Driverless vehicles: towards a fairer road funding model?

Road user charging could deliver a fairer, more sustainable road funding model, and help to manage congestion in our cities — but no politician will touch it at this point in time.

In the meantime, more road users are opting to pay Uber rather than bear the costs of running a car, enabling the company to generate significant income from the use of public roads. This trend will accelerate as vehicles become increasing automated.

Driverless vehicles will provide an opportunity for government to capture some of this value and, at the same time, side-step the political challenges associated with road user charging.

Road user charging

In May last year, I published an article on the need for Australia to change the way we pay for our road network. I said the performance of our road network wasn’t up to scratch, and was harming our economy. Like Infrastructure Australia, I also said that if we continued with our current approach we could expect more of the same: a deteriorating and congested road network that costs more than it should, and delivers less than it could.

I made a case for the introduction of road user charging, as a mechanism for:

  • raising the funding we need to build and maintain an appropriate road network;
  • managing demand for our road network, and guaranteeing travel times; and
  • driving better investment decisions.

I was pleased that Infrastructure Australia had recommended a public enquiry into road user charging — a recommendation that our federal government has supported.

But time has marched on, and in the meantime the potential ramifications of more highly automated vehicles have begun to emerge. One significant ramification is the erosion of traditional sources of government funding for road infrastructure. Another is the value (and wealth) that is being created by the private sector from selling “journeys”. Governments need to move quickly if they wish to capture a share of this value for the benefit of taxpayers. But supporting road user charging in the current political environment would amount to political suicide. This presents a real conundrum for our political leaders.

How we currently pay for our roads

Unlike most utility services, including electricity, water, gas, telephone and data, we don’t pay for the use of roads by reference to the amount of road capacity we consume. Although we pay tolls for the use of some privately operated roads in Sydney, Melbourne and Brisbane, most roads are not tolled.

We do, however, pay fuel excise every time we fill our vehicles with fuel. The more we use our vehicles, the more fuel we consume, and the more fuel excise we pay. However, the link between fuel excise and the amount of road capacity we consume is weak. We pay the same amount per litre whether we are using heavily congested roads during peak periods, or uncongested roads during low demand periods. Further, fuel excise generates less than 50% of the funding that governments presently allocate to our road network, and that percentage is set to decrease as fuel powered vehicles become even more efficient and road users switch to electric, hybrid and alternatively fuelled vehicles. Governments will need to find new sources of revenue to fill the hole created by declining fuel excise.

The remaining sources of government funding for roads (such as vehicle registration fees, licence fees, stamp duty and other taxes) have no link to the amount of road capacity consumed.

Driverless vehicles will exacerbate the road funding problem

Automated, or ‘driverless’, vehicles are likely to accelerate the erosion of governments’ funding base for roads. Computers will drive vehicles in a more fuel efficient manner than human drivers. Moreover, many automated vehicles will be fully electric and generate no fuel excise. If these vehicles prove to be less accident-prone than human-driven vehicles, a significant obstacle to increased ride sharing may be removed, resulting in fewer vehicles to achieve a given number of journeys. Fewer vehicles to achieve a given number of journeys means less fuel excise and less vehicle registration fees from those journeys.

At the same time, self-driving vehicles will probably accelerate the need for investment in our road network, in order for the safety, mobility and productivity benefits which they offer to be fully realised. More highly automated vehicles will likely require changes to roadside communications infrastructure, to enable the vehicles to ‘talk’ to other vehicles, to traffic lights and to network control centres. Lane markings and road signs may also require enhancement.

The next generation of automated vehicles, that allow human drivers to take their eyes off the road and engage in non-driving activities (like reading emails), will probably only be able to operate in that mode on motorway-standard roads, at least initially. Users of these vehicles will become frustrated when they are required to resume control of the vehicle as it exits a part of the road network in which the vehicle can operate autonomously, and governments will come under pressure to expand the segments of the road network in which these vehicles can operate autonomously.

Industry experts are predicting that private ownership of motor vehicles will decline, and that we will increasingly opt to purchase journeys in automated vehicles from ride providers or fleet operators, like Uber and GoGet. Recent statistics showing a decline in the proportion of young adults holding driver’s licences support these predictions.

Uber and other ride providers are capturing the value in public road networks

Uber and other ride providers are charging people for journeys. In doing so, they are consuming public road capacity. Whilst they pay fuel excise like everyone else, the contribution which this makes to the road funding task is set to fall for the reasons already mentioned.

