Victoria's Transport Sector: A New Vision

PREFACE

Project Victoria originated from a concern amongst business organisations in Victoria to address the major economic and budgetary issues facing Victoria, without increasing the burden of taxation.  The first stage involved a comprehensive assessment of Victoria's financial situation and examined measures designed to improve that situation and the efficiency of government services.  The findings of that study were published in 1991 in "Victoria:  An Agenda for Change".

In the second stage of Project Victoria detailed proposals for improving efficiency and productivity in key government areas have included:

• A Restructuring Strategy for Electricity in Victoria (1991)
• Schooling Victorians:  Lessons for the Future (1992)
• Towards a Healthier State:  The Restructuring of Victoria's Health Services (1992)
• Workplace Rehabilitation:  A Strategy for Replacing Work-Care (1992)
• Waterfront Competition:  The Restructuring of Victoria's-Ports (1992)
• Reforming Local Government in Victoria (1993)
• A Restructuring Strategy for Melbourne Water (1993)

The business organisations sponsoring this Report are listed on the previous page.  While commissioning this study, the sponsoring business organisations do not necessarily accept all the detailed recommendations of this study, which remain my responsibility.

I wish to acknowledge the role of the researchers, corporations, workers and business organisations who made contributions to this Report, and to thank the members of the Project Victoria Committee who provided expert advice and assistance.

Richard J. Wood

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EXECUTIVE SUMMARY AND MAIN RECOMMENDATIONS

An efficient and competitive transport sector is important for Victoria's economic health.  It is critical for industries burdened by excessive transport costs, because these costs prevent industries from competing in markets both here and abroad.  It is essential for individuals who are required to "make do" with inadequate and overpriced services, and for the Government whose finances, our taxes, are drained each year by the subsidies it pays to the Public Transport Corporation (PTC).

This Project Victoria Report puts forward proposals aimed at improving the efficiency of the transport sector and reducing its cost to the Victorian taxpayer.  These proposals are designed to create a structural framework for the transport sector which offers a reasonable balance between:

1. allowing private sector agents to operate in a competitive environment;  and
2. retaining a government role in transport services to the extent necessary to protect consumers against potential monopoly practices, to protect the community against costs, such as pollution and congestion, that might otherwise be imposed by the "free" play of market forces and to provide subsidies for transport by disadvantaged groups.

In part, Project Victoria's recommendations build upon reforms which the Government has already implemented.  However, the reform process needs to be expedited and extended more widely.  Victoria has important natural advantages that can make it a transport hub and allow it to provide transport services presently operated by the public sector at a much lower per head cost than at present.

PTC REFORMS

The Victorian Government has instituted reforms in the operation of public transport services which it claims should reduce the recurrent deficit shown in the Budget papers by $245 million per annum by 1994-95.  However, while the estimated recurrent deficit for 1993-94 of $401 million reflects the effect of savings to date, no target figure for the overall 1994-95 recurrent deficit has been stated.  It is not possible therefore to assess what further reduction (if any) in the deficit the Government expects in 1994-95 or what further savings it expects to effect by that year.

It is important to understand that the recurrent deficit of $401 million shown in the Budget papers for 1993-94 considerably understates the true extent of the public transport deficit borne by taxpayers.  Thus, the Budget deficit figure for 1991-92 of $500 million compares with the deficit of $1477 million published for that year by the Commonwealth Grants Commission (CGC) on a basis comparable with other States.  The difference mainly reflects debt charges not included as a cost to transport in the Budget figures.  The CGC analysis for 1991-92 also indicated that this recurrent deficit was about $400 million, or 27%, higher than was needed simply to provide public transport services at the average level for the States.  The composition of this "excess" deficit was as follows:

PTC Operating Deficit 1991-92

Transport Mode	Actual ($ million)	Amount Deficit Exceeds All-State Average ($ million)
Urban Transit	923	119
Non-Urban Freight	266	117
Non-Urban Passenger Transport	289	164
TOTAL	1,477	400

While the reforms instituted with a view to saving $245 million per annum by 1994-95 will have already reduced this "excess" deficit to some extent, other States have also been improving the efficiency of their services and cutting their public transport deficits.  NSW, for example, reduced staffing of the State Rail Authority over the 5 years to 1992-93 by nearly 40%.  It seems likely, therefore, that Victoria's $245 million saving program will still leave a considerable "excess" deficit in 1994-95.  Moreover, that excess deficit relates to the average performance for the States and would be a good way short of best practice amongst the States, let alone the world best practice objective stated by the Government.

Studies by the Industry Commission, the Bureau of Industry Economics, EPAC and the Victorian Commission of Audit all support the analysis of the Grants Commission.  These studies show that all parts of the PTC operate below -- in most cases well below -- Australian and world best practice.  If the PTC's performance was brought up to Australian or world best practice, then savings of around $400 million per year should be achievable.

Accordingly, Project Victoria proposes that the Government should speed up and extend the reform process so as to at least eliminate Victoria's "excess" deficit of about $400 million by 1994-95.  That implies reducing the 1991-92 overall recurrent deficit (on the CGC basis) to just under $1100 million per annum, still a massive taxpayer subsidy.  However, as the Government is in the process of effecting savings of $245 million per annum, the elimination of the "excess" deficit by 1994-95 should require additional savings of something less than $400 million.

The extent of the public transport subsidy is all the greater when it is realised that the public sector's share of transport operations is surprisingly small.  Only about 3 per cent of total passenger trips in Victoria are made on public transport.  The lion's share of these public passenger services -- 98 per cent -- is provided within the Melbourne metropolitan area.  Those services still account for only about 2 per cent of daily trips in Melbourne.  Public sector rail has also had a declining share of the freight market, and now accounts for only about 3 per cent of total freight tonnes carried within the State.

Particularly given the relatively low usage of public transport, the present extent of losses -- or subsidies -- is difficult to justify on environmental or social welfare grounds.  In particular, the possible reductions in pollution from the use of public transport are small and public transport subsidies mostly benefit middle income groups and encourage urban sprawl.  Urban rail and bus services reduce congestion costs, but such reductions could be achieved in other ways.

In order for the "excess" deficit of $400 million to be eliminated by 1994-95 it will be necessary that non-urban freight and passenger services in particular undergo a major rationalisation.  These services account for 70 per cent of the excess deficit and they offer considerable scope for either closure (and leaving the service to be provided by the private sector) or to be contracted out to the private sector.  In the latter case, the Government could provide subsidies;  for disadvantaged groups or so as to save additional road construction costs that might otherwise have to be (justifiably) incurred.  In the urban transit system there is a similar need to extend privatisation of transport operations and contracting out of ancillary services, and to limit the subsidy in rail fares so that it more clearly targets low income groups and does not encourage urban sprawl.  Privatising the provision of transport services and encouraging competition is likely to result in bus services replacing some outer suburban tram services (which are very costly to operate).

Reforms which are currently being implemented by the Government and the PTC are making some headway in achieving savings and improving efficiency.  In the past twelve months the range of reforms to the PTC have included:

• transferring regulatory responsibility for train and bus services from the PTC to the Department of Transport;

• appointing a new management board;

• restructuring the PTC along corporate lines;

• privatising the provision of transport services;

• terminating services which are no longer viable;

• contracting out services ancillary to the provision of transport services;

  These include:

  • accounting services;

  • automated fare collection;

  • catering services;

  • civil maintenance services including painting of stations, gardening, general plumbing and carpentry and graffiti removal;

  • cleaning;

  • information technology;

  • internal audit services;  and

  • property management.

• introducing new transport services;

• signing a new four-year working agreement with the public transport unions;

• introducing priority bus lanes;

• commercialising stations;  and

• restructuring freight operations.

However, notwithstanding these generally positive steps, the current reform process does not in Project Victoria's view adequately address the fundamental structural issue of separating the roles of, on the one hand, providing or operating transport services from, on the other hand, the roles of funder of subsidies for welfare and environmental reasons and regulator.  Thus, once the current reform process is complete, the PTC will still be responsible for:

• the provision of metropolitan rail and tram services;
• the majority of country passenger rail services;
• all intra-state rail freight;  and
• some metropolitan bus services.

