Whilst road pricing has been a hot topic in recent months in various states across Australia, the evolution of charging commuters for roads across Australia’s has been a long series of developments. With many challenges to defining how to charge commuters – including competing priorities and governance, and new technology such as EV’s, we unpack this topic below.
Road pricing has made its way into the news recently for a number of different reasons.
Firstly, in 2021 the Victorian government introduced the Zero and Low Emission Vehicle (ZLEV) charge which levied electrical vehicle owners 2.8c for each kilometre they travelled. The intent was to charge EV users for the costs they impose on Victoria’s road network.
However, in October the High Court of Australia ruled the charge invalid, as it amounted to an excise duty, which under the Constitution, can only be levied by the Commonwealth.
Secondly, in the last year the NSW Government also announced the Independent Toll Review. This has come about because of emerging public concerns about the affordability of current tolls on Sydney motorways, particularly given the rising cost of living. Concerns have been accentuated by the inequities in tolling, whereby some motorists on their daily commute face quite significant charges, while other motorists in Sydney, pay very little.
The Independent Review has released a discussion paper which considers the efficiency and fairness of existing tolling arrangements that are set out in PPP contracts with road concessionaires.
The challenges posed by toll roads are merely a subset of the broader issues in road user charging. Whilst governments think that users should pay more directly for roads, developing a comprehensive set of road prices that applies across Australia’s road network is challenging.
Frontier Economics’ has been providing economic consulting advice in the transport sector – and on the development of road user charges – for many years. Here, we unpack the challenges of road pricing and discuss a possible path forward.
Our Local, State and Federal governments are entering into a challenging space when it comes to the pricing roads. There are multiple reasons why pricing road use is challenging:
Firstly, there are multiple objectives to consider when pricing roads which are sometimes conflicting. Road charges can:
The second reason is that we have Local, State and Federal Government roads. This creates challenges because you immediately have multiple governments involved, and we have motorists travelling, potentially in one trip, on multiple roads that are owned by different governments. The charging arrangements for that entire network therefore becomes far more complicated.
The final layer to this is that is that different governments have different powers in respect to vehicles, vehicle use and charging. The Federal Government has responsibility for the importation and design of new vehicles, and the power to levy the fuel excise, which is often argued to be the main mechanism for implicitly funding the road networks. The State Governments are far more confined in their ability to levy state-based road charges, however, they are in charge of things like registration. So, this limits the ability for any one government to create a comprehensive charging structure on its own.
It’s necessary for all governments to consider a reformed approach to road pricing now, because of the emergence of Electric Vehicles (EVs) – who don’t pay the fuel excise. And currently the main mechanism used to implicitly fund road development is this fuel excise. This funding is expected reduce over time, as more motorists take up EVs. Essentially, motorists will be using less fuel, and as we use less fuel, this funding source will disappear.
The time to deal with this is now. Solving this problem means moving away from current arrangements which is challenging. States, such as Victoria, have tried to go it alone by implementing road use charges for EV. But this approach has been struck down in the High Court Challenge. So, you can see states acting on their own isn’t really a great option.
The first step is to acknowledge that road pricing is an issue across governments and one that might benefit from intergovernmental co-operation. An intergovernmental agreement could be developed, that sets out:
Some pricing improvements for heavy vehicles have already been achieved. It’s been a slow process with incremental improvements but there is no reason why that process, which we have been heavily involved for the last 15 years with can’t be expanded.
Given the outcomes of the High Court Case, governments need to work together on this emerging issue, and a better, intergovernmental, solution is required if we are to create road charges that are more efficient and fair for all motorists across Australia.
Frontier Economics' Tim McNamara, Mike Woolston and Dinesh Kumareswaran were commissioned by the Water Services Association of Australia (WSAA) to produce the report Understanding Efficiency to explain in "plain English" the concepts of economic efficiency and how they apply to the water sector. The report also illustrates what efficiency looks like under different scenarios using examples from the water sector and detailed case studies. Below is the Executive Summary of the report.
The aim of this report is to explain in ‘plain English’ the concepts of efficiency and how these are utilised within businesses, by economic regulators and others to assess service and expenditure proposals in pricing submissions and business cases.
It is important for businesses to be able to understand and demonstrate efficiency, not just to get approval of pricing submissions from regulators – but also to demonstrate they are providing value for money to customers, owners, and other stakeholders.
Common or dictionary definitions of ‘efficiency’ tend to focus on the relationship between inputs and outputs of producing a good or service, but this narrow interpretation may lead to misconceptions. Minimising costs may not necessarily be consistent with providing customers’ desired service levels, maintenance and investment in asset capability and supply resilience, or delivering broader outcomes which are desired by customers or society.
