) and how and when they drive.

But Tooth would like us to go one better than the Brits (and anyone else). The government could “internalise the externality” of the intangible costs of death and disablement on society by imposing a commensurate charge on insurance companies, which they would pass on to customers having accidents in which they’re at fault.

The government could use the proceeds to build safer roads or for some other worthy cause. The real purpose of such a tax would be to encourage people to avoid it by driving more carefully.

Is this ringing any bells? Putting a price on bad driving follows the same logic as putting a price on carbon.

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Brave minister wants us to think about road user charges

If you're searching for a politician with courage, smarts and foresight, meet Paul Fletcher, Malcolm Turnbull's Urban Infrastructure Minister. He's so unlike your typical gutless pollie he reminds me of Paul Keating.

Fletcher gave a speech last month in which he raised issues from which most politicians would run a kilometre. He thinks heavy vehicles – trucks weighing more than 4.5 tonnes – should pay road-use charges that more accurately reflect the huge damage they do to our roads. That's brave.

But he thinks ordinary drivers should also be paying a road-user charge. That's not brave, it's outrageous.

Fletcher, however, has his own arguments to persuade us it's really quite sensible.

He says he's worried about how the federal government will be able to maintain its contribution to building and maintaining the nation's roads when the move to more efficient cars causes its revenue from fuel excise to fall away.

He reminds us that, whatever the price of petrol, it's almost 40¢ a litre higher than it needs to be, thanks to the federal government's fuel excise.

This means, of course, that how much tax you pay is partly a function of your vehicle's fuel efficiency. So someone driving a 12-year-old Holden Commodore pays 4.5¢ a kilometre, whereas someone in a six-year-old Renault Megane pays 3.5¢.

But get this: someone with a late-model Toyota Prius hybrid pays just 1.5¢ a kilometre and someone who's paid $125,000 for one of the new all-electric Teslas pays exactly … nothing.

See the problem? As we all do the right thing and move to more environmentally friendly driving, the government's excise revenue will be going down, not up.

Today, electric vehicles make up only about half a per cent of our vehicles, but projections put that up to 30 per cent within 20 years.

Then how will we pay for our roads?

Fletcher's answer is that we need to move to funding them more directly by a user charge – say, one based on the number of kilometres you drive.

He stresses this isn't an argument for motorists to pay more. They already pay a lot more than federal excise to drive their cars, including state rego fees and stamp duty.

Indeed, if you pull together all the taxes and charges we pay that are in any way associated with cars and trucks – including under GST and the fringe benefits tax – you can get to a total of about $30 billion a year, of which fuel excise accounts for only about a third.

This compares with total spending on building, maintaining and operating roads – federal, state and local – of about $25 billion a year.

So Fletcher's idea is to rationalise this mish-mash of taxes and charges and replace them with a road-user charge that would be much more visible.

But this is where he reminds me of Keating, who often used wrong but more appealing arguments to persuade us to accept needed but unpleasant measures.

Fletcher has picked up a long-standing piece of motoring organisation propaganda – that every cent of tax paid by motorists should go back into roads – and given it the status of a self-evident fiscal truth.

The truth is there's never been any link – legal or informal – between the taxes and charges on petrol and cars, and the amount governments spend on roads.

Nor should there be. Governments have to pay for 101 services we demand of them apart from roads. So they have to raise a lot of revenue, which they do by taxing a wide range of activities and things, not just one or two.

What they tax tends to be what we're used to them taxing, since we have such knee-jerk opposition to anything we can condemn as a "new tax".

The feds' spending on roads is equivalent to only about two-thirds of what they raise from fuel excise. So should excise receipts decline in the future, this will be a problem for the whole budget, not for road spending in particular.

Fletcher is right to think that user charges would be an improvement because their greater visibility would encourage us to be more economical in our use of roads.

That's particularly true of heavy vehicles, because it's they that do most of the damage to our roads. We don't want goods being moved interstate by road rather than rail because we're charging semi-trailers and B-doubles only a fraction of the cost of the damage they do.

But if the rest of us had to pay a user charge whose purpose was to cover all the remaining costs of roads and to replace all the other taxes and charges, that might be neater and more visible, but it would be a lost opportunity to help us reduce a different, fast-growing cost for city motorists: congestion.

The cost of congestion is the cost I impose on other motorists by driving my car at the same time they do.

And the way to reduce it – as well as the spending needed for new motorways and even public transport – is to replace some of the tax we pay with a user charge that varies by location, time of day and distance travelled.

As Fletcher says, there's a lot more thinking to be done about how we pay for roads.

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