It will continue to own the tram and train track networks, stations and depots.

While the reforms instituted will certainly allow the PTC to operate on a more commercial basis, a structure which leaves the operation of most public transport services in the hands of the PTC will continue to expose that operation to political interference.  Moreover, opportunities for reaping the benefits of competition in the provision of public transport services by the private sector will be limited.  Under the reforms proposed in this Report, these problems will be dealt with by transferring to the private sector, to a much greater extent, the ownership of transport infrastructure and responsibility for the provision of transport services.

Infrastructure currently owned by the PTC includes the railway and tram networks, stations, depots, rolling stock, trams and buses.  Project Victoria argues that the private sector should participate in the ownership of such assets, either completely or jointly with the public sector through a holding company or trust arrangement.  This will depend on the nature of the asset.  Ownership of assets with little or no monopoly elements and which are capable of being operated independently, such as some stations, rolling stock and buses, should be wholly transferred to private ownership.

Project Victoria envisages a much greater role for the private sector in the provision of transport services.  For tram and train services this could be achieved by introducing a franchise system, whereby the private sector competes at periodic intervals to provide existing transport services, and is encouraged to provide new services.  Alternatively, as considerable inter-modal competition is possible, the objective of encouraging private sector competition could be achieved by transferring the PTC's existing tram and rail operations to the private sector as single entities.  For bus services, this Report recommends a system of open competition.  The Government has already initiated reforms of this nature, privatising a number of country rail services and the majority of its metropolitan bus fleet.

As it is not yet clear how the establishment of the National Rail Corporation (NRC) will affect the provision of freight services in Victoria, this Report is constrained in making specific recommendations in this area.  Project Victoria believes, however, that the PTC's existing operations should be urgently reviewed in light of the NRC's establishment with a view to maximising the role of the private sector.  It is difficult to see any justification for the PTC continuing to operate its loss making freight services, which have only a small share of the Victorian freight market.

Project Victoria recognises that the private operation of mass transit and freight services will require regulation and believes this should be a restructured PTC's principal role.  It further recognises the need for transport services to be available to all members of the community.  However, where Government subsidies are required to ensure the provision of transport services which would not otherwise be commercially viable, these subsidies should be limited to low income and other disadvantaged groups and should be clearly defined and transparent.

ROAD REFORMS

Project Victoria does not accept that it should be an object of government to provide subsidised transport by rail in order to reduce road usage because, in the view of some, that is better environmentally.  However, it acknowledges that road usage can, and does, impose environmental and congestion costs.  At present, Victoria's system of road charges does not accurately account for these and other road-related costs.  Accordingly, the reforms to the public transport sector proposed in this Report will only lead to the optimal allocation of resources in Victoria's transport sector if there are complementary reforms in the road sector.

Roads are used for the provision of bus services by both public and private sectors.  They are used by private road freight operators competing with rail.  They allow individuals to choose between private vehicle use, on the one hand, and a range of other transport services, including rail, bus and air, on the other hand.

Unless the system of road charges accurately targets all beneficiaries of roads and reflects as far as is practicable the total cost of road use (including construction, congestion, pollution and road damage costs), intermodal competition will be distorted and there will tend to be over-usage of roads and under-usage of other transport modes.  Equally, unless the level of expenditure on roads reflects the demand for road usage there will be a similar (but opposite) distortion there.

The Government has initiated a 3 cent per litre levy on petrol to pay for improvements to Victoria's road system.  This system of revenue raising, while administratively simple and advantageous for a cash-strapped government, does not efficiently target those who will benefit from such improvements.  It merely reflects the wider failure of an existing system which does not accurately impose charges on those who benefit from roads, or target those users who cause road damage and benefit from road repairs.  This failure ultimately results in an inefficient allocation of resources in the transport sector.

Project Victoria therefore favours the introduction of a system of revenue-raising designed to overcome this problem.  Modern technology offers the potential to charge road users on a user-pays principle, both on the basis of frequency of use and on the repair costs imposed by the damage caused.  It is also possible to incorporate charges related to the cost of congestion.  Once implemented, this technology could be used to improve traffic flow, thereby reducing congestion itself.

This Report offers a number of additional initiatives designed to improve the provision of transport in Victoria.  These include the deregulation of the taxi industry, and an alteration in the way airport services are provided.

The objective of the policies set out in this Report is the establishment of an effective and efficient transport sector capable of meeting the ever-changing transport needs of the community.  Victoria needs a transport sector which enhances its social and economic progress, not hinders it.  It has the opportunity to become the transport hub of Australia.  The Government, by its actions so far, has indicated a willingness and a desire to achieve this goal.  It must, whenever and wherever possible, be encouraged to continue to move forward.

MAIN RECOMMENDATIONS

1. That the provision of public transport services be further restructured with the objective of reducing Victoria's recurrent deficit per head on such services (calculated on the Commonwealth Grants Commission basis) to no more than the average for the States by 1994-95.  While Victoria's "excess" deficit calculated on this basis was $400 million in 1991-92, the additional savings now required to meet this objective by 1994-95 will probably be less than $400 million given the reforms already implemented to achieve the Government's stated objective of cutting the PTC's operating deficit by $245 million per annum by 1994-95.

2. In seeking such savings particular attention should be given to greatly reducing or, preferably, eliminating the role of the PTC in the provision of non-urban rail passenger and rail freight services and to either passing the operation of existing services to the private sector or leaving it to that sector to provide such services.  In such cases subsidies should be limited to low income groups or for other clearly defined public interest purposes.

3. Particular attention should also be given to early further privatisation and/or contracting out of services ancillary to the operation of urban rail passenger and freight services, and to reducing the subsidy component in urban passenger travel to outer suburban areas.  This is likely to result in the closure of costly tram services to such areas.

4. The Government should also move progressively to establish a more competitive environment for the provision of transport services by the private sector and, to this end, should announce the intention of:-

   • transferring ownership of tram and train tracks from 100% public ownership to either 100% private ownership or a mix of public and private ownership.  (Where a degree of public ownership is maintained, contracting out of ancillary services, such as maintenance and cleaning, should continue);

   • encouraging private ownership of stations, depots, rolling stock, trams and buses;

   • transferring the remaining PTC transport and service operations to the private sector;

   • franchising individual tram and train services to the private sector or, if sufficient inter-modal competition exists, transferring existing train and tram services in entirety to independent private sector transport providers;

   • allowing open competition for the provision of bus services;  and

   • re-establishing the PTC as the body responsible for the regulation of transport services and transport infrastructure.

   To ensure these objectives are met, an independent body should be established to act as a change agent;  to oversee the restructuring of the PTC and to ensure, wherever possible, that all relevant parties are involved in the change process.

5. That road charges be based upon "user-pays" principles.

   This will be achieved by establishing charges based upon:

• frequency of use;

• damage caused;  and

• road congestion.

6. That the taxi industry be deregulated to remove existing restrictive practices.

7. That the provision of airport services be restructured to allow easier access for new participants.

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1 INTRODUCTION

With the advent of fire we took a step forward;  with the invention of the wheel we superseded the foot.  Trains, trams, motor vehicles -- these all followed -- innovations and improvements in the way people were transported

This Project Victoria study examines Victoria's ability to transport its people and its produce.  It examines, in policy terms, where we have been, and why.  It explains where we should go, and how.  It shows the extent to which we, as a State, have succeeded and, sadly, the extent to which we have failed.

In particular, this paper sets out policies which, if implemented, will optimise the range and quality of transport services provided to the community.  They are designed to enable Victoria to take advantage of its opportunity to become the major transport hub of Australia.

The policies which this study recommends incorporate a level of public intervention and regulation to deal with externalities, public goods and monopoly elements associated with the transport sector.  However, these policies also recognise that, generally, the financing and provision of transport services demanded by the community can be delivered most efficiently and effectively by the private sector.