Rather, economic efficiency can be seen as synonymous with value for money - providing the services customers want at the lowest long-term cost. The regulatory frameworks applied by most economic regulators do provide for broader ’value for money’ outcomes in assessing efficiency.
There are a number of common misconceptions about demonstrating efficiency in the urban water sector. These related misconceptions include:
A common thread underlying these misconceptions is that ‘efficiency’ is synonymous with cost minimisation. Not only is cost minimisation in itself not an appropriate objective - but it is not an appropriate interpretation of what it means to be ‘efficient’.
Minimising costs may not necessarily be consistent with:
While how best to demonstrate efficiency may depend on the audience, fundamentally it is about demonstrating that a proposal is in the long-term interests of customers.
The overarching approach of economic regulators in determining efficient levels of expenditure for regulated urban water businesses, which they then allow to be recovered in regulated prices, typically involves:
Typically regulators adopt a ‘prudency and efficiency test’ to provide assurance that the businesses are (1) doing the right things; and (2) doing those things as efficiently as possible.
Regulators typically assess the prudency and efficiency of operating and capital expenditure individually, as well as the trade-off between these two types of expenditures:
We examined a number of recent regulatory reviews and decisions by state economic regulators. This provided a number of key insights and lessons that can be drawn upon for future periods.
We have identified some overarching guiding principles that should be adopted to demonstrate the efficiency of expenditure proposals regardless of the context in which efficiency is being measured or demonstrated:
However, there is no single methodology or technique that is appropriate to use in all circumstances to measure and demonstrate efficiency. The appropriate approach may vary depending on factors such as the nature of the:
Table 1. Approach to demonstrating efficiency - a guide
| Step | Type of expenditure | Evidence/
data required |
Techniques | Example |
| Outline why the spending is in the long-term interest of customers | All | Link spending to specific outcomes for customers in terms of services and prices over the long term
Clear ‘golden thread’ narrative |
Investment Logic Mapping | See section 4.2 and 5.5 |
| Prudency: Link spending to non-discretionary obligation | Non-discretionary
opex & capex |
Identify key drivers including relevant legislative or regulatory obligations | Understanding of non-discretionary service (and related) outcomes, including their timing | Central Coast Council (section 3.3.3) |
| Prudency: Demonstrate that customers want the proposed service/level or outcome | Discretionary opex & capex | Customer feedback | Surveys, customer forums | Case study 2 |
| Prudency: Demonstrate that customers are willing to pay for this service | Discretionary opex & capex | WTP studies | Choice modelling | Case study 2 |
| Analyse a range of options to produce the desired outcome | All | List of alternative options including capital vs recurrent solutions – ideally in business case | Cost-benefit analysis | Case study 3 |
| Identify a preferred option | All | Business case or similar | Cost-benefit analysis (benefit -cost ratio, NPV etc) | Case study 3 |
| Undertake sensitivity analysis to demonstrate the preferred option is robust | Capex/major opex step change | Business case or similar (preferred option is superior under a range of assumptions/scenarios) | Sensitivity analysis
Real options analysis Scenario analysis |
Case study 3, Sydney Water resilience expenditure (section 3.6.3) |
| Ensure/demonstrate the preferred option/proposed services will be delivered at the lowest cost | Opex | Historical expenditure
Productivity growth (continuing efficiency) forecasts Market-tested estimates |
Base-step-trend
Benchmarking
|
Case study 1 |
| Ensure/demonstrate the preferred option/proposed services will be delivered at the lowest cost | Capex
Step jump in opex |
Robust procurement process (e.g. market-testing or similar)
Detailed approach to managing delivery of project and associated risks Proposed expenditure is within long-term context & strategy Consideration of scope for application of continuing efficiency factor |
Business case methodology | Powercor ICT investment (section 3.4.3) |
| Benefits realisation (ex pt) | All | Ex post assessment of benefits and costs | Post project review | See section 2.2 |
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Should economic regulators pursue other objectives, such as equity and social justice, in addition to efficiency? The theme of the 2023 ACCC/AER economic regulation conference was ‘Beyond efficiency?’
Speakers during the conference’s opening plenary session were invited to explore whether economic efficiency should continue to be the sole objective pursued by the economic regulatory frameworks in Australia. Or, alternatively, should the remit of regulators be expanded to include other objectives besides efficiency in the name of tackling the major challenges of our time, including: climate change, technological disruption and digitisation, the transformation of services and business models, and the growing inequity in access to services and outcomes?