It is being called “mobility as a service”. A more apt term would be “mobility as a business”, as significant value and wealth is being created from the sale of journeys. In June last year, Saudi Arabia’s sovereign wealth fund invested US$3.5 billion in Uber, which valued the US-based ride provider at US$62.5 billion.

Governments provide a significant portion of the value in journeys by allowing journey providers to use taxpayer-funded roads. Is it appropriate that Australian governments continue to allow this value to be wholly captured by ride providers and other private sector entities that generate significant income from the use of public roads?

Governments should ensure taxpayers capture a share of this value

Value capture has become a buzzword in the Australian infrastructure sector, as Australian governments are revisiting the concept of capturing a share of the windfall gains that flow to landowners when governments build railway stations and other transport infrastructure near their land. The same concept should apply to the value being created from the sale of journeys using publicly funded roads.

Governments could capture an appropriate share of this value, for the benefit of all taxpayers, by imposing road user charges on everyone that consumes public road capacity. But the politics of doing so are fraught. No politician wants to impose new charges on every motorist. Even if the new charges were set at a level that simply replaced existing fuel excise, some individuals would end up worse off, and most would be concerned they might end up worse off. The equity issues associated with the introduction of road users charges will be challenging, to put it mildly.

Overcoming the political challenges

If we start thinking about mobility as a business, and start managing our road network as a valuable business asset, a corporatised road network model could provide a longer-term pathway to a fairer and more sustainable road funding model. Under a corporatised road network model:

  • our road networks would cease to be operated by government, and would instead be operated by private sector companies who would operate the network with a view to generating a return for their shareholders;
  • the private sector road operators would lease sections of the road network from the government and pay a rental stream to government in return for the right to operate that section of the road network and generate an income stream from it;
  • the road operator would charge the operators of vehicles a road user charge for the use of the road network. By the time this model was implemented, many and perhaps most vehicles would be driverless vehicles owned by fleet operators;
  • the fleet operators will charge citizens for journeys in their vehicles. The journey charge paid by the citizen would cover the road user charge paid by the fleet operator to the road operator in connection with the journey;
  • government would establish an independent economic regulator for the road industry, who would regulate the road user charges that road operators could charge, and the returns that road operators could generate for their shareholders; and
  • competition between fleet operators would minimise the journey charges that fleet operators could charge for journeys in their vehicles.

The revenue stream generated from road user charges would enable the private sector road operators to maintain the road network and raise finance from debt markets to pay for capacity upgrades. The road user charges which the road operators could levy would be capped at a level which enables the operator to recover its efficient costs, including a commercial return on its investments in capacity upgrades. The road operator should be able to take demand risk given current demand levels are known and future demand levels can therefore be predicted with some confidence.

The private ownership of the road operators would bring commercial rigour to investment decisions. The drive to maximise returns for shareholders will provide a powerful discipline to make the highest returning investments in maintenance and capacity expansions. The government regulator would require each operator to meet minimum service levels (such as an minimum average speed during peak periods), thereby ensuring adequate maintenance and capacity upgrades.

Similar corporatised models, also known as regulated asset base models, are widely used in utility networks in a range of countries and have demonstrated a strong track record of driving the right investments to optimise network performance, while controlling prices.

A side benefit of the expected shift towards driverless vehicles owned by fleet operators is that it could overcome the political challenges associated with imposing road user charges directly on citizens. Many citizens are already embracing the concept of paying for journeys in someone else’s vehicle, instead of paying the costs of owning and running their own vehicle. The introduction of driverless vehicles is expected to accelerate this trend. By the time broad-based road user charging is finally introduced, most vehicles will be driverless and owned by fleet operators rather than individuals. If the road user charge is imposed on the fleet operators, and recovered from individuals as part of the journey charge, voters will be much more willing to accept it.

But the ability of government to utilise this model won’t last forever

A corporatised road network model will take years to implement. In the meantime, private sector ride providers and other future vehicle fleet operators will invest in driverless vehicle fleets on the assumption that consumption of road capacity will continue to remain un-charged, unless our governments give them reason to think otherwise. If governments change the ground rules after these investments have been made, the private sector fleet operators and ride providers will cry foul. Accordingly, governments should start taking concrete steps towards a corporatised road network model, before the opportunity to do so disappears.

Thanks to Ian Webb, CEO of Roads Australia, for his input into this article.

Owen Hayford is an infrastructure lawyer. He has over 20 years experience advising the public and private sectors on the delivery of public infrastructure projects.  He has recently resigned as a partner of Clayton Utz to take a partnership at PwC Legal.  Owen is also a senior fellow at the University of Melbourne where he teaches a course on Public Private Partnerships as part of the Master of Laws program.

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