While many positive steps have been taken in the past nine months, particularly at the Public Transport Corporation (PTC), the current reform process still fails to address some of the fundamental structural issues confronting Victoria.

The basis for this study is that, in determining a suitable structure for the provision of transport services, it is necessary to create a framework which offers a reasonable balance between:

1. benefiting from the efficiencies which typically flow from a competitive environment;
2. moderating the outcomes that would be produced by the market in the interests of equity;  and
3. recognising that the regulatory and state ownership process tends to be captured by special interests and to bring outcomes that are not originally intended.

PUBLIC vs PRIVATE OWNERSHIP

Historically, state-owned enterprises have incorporated subsidies hidden from taxpayers, and enabled politicians to cater to specific interest groups to the detriment of the interests of the general community and the efficient provision of services.  This propensity is evidenced by the Government's requirement that tenderers for the contract to provide the PTC and VicRoads information technology services will have to provide those services from Ballarat.

While Victoria's economic position has significantly reduced the "bottomless pit" mentality which operated in the public transport sector, and significant steps have been taken to increase operating efficiency, the gains which have already been attained need to be "locked in" and further gains need to be sought.  According to analysis by the Commonwealth Grants Commission, a reduction in the public transport deficit of $400 million per annum would simply bring Victoria's public transport sector into line with average State performance levels.  This is $155 million more than the savings targeted by the PTC's current reform package.

"Locking in" existing savings and ensuring future savings are best achieved by increasing the role of private enterprise and reducing government involvement in the ownership of transport infrastructure and the operation of transport services.  Private enterprise, constrained by competition, will ensure that efficiency and productivity remain the focus in the transport sector.  And where governments consider subsidies to particular services or groups are warranted, it will ensure that their provision is at lowest cost.  By eliminating hidden cross-subsidies, the costs become visible, opening the resulting political decision to review.  In this way, subsidies to special interest groups must be overtly made and explicitly costed.

COMPETITION AND ITS LIMITATIONS

In transport, as in all business activities, ensuring competitive provision is the surest way of bringing about services that meet the needs of the consumer at the lowest cost.  Competition means that providers must constantly search for new market needs if they are to survive and make profits;  it means that they must exercise constant vigilance on costs since higher cost providers will face competitors who are able to win markets by lowering prices or offering a better value mix of prices, comfort, reliability, etc.

In the transport sector, a tension arises between the needs of fostering competition and the ability to ensure competition.  Competition can, and already does, exist within and between transport modes.  However, within transport modes there are economies associated with size, scope, density and system integration which, together with physical constraints, limit the potential of competition.

It is against this framework, and the need to maximise consumer benefits, that Victoria's transport sector must be addressed.

Following this Introduction, Sections 2 and 3 set out Victoria's, and in particular its transport sector's, economic position.

Sections 2 and 3 show clearly the need for change.  Change is required not simply because Victoria can no longer afford to bear the costs of a poorly managed, inequitably funded and inefficiently structured transport system.  That is irrefutable.  Change is required because Victoria needs a better transport system if we are to move forward.

Section 4 focuses on the operations of the Public Transport Commission (PTC).  It examines the performance of the PTC prior to the election of the Kennett Government and the changes which the Kennett Government has implemented to improve the provision of public transport and freight services in Victoria.  Strategies to enhance these gains are then suggested.

Sections 5 examines the provision of road infrastructure, and sets out alternative funding strategies, while Section 6 considers briefly some additional transport sector initiatives.

In the Conclusion we reiterate the need for change and the ways it which change can be achieved.

For support for these policies we need only look across the Tasman.  In New Zealand, where labour practices have been reformed, where air travel has been transformed and where only recently the railway system was privatised, a moribund transport sector is being moulded into one capable of efficiently and equitably meeting the needs of a modern society.

This is the type of transport sector Victoria needs.  This is the type of transport sector the recommendations of this Project Victoria study are designed to achieve.

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2 BACKGROUND

2.1 VICTORIA:  A STATE ON THE BRINK

The State of Victoria faces a very uncertain future without fundamental adjustments to its budgetary policies and its state owned business enterprises.

The State's economy has deep-seated structural problems.  Victoria is heavily dependent on protected manufacturing industry, particularly the highly-protected and labour-intensive motor vehicle, clothing, textile and footwear industries.  Accordingly, it will be more adversely affected by ongoing reductions in tariffs and other trade barriers than other States.  Victoria also suffers from a deficiency of industries which appear to have the best growth prospects in the 1990s, including mining, resource processing and tourism. ⁽¹⁾

In addition to these economic problems, the State's public sector has very severe budgetary problems, the dimensions of which are explored in detail in the recent Report of the Victorian Commission of Audit (Audit Report). ⁽²⁾  The Victorian Government is, by any standard, suffering from an excessive debt burden.  At the end of the 1991-92 financial year, the Victorian public sector had net debts of $31 billion and total financial liabilities of just under $70 billion. ⁽³⁾  The latter figure is equivalent to 70 per cent of the Victoria's Gross State Product (GSP), and equivalent to $47,000 per Victorian household.  In comparison, the New South Wales Government had total financial liabilities of around $50 billion, ⁽⁴⁾ which is equivalent to $20,000 or 42 per cent per household less than in Victoria.  Queensland, which seems destined to set fiscal standards for the Australian States during the 1990s and which is predicted to overhaul Victoria as the nation's second most populous State by the end of the century, has total public sector liabilities of only $10 billion. ⁽⁵⁾

As a result of Victoria's high level of debt, the State is burdened with high taxes (over 6.5 per cent above the national average); ⁽⁶⁾  with the lowest or second-lowest credit rating of the Australian States ⁽⁷⁾ and, correspondingly, with the highest cost of funds;  and with the highest debt-servicing costs (38 per cent of own-source revenue). ⁽⁸⁾

Victoria's budgetary problem arises not only from the size and cost of the State's public sector liabilities, but also from the unproductive purposes for which the liabilities were incurred.  About 76 per cent of the Victorian Government's liabilities accrue to its general government sector, which means that they were used for non-commercial activities, and will have to be serviced directly by Victorian taxpayers. ⁽⁹⁾  More importantly, the bulk of the liabilities accumulated by the Victorian general government sector over the last ten years was used for consumption rather than investment purposes, and will yield no future benefits -- monetary or otherwise -- to the Victorian taxpayers.  Between 1981-82 and 1991-92, the net debt of the Victorian general government sector increased more than fivefold, by $14 billion; ⁽¹⁰⁾  whilst during the same period, the sector's capital stock after depreciation actually shrank by $400 million. ⁽¹¹⁾  Furthermore, over half the liabilities of the general government sector arise from unfunded employee entitlements:  in other words, for consumption of labour services.

Before the major budgetary changes announced by the new Government, it was credibly forecast that Victoria's fiscal position would continue to deteriorate, leading ultimately to a debt spiral, in which the Government would need to borrow just to meet its interest bill. ⁽¹²⁾  If policy settings in place as of October 1992 had been maintained, the deficit of the Victorian public sector was set to double in 1993-94 and to increase annually in real terms through the remainder of this century.  This would result in net public sector debt increasing to 37 per cent of the State's GSP, and debt-servicing costs expanding to around 40 per cent of own-source revenue. ⁽¹³⁾  Moreover, if budgetary policies had remained unchanged, there would undoubtedly have been further reductions in the State's credit rating, higher taxes, and lower levels of capital expenditures, none of which was factored into the above projections.

The present woeful condition of Victoria's public sector finances is in the main the result of policy failure by successive Victorian Governments.  During the 1980s, they: ⁽¹⁴⁾

1. took a benign, indeed cavalier, attitude to borrowing and debt, and as a result failed to ensure that debt was used for productive purposes, failed to adjust the level of borrowing to changes in the cost of funds, and failed to guard against risks associated with high debt levels;
2. allowed a pronounced mismatch between outlays and revenue to develop by failing to increase revenues, failing to replace reductions in Commonwealth grants with own-source revenue, and by financing recurrent outlays with "once-off" revenue such as from asset sales;
3. encouraged interest groups to "capture" government services by allowing public sector unions veto powers over industrial relations, by politicising the public service, by limiting competition in the provision of services, by maintaining management systems which were incomplete, open to manipulation and lacking uniformity, and by emphasising vague notions of social justice above other objectives such as value for money, efficiency and equity;  and
4. assumed too many financial risks by participating directly in a variety of commercial ventures, by providing Government guarantees, and by promoting easy lending policies on the part of State-owned and State-regulated financial enterprises.