Some of the speakers at this session, and some conference delegates, were firmly of the view that it is now time for regulators to balance the pursuit of efficiency with other objectives, such as equity and social justice.
This bulletin presents a summary of the address given by Dinesh Kumareswaran, Director of Frontier Economics, during this first plenary session. Dinesh argued that regulators should pursue one objective, and one objective alone: the promotion of economic efficiency.
A common misconception is that efficiency means producing widgets at the lowest possible cost. This is a very narrow and misguided view, and not at all how economists (should) think about economic efficiency.
When economists talk about efficiency, what they really mean is maximising total societal welfare. Total societal welfare is a very broad concept that encompasses economic prosperity, satisfaction, fulfilment and wellbeing.
So, when you hear economists mention efficiency, remember that what they are really referring to is, as the United States Declaration of Independence puts it, “the pursuit of Happiness.”[1]
Economic theory categorises efficiency into three dimensions:
For more than 30 years, the regulatory frameworks that have been applied in Australia to natural monopoly industries have generally framed the objective of maximising total societal welfare in terms of promoting the long term interests of consumers with respect to price, quality and reliability of essential services.
During those three decades there has been consensus amongst Australian regulators that the most effective way to promote the long term interests of consumers is to set regulated prices or revenues in a way that incentivises allocative, productive and dynamic efficiency. As the Australian Competition Tribunal has observed:
…it is axiomatic in the principles of regulatory economics, that promoting allocative, productive and dynamic efficiency generally serves the long term interests of consumers.[3]
A second common misconception is that economic efficiency is simply a means to an end. Invariably, those who espouse this view are unable to articulate clearly what the ‘end’ is.
When efficiency is understood properly to mean the maximisation of total societal welfare (happiness), it becomes clear that economic efficiency is in fact the end goal, rather than simply the vehicle to get there.
As explained below, there are at least three reasons why the promotion of economic efficiency should be the sole objective of regulators.
One of the first lessons from public choice theory is that the Government should only intervene in markets if there is clear evidence of a market failure.
Evidence of market failure is not a sufficient condition for intervention—since regulation is almost never costless, and those costs may outweigh the benefits of regulation—but it is a necessary one.
Hence, if the Government is to intervene in a market through regulation, it must be crystal clear why regulation is required in the first place.
Economic regulation of natural monopolies was developed to address a very specific type of market failure. Given the lack of competitive constraint faced by such firms, if left unconstrained, natural monopolies would have a strong incentive to exercise their market power to set prices and output at a level that would diminish total societal welfare.
This reduction of total societal welfare—referred to in the economics literature as the deadweight loss from monopoly—is a form of economic inefficiency.
Economic regulation aims to protect against that loss of economic efficiency by trying to reproduce as closely as possible the efficient outcomes of a market that does not suffer from that market failure.
Remember, the golden rule is that the Government should intervene in markets only if there is a clear market failure. In other words, Government remedies should be targeted to clearly defined market failures, where it can be demonstrated that the Government intervention would result in a net benefit to society.
The market failure problem associated with natural monopolies has remained fundamentally unchanged over the past 30 years. If economic inefficiency is the problem, then the solution must be regulatory frameworks that are oriented towards promoting economic efficiency.
Of course, there are many different types of market failure that can occur, apart from the classic market failure associated with natural monopolies.[4] Economic regulation may have a legitimate role in addressing these different types of market failure. However, in every such case, the sole objective must be to maximise economic efficiency.
There is overwhelming evidence that the most successful organisations (public and private) are those that single-mindedly pursue one objective, rather than multiple (often competing and unstated) objectives.
There are two reasons for this.
Firstly, all the resources of the organisation can be marshalled in the same direction, towards achieving a common purpose—rather than being diverted ineffectively in different directions.
Secondly, some objectives conflict with one another. In these circumstances, it may be impossible to achieve one objective without sacrificing another.
For example, the pursuit of equity and social justice (which some at the ACCC/AER regulation conference advocated for) typically involves redistributions from one group to another. This inevitably results in some groups being cross subsidised by others. Cross subsidies do not simply involve a transfer of welfare between groups; they also result in a deadweight loss to society (i.e., a reduction of total societal welfare).
Hence, the pursuit of equity and social justice is usually irreconcilable with the goal of promoting economic efficiency. The only way to do more of one is to do less of the other.
Therefore, regulatory agencies are likely to be more effective if they are focussed on a single objective (the promotion of economic efficiency), rather than pursuing efficiency and equity/social justice.
This does not mean that genuine social problems should be ignored. The point is that whether and how such problems should be addressed ought to be left to policymakers rather than regulators to determine.[5]
Ronald Reagan said the nine most terrifying words in the English language are: “I’m from the Government, and I’m here to help.”
