What can transport do to help increase national productivity?

Transport’s contribution to national productivity has been in decline now for almost 15 years. Given the sector’s importance as an enabler of economic activity this is less than ideal. That’s the bad news. The good news is that there are key policy levers to manipulate in order to improve transport’s contribution. These levers, however, raise some socially contentious issues.

iMOVE commissioned Tulipwood Economics to examine the current productivity of transport in Australia and provide reform options to boost productivity performance in the sector. The report is available for download below.

The numbers

In broad terms, transport accounts for 10% of Gross Domestic Product (GDP) and employs more than 500,000 workers. A dive into more transport statistics reveals more about the extent of transport’s heavy lifting and pain points.

• Almost 250 billion tonne kilometres of freight move on Australian roads, and almost 450 billion tonne kilometres via rail.
• The passenger network moved 163 billion passenger kilometres by car and 15 billion by rail.
• Megaprojects dominate the $50 billion annual transport infrastructure pipeline, with high risk of significant cost overruns and benefit shortfalls, and crowding out more, smaller, higher-return projects.
• Road use revenues, raised mainly via annual registration fees and fuel excise, fail to sufficiently address road damage and congestion costs, adding deadweight costs to the economy. Meanwhile, declining fuel excise revenues with the rise of electric vehicles steadily undermines the current system of cost recovery.

The overall current picture is of more movement, higher demand on infrastructure, with declining efficiencies.

However, if we are able to move levers to improve productivity, the gains could be significant. In 2012-13 the transport sector’s productivity was 13% higher than it is currently, and a return to that level would see our GDP $14.6 billion higher in 2040 and be worth $86.2 billion (in Net Present Value terms) over the period to 2039-40.

The four key levers

While these levers require varying degrees of political bravery, the gains for Australia could be substantial. The report recommends:

1. Changing public investment in transport infrastructure

Public investment needs to rebalance the national transport infrastructure pipeline toward smaller, staged, high-benefit cost ratio upgrades — debottlenecking, shoulders and overtaking lanes, bridge strengthening, flood immunity, intermodal terminals and linkages, level crossing elimination, telematics and digital integration.

The hurdle to approve megaprojects needs to be raised to offset optimism bias. Better public investment choices in transport infrastructure could potentially raise GDP by $6.7 billion in net present value terms to 2039-40.

2. Road pricing reform

 Of the four levers, this is perhaps the most controversial, and hardest to both implement and sell to the public.

The fact that, in total, annual road-related revenues meet annual road expenditure is not sufficient to conclude that road pricing — via registration charges, fuel taxes and tolls — is at the optimal level to manage the allocation of scarce road space (or slots) for (and between) passenger and freight vehicles, especially at peak congestion times.

As a matter of economic theory, the optimal benchmark for transport pricing is to charge each user (whether a passenger or freight vehicle) their marginal social cost (MSC) of their trip.

Road pricing reform is needed to extract greater capacity and efficiency from the existing transport network and to guide future investment. The cost associated with providing and running roads includes:

• road construction and maintenance
• traffic light systems
• incremental congestion imposed on other road users
• increased risk of accidents

Amongst the options for change are:

• Continue to move to more cost-reflective and stable mass distance user charges for heavy freight without adding to overall system complexity.
• Introduce distance-based road user charging for EVs and rebalance fixed (i.e. registration) and variable (i.e. fuel excise) charges for all passenger vehicles to better reflect costs.
• Review the estimates of the costs of economically unjustified congestion and trial congestion pricing on a handful of very congested routes where there are potentially net benefits.
• Apply more cost-reflective public transport fares to improve cost recovery and network frequency and quality.

 Reviews stretching back more than a decade have recommended a shift to a more cost-reflective mass–distance charging framework, which would directly link charges to vehicle weight and distance travelled.

Selective road congestion pricing, which would improve freight productivity and also benefit households, could potentially raise GDP by $11.9 billion in net present value terms to 2039-40. A broader suite of road pricing reforms would likely have an even larger positive impact on GDP.

iMOVE strongly supports this policy reform. More cost reflective mass-distance charging would provide clearer incentives for efficient fleet choices, reduce cross-subsidies, and better align revenues with the costs imposed on the network. While the NTC has developed proposals to move in this direction, progress has been slow, constrained by concerns about freight costs, interstate competitiveness, and political sensitivity around charging reform.

3. Improved regulatory flexibility and responsiveness

Improved regulatory flexibility and responsiveness is required to support the uptake of larger, higher productivity heavy road freight vehicles. A more responsive and flexible regulatory environment that accelerated the uptake of new innovations and technologies and lowered costs could potentially raise GDP by $11.5 billion in NPV terms to 2039-40.

4. Uptake of heavy freight autonomous vehicles

Looking ahead to the 2040 – 2070 period we believe autonomous vehicles could significantly reduce freight costs and overall transport sector efficiency. Over this period, the improved productivity (and resulting decrease in the cost of road freight) would increase GDP by $78.3b and employment across the economy by 40,100 FTEs with respect to the baseline, represent percentage increases of 1.2 per cent and 0.15 per cent respectively.

Conclusions

The Final Destination report should be taken as an addendum to recent Commonwealth, State, and international reviews, which describe ongoing endeavours to:

• improve public infrastructure investment project selection and prioritisation;
• manage congestion and cost recovery through better road user charging systems;
• develop more flexible and responsive regulation to meet the challenge and opportunity of autonomous vehicles;
• build greater resilience against costly natural disasters; and
• prepare for a decarbonised industrial structure.

The potential benefits for Australia to use transport productivity to lift our national productivity are substantial. Therefore, our recommendation to government is to recognise the need to make progress in some or all of these difficult areas and to engage with the community to find a way forward.

Download the final report

Download your copy of the final report, Final destination: Transport and Productivity, by clicking the button below.