These policies allowed the Government and the State as a whole to operate for a period under the illusion of success, which was translated into three successive electoral victories by the Labor Party.

The flaws began to become evident in 1987-88, but the then Government failed to respond adequately.  As a result, the public sector's financial position continued to deteriorate, and as it did it became even less able to adjust to changes in the fiscal environment.

When the Victorian Government was confronted with a series of adverse developments beginning in 1989-90 -- including the national recession, the collapse of the commercial property boom, the failure of a number of State-owned or -regulated financial institutions, changes in State-Federal relations -- its budgetary position deteriorated dramatically.  Again, however, it failed to put in place the necessary remedial actions, choosing instead the easy, but ultimately counterproductive, tactic of blaming external forces.

The truth is that the external factors, though real and harsh, did not cause Victoria's budgetary crisis;  Government decisions, which failed to make rational allowance for adverse conditions, were the cause.  Accordingly, Victoria's budgetary position will not "self-repair" with the advent of more buoyant economic conditions.  Its problems are structural and its solutions require significant policy changes.  Those policy changes must be grounded in a firm understanding of government failure, overall and in particular policy areas, if they are to be appropriate and acceptable.

Victoria is not the only State to have to cope with a poorly-structured economy or with deep budgetary problems;  but it faces competition for resources from States that are better-positioned and far leaner.  South Australia and, to a lesser extent, Tasmania have similar problems.  Indeed, the southern States together represent the Australian equivalent of a "Rustbelt". ⁽¹⁵⁾

The existence of other States with similar problems provides little comfort, and no solutions.  The more important fact is that there are States, particularly Queensland and Western Australia, which have relatively well-structured economies and sound public sector finances, which will act as strong magnets for economic activity, for people, jobs, and investment.

The clear and urgent message for the Victorian Government is reform -- reform of its own activities and finances -- or else prepare for a decline in jobs, wealth and quality of life.  The task is far from impossible, but it requires leadership, vision, and a coherent strategy from the State Government.

2.2 THE GOVERNMENT'S ECONOMIC STRATEGY

The Kennett Government has put together a strategy, ⁽¹⁶⁾ which, in general, is focused in the right direction.  The strategy includes a plan to restore the State's finances to a sustainable position and a plan to accelerate the process of micro-economic reform through the reform of State-Owned Enterprises and of industrial relations.

The primary aim of the new Government's budget strategy is to arrest the growth in debt and other liabilities, and in the medium term to restore the State's credit rating to AAA.  As part of the strategy, it has already foreshadowed a reduction in the budget sector deficit of around $2.0 billion per year, to be implemented over three years, and to be achieved by cuts in departmental spending of $872 million and new revenue initiatives of $261 million. ⁽¹⁷⁾  As part of the reduction in spending, it intends to reduce the budget sector workforce by 31,800 during 1992-93 and 1993-94, through a programme of voluntary redundancies at a cost of $1.7 billion. ⁽¹⁸⁾

The restoration of the State's credit rating to AAA status, is, given Victoria's fiscal position, an appropriate medium-term benchmark.  A State's credit rating is based on a comprehensive set of information and critical factors, it is forward-looking, it is used by prospective investors and other States as a measure of relative performance, and, importantly, it is an arm's length assessment of government performance.  Additionally, the appropriate target credit rating for Victoria is the highest -- AAA.

The Victorian Government must, if it wishes to compete, meet the standard of performance set by its main competitors, which are the AAA States of Queensland, New South Wales and, soon perhaps, Western Australia.

The measures announced to date by the Kennett Government should achieve the stated goal of a AAA credit rating, but only in a minimum of nine years. ⁽¹⁹⁾  Given the substantial foreseeable risks still confronting the State's finances -- including the potential for slow economic growth, higher interest rates, and cutbacks in the level of Commonwealth grants -- Project Victoria agrees with the conclusions of the Audit Report that the measures announced to date represent only the minimum required.  As such there is no room for failure to perform or for slippage.

This conclusion is supported by the Government's latest set of forward estimates which include the expected impact of the Government's economic strategy over the next four years.  As shown in the Table below, net debt is expected to stand at 30 percent of GSP in 1996-97, just slightly less than the level achieved in 1992-93 and over 12 percentage points above the level needed to achieve an AAA rating.  Moreover, interest costs will be even higher in 1996-97 than in the current year.

Summary of Key Financial Indicators ⁽²⁰⁾

	1992-93 Budget	1992-93 Actual	1993-94 Estimate	1994-95 Estimate	1995-96 Estimate	1996-97 Estimate
Public Sector Net Debt/NFGDP (%)	32.2	30.8	32.0	31.4	30.6	30.0
Budget Sector Interest/Revenue and current grants (%)	17.1	17.7	17.0	18.1	18.3	18.5
Net interest/State revenue (%)	27.4	28.3	26.8	29.0	29.1	29.3
Interest cover (times)	0.3	0.4	0.3	1.1	1.1	1.0
Operating balance/Operating revenue (%)	(11.5)	(10.0)	(12.0)	1.4	2.4	0.2

The Government's strategy for reforming State-Owned Enterprises is much less detailed than is its financial strategy. ⁽²¹⁾  Nevertheless, the approach and direction so far presented are more or less correct.  The aims are to deliver greater efficiency through effective and sustained competition (including contracting-out of services);  to empower consumers rather than suppliers;  to encourage direct community ownership in firms through privatisation;  and to create incentives for managers to achieve international best practices.  It remains, however, to put flesh to the bones of this strategy.

2.3 TRANSPORT:  THE PIVOTAL SECTOR

The transport sector is pivotal to the success of the Government's wider reform agenda.  Indeed, without an across-the-board reform of the transport system in Victoria -- particularly of activities currently operated by the Public Transport Corporation (PTC) -- the Government cannot achieve its financial or economic objectives.

Transport is crucial to the Victorian economy;  it is an essential part of the infrastructure that makes possible the operation of the whole State economy.  The importance of the transport system is illustrated by the fact that transport:

• accounts for 4 per cent of the State's GSP, ⁽²²⁾ (for the nation as a whole, transport represents between 4.5 and 5 per cent of GDP); ⁽²³⁾
• employs about 8.5 per cent of the State's workforce; ⁽²⁴⁾
• accounts for about 14 per cent of total household expenditure in Victoria; ⁽²⁵⁾
• impacts on almost all industries and activities;
• imposes costs which range up to 13 per cent of the value of output, with the highest share of costs being in the mining sector, but with the dominant user being the manufacturing sector; ⁽²⁶⁾  and
• accounted for 27 per cent of public sector capital expenditure over the 5 years to 1991-92. ⁽²⁷⁾

The transport sector in Victoria is also important from a policy perspective because it is under extensive government control;  because it is has been identified as one of the most inefficient sectors in the State, and because it consumes a large portion of State Government funds.

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3 THE TRANSPORT SECTOR

3.1 INTRODUCTION

The transport sector moves two basic types of goods:  people and freight.  For both passenger and freight transport the Government exerts a large degree of control, primarily through the Public Transport Corporation (PTC).

In addition to the role played by the PTC, the State participates in the transport industry through the provision of essential infrastructure such as roads (through the Roads Corporation, known as VicRoads);  through the provision of port services (through the Port of Melbourne Authority, Port of Geelong Authority, and the Port of Portland Authority);  and through regulation ⁽²⁸⁾ and policing.

This study will concentrate on the activities of the PTC and VicRoads;  that is, on the provision of passenger and freight transport services, and on the construction, maintenance and pricing of roads.  Ports have already been analysed in an earlier Project Victoria report.