A very close second must be: “I’m a regulator, and I have a great idea.”
Many regulators seem to have a penchant for ‘innovation’, new thinking and broadening the scope of their activities. Whilst improvements to the regulatory framework are sometimes necessary to respond to new challenges, it is vital that regulators resist the urge to go beyond their core role and step into the shoes of policymakers.
Good governance requires a bright line to be drawn between the roles of policymakers and regulators. This clear separation of powers is essential to:
If we as a society are unhappy with the direction of policy, we can remove the ultimate policymakers (i.e., elected representatives) via the democratic process. In principle, this limits the scope for bad policies. If regulators encroach on the domain of policymakers and we are dissatisfied with the policies they introduce, given that they are (at least in Australia) unelected officials, how do we vote them out?
The need for accountability and restraint on the power of decisionmakers is why most free, democratic societies such as Australia have a clear separation between the executive, legislative and judicial branches of Government.
If left unconstrained, governing institutions have a tendency to seek the accumulation of power and influence, often to the detriment, rather than service, of society. The solution to this problem is to separate the power of institutions so that they can each be held to account, while providing checks and balances on one another.
The desire for a clear separation of powers was the reason why, for example, three different market bodies—the Australian Energy Market Operator (system planner and operator), the Australian Energy Market Commission (rule maker), the Australian Energy Regulator (regulator)—were established to govern the National Electricity Market.
These three agencies were given separate (rather than overlapping) mandates, powers and obligations.
In principle, this is a good model for the governance of institutions. Because the regulator is not permitted to make the rules that it enforces:
Equally, because the rule maker is not responsible for enforcement, it is free to design and evaluate the rules dispassionately and on their merits.
Of course, under this model, regulators may have a legitimate role in identifying problems (market failures) and bringing those to the attention of policymakers. However, the relationship between the regulator and policymakers should remain at arm’s length, with the regulator simply raising awareness of an issue and then leaving it to policymakers to assess in an open and transparent way whether and how the issue should be addressed. In order to maintain the separation of roles, the regulator should not become an activist or advocate for policy change.
There is no doubt that regulators today must make decisions under considerable uncertainty about the future, in the face of new challenges such as climate change, technological disruption and digitisation, the transformation of services and business models, amongst others.
These challenges may require regulators to re-evaluate how best to achieve the most efficient outcomes for society as a whole and to adapt their frameworks accordingly. But there is no case for abandoning the efficiency objective, or adding new objectives that are unrelated to the problem that regulation is intended to solve. Doing so would likely produce worse outcomes for society at large, blur the distinct roles of policymakers and regulators, undermine clarity of purpose and reduce the accountability of decision-makers.
[1] This point was made by Dr Darryl Biggar during the closing session of the conference.
[2] This is a condition known as Pareto optimality in the economics literature.
[3] Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, para. 93.
[4] Other examples might include misleading and deceptive conduct arising from asymmetric information, negative externalities, coordination failures, and so on.
[5] The rule that the Government should intervene in markets if and only if there is a clear market failure applies just as much to policymakers as it does to regulators. This means that before intervening to address claimed equity or social justice problems, policymakers must (a) demonstrate convincingly, with evidence, that there is in fact a real market failure rather than an imagined one, (b) demonstrate that the intervention would be net beneficial to society as a whole and (c) be transparent with the public about what the equity and social justice objectives are and what Government actions are being taken to pursue those objectives. Policymakers should not intervene unless they are willing and able to do all these things.
The case for developer charges: fair water infrastructure contributions promote better development outcomes and reduce infrastructure costs to the community
However, such contributions have never been more important to the community. These charges signal to developers the costs of providing infrastructure in different areas, and thus promote socially optimal development decisions – i.e., development in locations where the benefits to the community exceed the costs. They also minimise price increases to customers’ water bills (helping to reduce cost of living pressures), and they allow some of the land value uplift generated by rezoning to fund much needed infrastructure.
Cost-reflective infrastructure contributions can also be an efficient and fair funding source for infrastructure provided by local councils to serve new developments, including much needed public open space, transport (eg, local roads) and local stormwater infrastructure.
The term ‘rent-seeking’ was first used to describe the wasting of resources by entrepreneurs to fight for artificially created wealth transfers. This is an apt description for the time spent in recent years by developers seeking to convince the NSW Government to resist the reintroduction of cost-reflective water, wastewater and stormwater infrastructure contributions (or ‘developer charges’) in Sydney and the Hunter.
Following a review by the NSW Productivity Commission in 2020, the NSW Government committed to reform the infrastructure contributions system, with a key element being the phased reintroduction of developer charges for Sydney Water and Hunter Water’s water, wastewater and stormwater services. This follows over a decade of these charges being set to zero (set by Ministerial direction in 2008). The consequence has been that Sydney Water and Hunter Water’s additional costs to provide water infrastructure to service new developments has not been recovered from developers, but from all water, wastewater and stormwater customers via their quarterly bills.
Under the methodology set by the NSW Independent Pricing and Regulatory Tribunal (IPART), these infrastructure contributions would recover Sydney Water and Hunter Water’s costs of providing water, wastewater and stormwater services to new development areas that are above and beyond the retail price revenue the water utilities will receive from servicing customers in the new development areas over time.[1]
Developers have long opposed paying these infrastructure contributions, arguing these costs should be borne by the wider community. They have suggested a broader revenue base (i.e., anyone but them) for infrastructure funding is needed, and that there is limited public benefit to infrastructure contributions.
Given concerns about housing affordability, the community is naturally interested in the key supply-side and demand-side drivers of house prices. Seeing an opportunity, developer groups have sought to re-prosecute their case opposing the developer charges as they claim they increase development costs and house prices.[2]
However, given the incentives at play, this requires closer scrutiny. Do these charges really increase development costs and house prices? What are the implications to the broader community and water customers if these infrastructure contributions are not reintroduced?
Infrastructure contributions may be a new cost to developers, but not to society. That is, infrastructure contributions do not create costs, they just represent a way of recovering them.
Since 2008, the costs of providing development-contingent water infrastructure have been paid by all water, wastewater and stormwater customers across Sydney Water and Hunter Water’s areas of operation through their regulated prices. IPART, with responsibility for setting maximum charges levied by Sydney Water and Hunter Water, explicitly accounts for these when setting the charges that are levied on customers via their quarterly bills. This decade old subsidy from water customers (including households) to developers has added billions of dollars to water bills of households and businesses, directly impacting the affordability of these essential services.
In 2019, IPART estimated that by 2029, Sydney Water’s average customer would be paying an additional $140 per year for their water, wastewater and stormwater services if infrastructure contributions were to continue to be set to zero.[3]
Despite the overwhelming current media focus on the cost of living, this impact on the affordability of water is one of the few areas that has escaped public scrutiny.
Re-introducing cost-reflective infrastructure contributions would simply reallocate these costs back to developers, who are creating the need to incur them and benefitting from them. This is in line with the “impactor pays” principle, enshrined in the Council of Australian Government’s National Water Initiative Pricing Principles, which were designed to increase the efficiency of Australia's water resources and infrastructure assets. This principle also underpins funding for a range of other critical services.
The reintroduction of infrastructure contributions would provide bill relief to all water customers, which will be increasingly important as major metropolitan centres in Greater Sydney and the Hunter continue to grow, and households face cost of living pressures.
Cost-reflective infrastructure contributions also support planning objectives, by signalling to developers the costs of providing water infrastructure to different areas in Sydney and the Hunter – with some areas being higher cost and others lower cost to service, and these variations being ideally reflected in infrastructure contributions.
This price signal would encourage efficient development decisions. Currently, without such cost-reflective infrastructure contributions, developers do not need to consider the different cost of providing water infrastructure to different areas in Sydney. This means there is a risk they develop in areas where the costs to the community of providing such infrastructure exceeds the benefits of the development.
Smearing development-contingent costs across all water customers risks diluting one of the key signals related to the cost of development between locations, which in turn can contribute to inefficient investment in relatively high-cost areas.
As the NSW Premier and Productivity Commission have recently said, we need to improve how we plan and develop Sydney to minimise stretching of infrastructure services, including building more housing in infrastructure corridors to enhance amenity, lower infrastructure costs and improve housing affordability.[4]
Provided developers have sufficient line of sight of infrastructure contributions (i.e., they are aware of these contributions before they purchase developable land), the economics of housing supply tells us that these costs are not necessarily passed through to homeowners through higher house prices.
As observed through numerous studies across multiple jurisdictions and the NSW Productivity Commission (see Box 1 in PDF Bulletin), they are likely to be factored into the prices developers pay for developable land – resulting in a lower than otherwise price to the landowner, who may still receive significant windfall gains by virtue of their land being rezoned or deemed developable.
That is, infrastructure contributions can allow some of the land value uplift generated by rezoning to fund much needed infrastructure.
If there are occasions where this means the landowner is not willing to sell to the developer, this would indicate that the benefits of the potential development in that location (as measured by what the developer is willing to pay for the land) does not exceed its costs to the community. However, this is unlikely to be common, as in an environment of increasing population, the value of developable land in and surrounding cities often exceeds its opportunity cost in alternative uses (e.g., for industrial use or agricultural production).