3.2 PASSENGER TRANSPORT

The majority of passenger trips in Victoria (as in all other States) take place in privately-owned vehicles -- largely privately-owned cars, but also taxis, buses and aeroplanes. ⁽²⁹⁾  Only about 3 per cent of total passenger trips in Victoria are made on public transport. ⁽³⁰⁾  Within the public, or government-run system, services are provided by rail (35 per cent), tram and light rail (35 per cent), and buses (30 per cent) (see Chart 1).

Melbourne is the only city in Australia, and one of the few in the developed world, which operates a tram or trolley car system as a central element of the public transport system.  (Many cities overseas operate trolley cars but usually on a very limited basis, and for tourist rather than regular commuter traffic.)  In Victoria, there are two types of publicly-controlled buses:  government-owned and privately-owned.  In 1991-92 the private buses carried the largest number of passengers (22 per cent of public transport services compared with 8 per cent by government-owned buses -- see Chart 1).  These privately-owned buses, which do not include all privately-owned buses, are here classified as providing public services because almost all aspects of their operation are contractually controlled by the Government.  In essence, these private buses act as franchised agents of the State, with the State Government specifying, inter alia, routes, service levels, pricing and financing.

Chart 1:
Victoria -- Share of Public Passenger Transport by Mode, 1991-92

Source:  Report of the Victorian Commission of Audit, Volume 2, May 1993, pages 159 and 164.

The lion's share (98 per cent) of public passenger services in Victoria is provided within the Melbourne metropolitan area, with the remaining 2 per cent provided across the rest of the State. ⁽³¹⁾  About 30 per cent of the non-urban public transport passengers travel on buses contracted to the State Government, the rest by rail. ⁽³²⁾

The whole public passenger transport system in Victoria is currently either controlled or operated by a single government agency:  the PTC.  The various modes of transport -- rail, tram, government buses, and private buses -- are operated as an integrated system, with little differentiation in terms of pricing and with minimal competition between modes.

Public transport in Melbourne, as in all major cities in Australia, is central-city oriented.  That is, most routes radiate to and from the city centre, like spokes from a hub.  This was a natural arrangement when the system first evolved last century, as urban activity and travel were centrally oriented.  It is now, however, far from ideal.  The availability and use of motor cars, combined with lower-density suburban living, has resulted in the dispersal of trips, with no strong directional orientation of transport demand. ⁽³³⁾

As a result, Melbourne's mass transit system serves the city centre well, with over half the central city trips carried by public modes;  but it services the much larger market for suburban travel very poorly.  In fact, it has been estimated that "... public transport is established to cater for about 2 per cent of daily trips in Melbourne". ⁽³⁴⁾  Further, the central focus of Melbourne's mass transit system means that a very large proportion of its use is for peak-period work travel.  This, in turn, means that the system has a very low rate of utilisation in off-peak periods.  It also caters to an inordinate number of relatively high-income CBD office workers -- a fact that works against the system's achieving its purported equity goals.

The existing centralised mass transit system will become even less suitable in the future.  The demand for travel will continue to be driven by growth in the suburbs, and it will become even more diffuse. ⁽³⁵⁾  Although there will continue to be a demand for central city travel, it will become an even smaller, more specialised proportion of overall travel.

3.3 FREIGHT

The main features of Victorian freight transport services are shown in Chart 2.  Road transport is clearly the dominant mode of freight transport within Victoria, accounting for 92 per cent of all tonnes carried.  Sea, or coastal shipping, accounts for the second-largest share of freight services at 5 per cent.

Chart 2:
Victoria -- Freight Surface Transport, by Mode (% of total tonnes carried)

Sources:

Report of the Victorian Commission of Audit, Volume 2, May 1993, Table 9.15, page 174.

ABS, Cat No. 9208.0, 30 September 1991, Survey of Motor Vehicle Use Australia, 1993, Table 25, page 20.

Department of Transport and Communications, Sea Transport Statistics, Coastal Freight Australia 1991-92, DTC, 1993, Table 4, pages 5-6.

Rail, including interstate and intermodal services, represents as little as 3 per cent of the total freight tonnes carried in the State.  In contrast, for the nation as a whole, rail carries about 20 per cent of total freight tonnes. ⁽³⁶⁾  It is also relevant to note the dramatic decline in rail transport in Victoria over recent years (see Chart 3).  Between 1975-76 and 1990-91, freight carried by rail in Victoria declined in absolute terms by 2.2 million tonnes or by 21 per cent.  During the same period, the freight shipped by road increased by around 46 per cent.  The result was a sizeable increase in the importance of road for freight transport.  For the nation as a whole, rail freight did not grow as much as road freight, but it did expand. ⁽³⁷⁾

Chart 3:
Victoria -- Growth In Domestic Freight Surface Transport, by Mode,
1975-76 to 1991-92 (% change in tonnes carried)

Sources:

Report of the Victorian Commission of Audit, Volume 2, May 1993, Table 9.15, page 174.

ABS, Cat. No. 9208.0, 30 September 1991, Survey of Motor Vehicle Use Australia, 1993, Table 25, page 20.

ABS, Cat. No. 9208.0, 30 September 1976, Survey of Motor Vehicle Use Australia, Table 19, page 21.

Department of Transport and Communications, Sea Transport Statistics Coastal Freight Australia 1991-92, DTC, 1993, Table 4, pages 5-6.

Bureau of Transport Economics, Port Authority Cargo Movements, 1975-76, BTE, 1976, pages 2-3 and 9-10.

Victorian Railways, Annual Report 1976, Victorian Railways, Melbourne, 1976, page 24.

The Victorian rail system possesses a number of special characteristics which at least partly explain the absolute and relative decline in rail freight services.  The most important characteristic is a dearth of bulk commodities, particularly coal, iron ore and other minerals.  Bulk freight tasks make up a very large portion of the total tonnes carried in New South Wales, Queensland and Western Australia;  these have been the main reason for the growth in rail freight in these States over the last few decades.  Victoria tends also to have relatively short distances between transport nodes and as a result cannot achieve the same economies of size available to other States.

In the Victorian rail system, moreover, all freight services are provided by a single government-owned agency, the PTC, which also provides or controls all public passenger services.  Unlike Western Australia, there are no privately-owned or -operated freight rail facilities in Victoria;  and unlike all other States, passenger and freight services are combined in the same large government agency.  Government ownership tends to limit the scope for flexible and efficient work practices, thereby affecting rail freight's competitiveness.

Finally, it can be noted that interstate traffic dominates the State's rail freight traffic:  in Victoria 85 per cent of all tonnes carried are transported between States.  This is the largest share of any State. ⁽³⁸⁾

Victoria, the Commonwealth, New South Wales and South Australia have set up the National Rail Corporation (NRC) to take over interstate rail freight services.  The NRC will have a very great impact on the Victorian rail system, probably greater than on any other State.  Indeed, it will necessitate a complete review of the State's intrastate rail operations, including whether or to what extent such operations should continue.  It is estimated that the PTC will lose 40 per cent of revenue, nearly 50 per cent of tonnage, 15 per cent of the heavy rail network, and a very large proportion of its best rolling stock to the NRC. ⁽³⁹⁾  Further, the conversion of the Melbourne-Adelaide line to standard gauge means that the remaining intrastate system will have two gauges -- standard and the old wide gauge.  An additional complication is that a sizeable amount of intrastate freight business as well as non-urban passenger services will, as a result of the NRC, be shipped on routes which will have both standard and wide gauge track.  Given the costs associated with maintaining different sets of equipment and transferring cargo, this is not a sustainable arrangement, and a conversion of all track to standard gauge will be required if the intrastate system is to continue running as an integrated system.

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4. THE PUBLIC TRANSPORT CORPORATION (PTC)

4.1 INTRODUCTION

The Public Transport Corporation (PTC) provides or controls all public passenger and freight services in Victoria.  It has been one of the main contributors to the State's budgetary plight, and is therefore one of the prime targets of budgetary reform and restraint.

4.2 PERFORMANCE OF P.T.C.

The performance of the PTC has been critically analysed on numerous occasions.  The following sub-sections outline the findings of the:

• Commonwealth Grants Commission;  and
• Other Research

4.2.1 Commonwealth Grants Commission

Public transport costs Victorian taxpayers -- in subsidies over and beyond the moneys spent on fares by users -- up to $2 billion per year.  Due to the arcane accounting systems employed within the PTC and other arms of government, however, the exact amount of that cost is not known.  In its Annual Report, the PTC disclosed an operating deficit of only $129 million for 1991-92. ⁽³⁹⁾  As discussed in detail in the Audit Report, this figure grossly understates the true level of subsidies to public transport in Victoria and the PTC's true operating deficit.  The Commonwealth Grants Commission (CGC) estimates that the PTC's deficit in 1991-92 was more like $1.5 billion. ⁽⁴⁰⁾  The Audit Report itself estimated the PTC deficit, including the opportunity cost of capital, to be around $1.8 billion. ⁽⁴¹⁾  The Minister for Transport has stated that the net cost to the budget of public transport subsidies is around $2 billion. ⁽⁴²⁾

The absurdly low deficit reported by the PTC is a good example -- and there are many others provided in the Audit Report -- of the extent to which the cost of public transport services has been hidden from public transport users and from taxpayers.

Public transport subsidies in Victoria are large by any standard.  Using the CGC data, the public transport deficit in Victoria in per capita terms is significantly higher than the comparable deficit of any other State, and 150 per cent larger than the all-State average (see Chart 4).  The public transport subsidies consume about 13 per cent of the State's recurrent budget outlays, which is twice the proportion of most other States. ⁽⁴³⁾  Importantly, the PTC's deficit represents over 75 per cent of its operating costs;  that is, the PTC recovers through its own revenue only 24 per cent of its operating costs. ⁽⁴⁴⁾

Chart 4:
Public Transport Deficits ($ per capita)

Source:  Reproduction of Chart 9.1, Report of the Victorian Commission of Audit,
Volume 2, May 1993, at page 150.

As shown in Chart 4, between 1989-90 and 1991-92, despite alleged reforms, the PTC's deficit continued to increase in absolute terms, while the deficit of transport agencies in all other States declined.  The reason is quite clear:  the other States instituted reforms more quickly and effectively.  Over this period the PTC cut its workforce by 2,500 positions, or by 12 per cent, while the State Rail Authority of NSW (SRA), which provides all public rail services in New South Wales, cut its workforce by 15 per cent, or 4,400 positions. ⁽⁴⁵⁾  Even Westrail and Queensland Railways, which even at the start of this period were far ahead of the PTC in virtually every measure of performance, made substantial cuts to their workforces. ⁽⁴⁶⁾  More importantly, all public transport agencies, with the exception of the PTC, were able to translate staff reductions into deficit reductions.  In other words, they made the cuts pay off, whereas the PTC did not.  As the Industry Commission found, "... of all the major railway systems, the urban rail sector of the Public Transport Corporation shows the least evidence of achieved reform ...". ⁽⁴⁷⁾

The unusually high level of public transport subsidies in Victoria is to a large extent the result of government policy decisions.  Data from the CGC, which identify the policy-induced differences in spending across the States, show that $400 million (or 27 per cent) of the $1,500 million subsidies paid out through the budget to cover PTC losses in 1991-92 can be attributed to factors under the control of the Victorian Government. ⁽⁴⁸⁾  Put another way, the CGC data show that in 1991-92 the Victorian Government spent $400 million more in public transport subsidies than was necessary for it to have provided the same level of services as provided in other States.

The CGC data show, at a more detailed level (see Chart 5), that Victoria "overspends" in each of the three categories of public transport services, but particularly on non-urban passenger services.

In 1991-92, Victoria spent in per capita terms $27 (or 15 per cent) more on urban transit, $26 (or 79 per cent) more on freight, and $37 (or 130 per cent) more on non-urban passenger services, than was required to provide the same level of services as the average for all States and Territories.  In terms of total dollars, Victoria spent, as a result of policy decisions, $119 million more on urban transit, $117 million more on non-urban freight, and $164 million more on non-urban passenger services, totalling $400 million on the combined public transport system. ⁽⁴⁹⁾

Chart 5:
1991-92 Deficits of Public Transport Components ($ per capita)

Source:  Reproduction of Chart 9.3, Report of the Victorian Commission of Audit,
Volume 2, May 1993, at page 151.

CGC data reveal that public transport is one of the five main areas of overspending in Victoria and logically, therefore, it must be one of the main focal points of the Government's spending cuts.  As shown in Chart 6, Victoria, as a result of its various policy settings, spent in 1991-92 about $1,000 million more than was required to provide recurrent budget services at the average level of all States and Territories.  The figure indicates that the Kennett Government should be able to achieve its planned reduction in government spending without excessive diminution in the quality or level of services.

Chart 6:
Victoria -- Excess Recurrent Spending, by Function

Source:  Reproduction of Chart 3.7, Report of the Victorian Commission of Audit,
Volume 1, May 1993, at page 86.

Chart 6 also shows that public transport accounts for the second largest area of excessive spending, after education.  Indeed, public transport accounts for around 40 per cent of the State's total level of overspending.  Health, debt charges and welfare are also areas of excessive spending.  All areas of overspending must, as recommended by the Audit Commission, be the primary focus of the Government's spending cuts.  The State Government will, however, find it very difficult to achieve the necessary cuts in some of these areas.  For example, health, education and welfare are to a significant degree funded by Commonwealth specific purpose grants and are therefore substantially under Commonwealth policy control -- a fact that limits the capacity of the State Government to effect change.  The politics of cutting expenditure in some of these areas is also fraught with difficulty, arising from the existence of very articulate interest groups.  Debt charges cannot be cut directly, but only by reducing debt levels and cutting back the deficit over time.

The State Government does have greater freedom to move in the public transport area.  It has, in fact, almost complete policy control.  Failure to achieve the full potential reduction in public transport subsidies will not just put greater pressure on achieving cuts to other areas, but very seriously jeopardise the Government's chances of achieving its financial targets.  If anything, the Government may have to "over-achieve" in transport to make up for obstacles in the other target areas.

The PTC's management has disagreed with the CGC analysis, arguing that the smaller States do not have the same "transport tasks" as Victoria and New South Wales, and should not therefore be used as a benchmark for the larger States -- if a local benchmark is to be used, it should be the NSW public transport system by itself.

The PTC's claim is greatly exaggerated.  The CGC assessment is both thorough and detailed.  Although it is not perfect, it is one of the best assessments of comparative spending anywhere in the world.  It uses extensive and detailed data derived primarily from public transport agencies and other official sources.  The methodology used by the CGC is accepted by the majority of State agencies.  It relies heavily on the technical assessment of leading transport consultants who are frequently employed on similar tasks by the PTC and other transport agencies.  And importantly, the CGC methodology explicitly takes into consideration, and adjusts for, most of the factors which are beyond the control of the State Governments.

Of course, if the public transport agencies of New South Wales are used as the benchmark, the PTC losses do not look as bad as when the all-State average is used.  For example, if subsidies to the PTC were cut to the same per capita level as provided by the NSW Government in 1991-92, the Victorian Government and taxpayers would save about $80 million -- a much smaller figure than the $400 million savings available moving to the all-State benchmark. ⁽⁵⁰⁾

The NSW public transport agencies are not yet, however, an appropriate benchmark for the PTC.  As recognised by the NSW Government, their public transport agencies are currently performing poorly.  More importantly, the NSW Government is committed to a programme of reform which will further reduce subsidies to public transport agencies.  The PTC's preferred target is, thus, very much a moving one.  Over the next three years, the NSW Government plans to reduce the SRA workforce by another 24% or 5,400 positions, and to improve the productivity of the SRA by 27 per cent in urban passenger services, 53 per cent in non-urban passenger services, and 42 per cent in freight services.  These reforms are consistent with meeting world best practice. ⁽⁵¹⁾

Thus instead of using the current NSW performance as its benchmark, the PTC should adopt the same benchmark as has the NSW Government -- world best practice -- which, as shown below, is consistent with reducing the PTC's operating deficit by $400 million.