This key conclusion – that housing affordability is not exacerbated by infrastructure contributions, provided developers are aware of these contributions before they purchase developable land – is also backed up by empirical literature. Abelson (1999)[5], Ruming, Gurran and Randolph (2011)[6], Davidoff and Leigh (2013)[7] and Murray (2018)[8] all found that the incidence of development contributions likely falls on developers or landowners rather than home buyers.
The most reliable Australian evidence is consistent with this view; with little credible evidence to the contrary.[9]
The NSW Productivity Commission has observed that, as a policy to increase housing supply, setting Sydney Water and Hunter Water’s infrastructure contributions to zero has been ineffective and costly, predominantly resulting in a transfer of wealth from water customers to owners of developable land, “including those that would have developed land regardless”.[10]
Cost-reflective infrastructure contributions can help to fund infrastructure more fairly, reduce pressure on water bills to residential and non-residential customers, and support better planning and development outcomes.
The focus should not be on whether these contributions should be reintroduced, but rather how to:
Resources spent on doing these well, rather than “rent-seeking”, will deliver value to the whole community, including developers.
Importantly, for the same reasons as outlined above, cost reflective infrastructure contributions can be an efficient and equitable funding source for infrastructure provided by local councils to serve new development – including public open space, transport (such as local roads) and stormwater infrastructure.
[1] Retail prices to customers reflect network-wide average costs (i.e., all customers face the same prices, regardless of their location within the utility’s network). Infrastructure contributions therefore recover the difference between the costs of servicing a specific development area and network-wide average costs.
[2] Daily Telegraph, Water torture for new housing, May 12, 2023.
[3] IPART, Prices for Sydney Water from 1 July 2020, Issues Paper, September 2019, p 29.
[4] NSW Premier Chris Minns puts Sydney NIMBYs on notice, 15 May 2023; Sydney Morning Herald, Sydney’s richest suburbs need to be higher, denser to solve housing crisis, 31 May 2023.
[5] Abelson, P, 1999, ‘The real incidence of imposts on residential land development and building’, Economic Papers, vol. 8, no. 3.
[6] Ruming, K, Gurran, N, & Randolph, B, 2011, ‘Housing Affordability and Development Contributions: New Perspectives from Industry and Local Government in New South Wales, Victoria and Queensland’, Urban Policy and Research, vol. 29, no. 3, pp. 257–274.
[7] Davidoff, I & Leigh, A, 2013, ‘How do Stamp Duties Affect the Housing Market’, Economic Record, vol. 89, no.286.
[8] Murray, CK, 2018, ‘Developers pay developer charges’, Cities, vol. 74, pp. 1–6.
[9] Bryant (2017) finds a substantial impact on house prices however there are a number of concerns with the empirical approach taken. UQ Economist Cameron Murray’s paper, in response to the work of Bryant, is more convincing, having applied a clear empirical strategy exploiting unanticipated changes to the developer charge regime to identify the impact of these developer charges, finding no impact on house prices and therefore house buyers. Even more illustrative is the replication of the results of Bryant (2017) when ignoring the mechanical relationship between house characteristics and developer charges.
[10] NSW Productivity Commission, Review of Infrastructure Contributions in New South Wales, Final Report, November 2020, p 101.DOWNLOAD FULL PUBLICATION
With the Victorian government announcing an end to native forest logging by 1 January 2024, we revisit a recent report prepared for WWF–Australia (World Wide Fund for Nature Australia) in August last year. In it, Rachel Lowry, Acting CEO, WWF–Australia explains, “This report was not commissioned to ignite or exacerbate ‘forestry wars’. Instead, it is designed to inform and motivate critical solution-focussed discussions, ideally led by the NSW Government.”
The New South Wales (NSW) native forest sector has been contracting over a long period as publicly provided wood supply has fallen to more sustainable levels. The 2019–20 Black Summer fires compounded this trend, significantly reducing sustainable wood supplies, particularly in the South Coast and Tumut regions. This shock to the sector, economy and regional communities – combined with an increased recognition of the significantly higher value that standing native forests offer in comparison to logging– provides an opportunity to reconsider the best use of NSW’s native forest resource. Other states including Victoria and Western Australia facing similar issues have made the decision to end the native forest logging.
In this context, Frontier Economics was engaged by WWF–Australia to consider options for the design of appropriate structural adjustment arrangements that would accompany a decision to end public native forest logging in NSW. Our Report, Transition support for the NSW native forest sector, outlines a design and cost estimate of such structural adjustment supports.