It must also be emphasised that Victoria's dire financial position makes reform of the public transport system much more urgent than in NSW.  The NSW Government already has a AAA credit rating, and thus is already in the fiscal position that Victoria hopes to attain at best nine years from now.  The NSW Government could afford to implement a more gradual pace of reform, but it has not.

4.2.2 Other Research

Research undertaken by Clare and Johnston ⁽⁵²⁾ on the profitability of Australian rail authorities confirms the conclusion derived from the CGC data.  As shown in Chart 7, they found that the PTC had, by a very large margin, the lowest rate of return of any Australian rail system, and that the PTC's performance has been getting worse in recent years whilst the performance of other authorities has either improved or at least not declined.

Likewise, a study by the Bureau of Industry Economics (BIE) ⁽⁵³⁾ which compares the rail freight operation in Australia with world best practices or benchmarks confirms the PTC's relatively dismal financial performance.  The BIE estimated that the operating costs of the PTC's rail freight operations were 34 per cent above world best practice in 1990-91.  That translates into excessive spending, and therefore into potential savings, of $92 million per year.  All rail freight operations in Australian rated poorly by world-best standards, but the PTC is clearly the worst.

Chart 7:
Rates of Return on Selected Rail Authorities

Source:  Reproduction of Chart 9.7, Report of the Victorian Commission of Audit,
Volume 2, May 1993, at page 154.

Travers Morgan, in a study commissioned by the Industry Commission, ⁽⁵⁴⁾ also found that the PTC's rail freight operations were inordinately costly -- some 40 per cent above world best practice.  They also examined the PTC's urban and non-urban rail passenger services and found a similarly dismal performance, with the operating costs of the urban and non-urban services being respectively 49 per cent and 40 per cent above world best practice.

Research into the comparative performance of the public transport operations also supports the CGC's assessment that the PTC's poor financial performance results from factors under the control of Government, and indicates that it results primarily from extremely low levels of productivity and efficiency rather than low charges or from a high quality of service.

As shown in Table 1, the PTC's freight operation ranked lowest of all Australian operations by all productivity indicators and shockingly below world best practice.

Table 1:
Australian Rail Freight Services -- Performance Indicators, 1990-91

Performance Indicator	SRA	QR	PTC	AN	W'rail	Aust	Best (1) observed
Price Average price to industry (2)   - coal (3)   - grain (4)   - general freight	4.9 5.8 5.8	5.0 5.0 5.5	4.3 6.0	3.4 7.7	5.1 6.0	6.05 2.88	1.6 3.7 3.4 1.4 2.2
Service Quality Ratio lost plus damaged freight per $100 charge (5)	0.12	0.07	0.31	0.49	n.a.		0.07
Labour Productivity   - average freight revenue per employee ($'000)   - ntk per employee	56 1.1	70 1.4	36 0.8	58 1.6	57 1.1		184 11.6
Capital Productivity   - locomotive productivity (6)   - wagon productivity (7)   - track productivity (8)	24 1.9 1.8	41 1.5 2.3	24 0.8 0.7	49 1.3 1.3	32 1.1 0.7		165 6.3 7.0
Performance against "world best practice" (WBP)   - reduction needed to reach WBP costs (%)   - reduction in fleet with WBP utilisation (9)     - locomotives     - wagons	26 23 32	22 17 19	34 23 66	n.a. 40 50	18 36 43	25 24 35	0 0 0
Reliability Availability of trains (10) (%)	(Syd- Melb) 83	(Syd- Bris) 60	(Bris- Melb) 95	(Melb- Adel) 91	(Adel- Perth) 79	(Syd- Perth) 62	99 (11)

Notes:

⁽¹⁾ Best practice is the best observed international performance, identified separately (or each category (and as such involves a number of different overseas systems, mainly North American, as best observed practice).

⁽²⁾ Revenue cents per net tonne kilometre (ntk), 1990/91.

⁽³⁾ For comparable lengths of haul.

⁽⁴⁾ Does not take account of haul length, which significantly favours "best observed".

⁽⁵⁾ E.g., SRA paid 12 cents in freight claims for every $100 freight revenue.

⁽⁶⁾ Ntk/loco, millions.

⁽⁷⁾ Ntk/wagon, millions.

⁽⁸⁾ Ntk/km of track, millions.

⁽⁹⁾ Potential reduction (%) in the number of locos and wagons given WBP rollingstock utilisation.

⁽¹⁰⁾ Availability of intermodal trains as promised for loading/unloading, by corridor, 1991.

⁽¹¹⁾ Best observed is the National Rail Corporation target for their own operations.

n.a. Not available.

For explanation of names of rail systems, see Glossary of Rail Authorities.

Source:  Reproduced from Bureau of Industry Economics, International Performance Indicators:  Rail Freight, Research Report 41, Canberra, May 1992, at page 71.

For example, labour productivity, as measured by average freight revenue per employee in the PTC rail freight operations, is at best 35 per cent and at worst 49 per cent below the level of other Australian operations, and a whopping 80 per cent below world best.  A similar picture can be seen in capital productivity, particularly in the use of wagons (87 per cent below world best) and the use of track (90 per cent below world best).

The PTC's losses cannot be explained either by higher quality or by low prices.  Their freight operations have very poor levels of service quality by domestic and international standards as do urban passenger transport if measured by frequency of service. ⁽⁵⁵⁾  The PTC's rail freight charges are above international standards (169 per cent), and above most, but not all, other domestic rail freight operations.

Unfortunately the data on rail passenger operations are either less detailed or up to date than for freight, but all analyses of the available data comes to the same conclusion.

The Industry Commission ⁽⁵⁶⁾ found the PTC's urban rail passenger operation to have a significantly lower level of labour productivity (15 per cent and 30 per cent respectively) than similar operations in Queensland and NSW.

We, using research undertaken on behalf of the CGC, ⁽⁵⁷⁾ found that the dominant reason for the PTC's above-standard level of subsidies, on its urban (including rail, tram and bus) operations, was the inefficient use of labour and capital resources.  The PTC also had a much higher interest bill, and lower usage of private buses than other States.  In 1989 it also had lower fares, though fares on the metropolitan services have since increased and now exceed the level of all other States.

The Industry Commission (IC) ⁽⁵⁸⁾ found the PTC's rail system as a whole (including passenger and freight services) had, by a very large margin, the lowest level of labour, capital and total factor productivity of all rail operations in Australia.  The IC also found that the Victorian rail system exhibited a marked decline in total factor productivity through the 1980s, relative both to other States and to itself.  The PTC's productivity record was abysmal even after adjusting for scale and type and composition of output.

In summary, all studies of the comparative performance of the public transport sector in Victoria reach the same conclusion as that derived from CGC data, which is that all modes of public transport in the State are performing abysmally -- largely as a result of factors under the control of the State Government.

The studies also support the conclusion reached from the CGC data that the losses of the public transport system in Victoria can be reduced by around $400 million per annum without an unacceptable reduction in the quality or level of services.  As shown in Table 2, the benchmarking studies indicate that the rail operations alone can save $310 million by meeting international best practices.  The tram and bus operations, which account for 66 per cent of PTC urban passenger journeys and, according to a detailed study undertaken for the CGC in 1988, suffered twice the efficiency loss of the PTC's passenger rail operations, could easily generate an additional $90 million in potential savings in recurrent government expenditure by moving to international best practices.

Table 2
Victoria;  Cost Savings from Meeting International Best Practice on Rail Facilities
(not including trams and buses) ($ million 1989-90)

Passenger*   Urban   Non-urban	218 159 59
Freight **	92
Total	310

Sources:
* IC (1991), op. cit., Vol. 2, Appendix K, passim.
** BIE (1992), op. cit., page 61.