Our Report found that Forestry Corporation of NSW’s (FCNSW’s) native forest logging business appears to offer poor financial returns to NSW taxpayers, with some parts of the hardwood business unlikely to be covering costs. The Independent Pricing and Regulatory Tribunal of NSW (IPART) has also reported on the loss-making activities of FCNSW’s hardwood division.
There is also clear evidence that that value of the native forest would be higher as a standing resource.
The volume of wood supplied by FCNSW’s native forest business has been falling, and is unlikely to return to historic levels of production given the current state of the native forest after the Black Summer fires and the increasing impacts of climate change.
Employment and economic contribution have also fallen to modest levels, even when both hardwood and softwood, and private and public industry in NSW is accounted for. Direct employment associated with FCNSW’s hardwood business is in the order of 1,070 across the State – including those employed by FCNSW, harvest/haulage contractors and mills.
A comprehensive structural adjustment package should accompany the decision to cease the remaining native forest logging activity by FCNSW. This package would support impacted employees, firms and communities during the transition.
Across jurisdictions, there is a broad consistency in the design of public native forest logging structural adjustment packages, including:
Structural adjustment packages are also often complimented with longer term support for increased investment in plantation resources.
Alongside a package of structural adjustment support, our Report finds there are likely to be alternative employment opportunities for displaced workers from the public native forestry sector, particularly in management of protected forest areas, recreation and tourism, plantation-based forestry work, fire and invasive species management and the management of carbon and biodiversity credits.
The estimated cost of the government-funded structural adjustment is $302 million in total. This includes:
Our Report developed these estimates along similar lines to those adopted in other jurisdictions. It is assumed the adjustment package would be implemented from 2028- 29 once the majority of the current WSAs with processors have expired.
The cost of the structural adjustment package is likely to be readily outweighed by a range of positive budgetary impacts including:
Complementing a structural adjustment support package, the NSW Government may invest in increased plantation resources. The Victorian and West Australian governments have announced funding for plantations of $110 million and $350 million, respectively.
Alternatively, FCNSW may consider the investment opportunity to expand its hardwood plantation estate in the expectation of a long-term financial return.
The forestry sector would sensibly lead any plantation expansion in NSW based on its understanding of the best locations, appropriate size of expansion, plantation species and market needs.
View the full report commissioned by WWF-Australia here.
DOWNLOAD FULL PUBLICATIONWith a growing freight task and changing vehicle fleet, Australia needs a lot of well-trained and capable heavy vehicle drivers. Because of this transport Ministers requested Austroads look for ways to improve the National Heavy Vehicle Driver Competency Framework (NHVDCF) which informs state and territory heavy vehicle driver licensing arrangement.
Today Austroads, with the assistance of Frontier Economics, released a Consultation Regulatory Impact Statement (CRIS) seeking feedback on proposed reforms which include:
The C-RIS is available here and is out for comment until 28 October.
Frontier Economics regularly advises clients on a range of policy and regulatory matters in the freight sector.
A report into the economic, social and environmental costs of failing to manage feral deer numbers in Victoria has been released by the Invasive Species Council and Frontier Economics.
The report, Counting the doe: an analysis of the economic, social and environmental costs of feral deer in Victoria, estimates costs of over $1.5 billion (7% discount rate) or $2.2 billion (4% discount rate) in present value terms, over the next 30 years. Avoiding these costs represents a benefit to society. The expense involved in managing feral deer population is a fraction of the cost these invasive species impose on society and the environment.
The Victorian feral deer population and distribution have rapidly increased, with analysis by the Victorian Department of Environment, Land, Water and Planning estimating that the population of deer could be between “several hundred thousand up to one million wild animals or more”.* It is likely to become more challenging to manage feral deer in future, with populations expected to increase further over the next thirty years, driven by a combination of climate change, natural dispersal and deliberate releases and farm escapes.
Feral deer numbers are having a significant and detrimental impact on a range of economic, social, cultural and environmental impacts in Victoria.
“Without effective controls on feral deer numbers our analysis shows that the population is likely to significantly increase, imposing a substantial cost on the Victorian community”, Frontier Economics’ managing director Danny Price said.
Even with conservative assumptions around the detrimental impacts of feral deer, key findings include:
Given the availability of information on the impact of feral deer, these figures do not capture the full range of potentially significant costs of feral deer in Victoria, such as the impact on:
As such, it is likely that the true economic, social, cultural and environmental costs imposed on the community as a result of feral deer in Victoria are larger than this estimate.
“While there is uncertainty around the number of feral deer in Victoria, what is certain is that the Victorian community is losing out by not managing feral deer. These losses will only grow as long as the Government fails to control feral deer numbers now and into the future” Mr Price said.
Infrastructure Australia today released the 2021 Australian Infrastructure Plan, which provides Australia’s green, grey and blue infrastructure sector with a 15 year roadmap to drive economic growth, maintain and enhance our standard of living and improve the resilience and sustainability of Australia’s essential infrastructure.
The 2021 Plan provides Infrastructure Australia’s reform pathway to respond to the 180 infrastructure challenges and opportunities identified in the 2019 Australian Infrastructure Audit. There are a number of key themes in the plan. We highlight and discuss several of these below.
The inclusion of waste and social infrastructure (such as green and blue infrastructure) for the first time, alongside energy, transport, telecommunications and water.
The need for place-based decision-making, including the need to holistically plan blue, green and grey infrastructure.
Recognition of the need for a consistent approach to valuing the economic, social and environmental benefits of blue, green and grey infrastructure (which has also been recognised by NSW’s Department of Planning Industry and Environment). Frontier Economics has discussed this in two recent bulletins: Greening our cities: from vision to value and Greening our cities: from vision to reality.
The need to embed sustainability and resilience into infrastructure decision-making, including the importance of a consistent all-hazards, systems approach to resilience planning and quantification of the costs, impacts and benefits of resilience investment.
Recognition of the need for clear management and governance of the water cycle, including stormwater and waterways.
The need to remove targets, mandates and subsidies for certain types of water, including recycled water. (For a look at how to encourage uptake of recycled water initiatives, and barriers, Frontier Economics undertook a review for Infrastructure NSW.)
It is a comprehensive plan addressing all aspects of infrastructure. It puts forth a compelling vision of Australia in 2036, that includes liveable, attractive and resilient communities with social infrastructure supporting a strong, healthy and prosperous nation.
The urban economics team at Frontier Economics advises across these areas. For more information or to discuss a project, please contact us.
The population in the Lower Hunter is forecast to grow by 20% over the next 20 years, and so too will the demand for water, wastewater and stormwater services.
Meeting the increased demand for water and the community’s expectations will involve new sources of water supply (including new climate-independent water sources), demand management, and measures to improve waterway health. The aim is for the region to remain a productive, liveable and resilient region, rather than one incurring ever more frequent water restrictions and an increased risk of being unable to meet community expectations for minimum levels of water supply during drought conditions. Meeting the community’s evolving expectations for water security could involve significant investment in long-lived assets with a range of economic, social and environmental outcomes.
In this context, Hunter Water in partnership with Department of Planning, Industry and Environment (DPIE), is coordinating the Lower Hunter Water Security Plan — a whole of government approach to ensure long-term water security for the Lower Hunter. The Plan was released for public exhibition today.
As part of developing the Lower Hunter Water Security Plan, Hunter Water engaged Frontier Economics to undertake economic, funding and distributional analysis of a range of potential portfolios of water supply and demand measures. Our work aimed to answer several key questions:
Our analysis entailed two streams:
Economic analysis
This ‘efficiency’ analysis used economic modelling including cost-benefit and adaptive pathway (or real options) analysis to identify:
Funding and distributional analysis
This ‘equity’ analysis used regulatory and financial analysis to identify:
Our analysis found that there are portfolios of water supply and demand measures that are likely to provide significant economic, environmental and social value to the community in the face of significant risks and uncertainties (such as climate change and demand). This includes identifying the significant value the proposed Belmont Desalination plant is likely to deliver to the community in managing both growth and drought in the Lower Hunter region. We note that the NSW Department of Planning, Industry and Environment has recently provided Hunter Water planning approval for the Belmont Desalination plant.
The Australian Competition and Consumer Commission (ACCC) has released the highly anticipated final report from its Murray-Darling Basin water markets inquiry.
To support the inquiry, the ACCC commissioned three pieces of research, each investigating a different aspect of water markets.
Frontier Economics was asked to assess water market architecture. Our report, Water market architecture: Issues & options - Input into ACCC market architecture assessment, considered whether the existing architecture and design of the southern connected Murray-Darling Basin (scMDB) water markets are constraining or distorting water trading activity and competition.
The scope of this research included system operation, trading and other rules and regulatory settings that influence the opportunity for trade, the level and location of trade, and manage the impacts of trade on other water users and the environment. The scope also extended to consider governance, including institutional make up, roles, functions and decision making processes. After conducting the review of current arrangements, the report proposed potential solutions to improve the operations, transparency, competitiveness or efficiency of scMDB water markets.