4.3 INVESTMENT BY THE P.T.C.

The PTC's abysmal performance can be partly attributed to the manner in which it has acquired and used its capital resources.

The PTC as a whole, like most other Victorian Government agencies, has since the mid-1980s cut back on capital investment and sold assets (see Chart 9).  As a result, its stock of productive capital has probably declined.  This does not mean, however, that any or all of its operations have been starved of capital.

The PTC's passenger rail operations have received substantial capital injections during the 1970s and early 1980s.  According to the Public Transport Users Association (PTUA), ⁽⁵⁹⁾ the PTC has one of the most modern suburban train fleets in the world, with no vehicles over 20 years old, and has purchased hundreds of new trams;  almost all its country passenger fleet is made up of vehicles built or fully overhauled within the last 15 years.

Chart 9:
Victoria -- Public Transport New Fixed Capital Investment in Real Terms,
1981-82 to 1991-92 *

* Note:  Includes expenditure on equipment and construction for both multi-mode and rail

Sources:

ABS, unpublished data, 1993.

ABS, Cat. No. 5206.0, September Quarter 1992, Australian National Accounts, National Income and Expenditure, Table 54, page 63.

The PTC's freight business appears to have experienced a larger share of the cut-back in capital outlays in the late 1980s and early 1990s.  Moreover, it is quite clear that much of the PTC's rolling stock, signalling, track and other infrastructure facilities are outdated and will need to be replaced if they are to be used and made to cover costs. ⁽⁶⁰⁾

The problem with the PTC, however, has been not so much the level of capital investment or the decline in capital stock, but the poor use of capital.  The PTC has the lowest level of capital productivity in both its passenger and freight business of any rail system in Australia, and is far below international best standards (see Table 1).  The problem stems from surplus or underutilised capital.  The Audit Report found the PTC to have surplus rolling stock, track and maintenance facilities and over 30,000 parcels of land valued at around $1 billion that were not used for rail purposes. ⁽⁶¹⁾

The PTC urban rail system is indeed one of the most extensive in the world, with twice the track kilometres of Chicago, and five-and-a-half times the track in Toronto -- a city with approximately the same population as Melbourne.  However, Melbourne's urban rail system services only 82 million customers -- 65 million less than Chicago and 161 million less than Toronto.  Melbourne also has, relative to similar cities abroad, a very large fleet and station system. ⁽⁶²⁾  There are numerous other examples of poor use of capital. ⁽⁶³⁾

The PTC also suffers from the Victorian syndrome -- large debt and little to show for it.  As with most Victorian Government agencies, the PTC's capital programmes over the last decade or more have been funded almost totally by asset sales or by debt.  As a result, the PTC has, relative to other rail authorities, a very large interest bill and a declining capital base. ⁽⁶⁴⁾  Given the poor return achieved by the PTC on its investments, its debt-servicing burden is particularly high.

Although there will need to be additional capital injected into some aspects of the public transport system if the system is to become more productive and financially viable, no more capital should be injected into the system unless there is radical, fundamental reform.

Moreover, the State Government would be able to maintain or even reduce its own net outlays on capital spending on all aspects of public transport from current levels by privatising rolling stock and terminals, closing down and selling off surplus and uneconomic facilities and using remaining facilities more efficiently.  It would be important that the proceeds from the sale of such assets, particularly the sale of land, remain with the PTC or its remnant agencies and that priority be initially given to using these funds to reduce the level of debt built up in the PTC.

The PTC's rail freight operations, if they are to be maintained as a integrated system, require a substantial capital injection as a result of the National Rail Corporation plan, and of the poor condition of its remaining capital stock.  In fact, about $300 million will be needed to convert the old, wide-gauge track to standard gauge to allow the system to run on a single gauge of track. ⁽⁶⁵⁾  This decision, however, must be made solely on a commercial basis -- if a line is not commercially viable it should, as a rule, be shut down and the land and assets sold.  This will need to be done on a line-by-line basis, and independently of the existing interest groups who are largely responsible for the mess that is the PTC.  It is highly likely that the freight network will be substantially, if not totally, reduced.

4.4 SOCIAL AND ENVIRONMENTAL ROLE OF P.T.C.

The main justification for running deficits in public transport -- world wide -- is the existence of benefits which are not captured by consumers of transport services, that is by the existence of what economists call "positive externalities".  Another rationale for subsidising public transport -- one which rests on weaker foundations -- is as a means of providing income support to low income groups (a "social wage" argument).  Unfortunately, data on external benefits are at best sketchy, and this prevents detailed assessments.  Nonetheless, it is reasonably clear that none of these factors justifies the large (relative to other public transport systems in Australia and overseas) losses in the Victorian transport system.

It is undeniable that the provision of mass transport systems in large metropolitan areas such as Melbourne generates external benefits in the form of lower road congestion, and reduced air and noise pollution. ⁽⁶⁶⁾  There are also aesthetic benefits, not susceptible to measurement.  It is also apparent that urban transport in Melbourne bestows benefits, identifiable in monetary form, on properties and businesses located near key facilities and routes.  The existence of these external benefits can to some extent justify the use of non-fare revenue to subsidise the operation of mass transport services such as those provided by the PTC in Melbourne.  The question, then, is not whether to subsidise but how, and by how much?

If direct subsidies are to be used they should only be provided to meet actual community service obligations (CSOs).  Furthermore, they must be designed to achieve the maximum benefit at the minimum cost, with the amount of each subsidy being no more than the net cost of running those uneconomic services under best practice conditions.

Introducing well-defined, transparent, operator subsidies for loss-making CSO services would have two major positive effects on transport efficiency:

1. Each service would have to be clearly identified, defined and costed before the State Government would consider funding a CSO subsidy.  This would result in each loss-making service being evaluated, to ensure that it satisfies a real community need and that the State Government should provide a subsidy.  Some services that have historically been perceived as CSOs should not be categorised as such;  either because they have never been, or they no longer are, CSOs.  The nature of politics and public service organisations makes it difficult to withdraw services once they are in place, particularly as traditional public enterprise financial reporting procedures do not require the itemisation of costs associated with each policy or service decision.  A process of re-assessment of all loss-making services would help overcome this problem.
2. Public transport would be able to operate on a strictly commercial basis, thereby enabling far easier evaluation of performance.  This would encourage management to run public transport in a far more efficient and service oriented manner, particularly if exposed to greater competition from the private sector.  The public transport sector would be expected to provide a positive return on investment after CSO payments were received.

During its commercialisation, the New Zealand Railways Corporation (NZRC) entered into a number of CSO subsidy contracts.  After the initial CSO contract period, a number of the subsidies for branch lines were withdrawn.  However, NZRC continued to operate the services because it had reduced its costs to such an extent that the previously subsidised services were no longer making losses and were actually contributing to profits on the main rail lines. ⁽⁶⁷⁾

In determining whether a CSO subsidy is appropriate it is necessary to consider whether there is any alternative, more efficient, means of providing the service.  Meeting an existing CSO by alternative means at a lower cost would reduce or remove the need for a Government CSO subsidy.

Great care must be given when defining and costing subsidies.  If subsidies are set too high, inefficiencies will become institutionalised;  if they are set too low, management may lose incentive because they will be constantly perceived to be under performing.  As it is also possible for the basis of each CSO to alter over time, subsidies should be periodically re-examined.

The subsidy payable for each CSO should be determined on the basis of the "best practice cost" achievable by transport providers, "best practice cost" being the lowest cost at which a CSO can be met by either a public or private transport operator.

A system of CSO subsidisation already applies to local bus contractors in outer Melbourne suburbs, but generally the subsidies provided to public transport services in Victoria and other States are so poorly targeted as to be counterproductive.

All the transport systems used as benchmarks in this study provide subsidies to their urban public transport operations.  However the level of subsidies paid in Victoria is much larger than in any of the benchmark systems.  We need to ask, then, whether the Victorian system provides a greater level of external benefits commensurate with the higher level of subsidies.  Unfortunately, this question can not be addressed in detail.  Logically, however, if the external benefits are perceived to be relatively high in Melbourne -- and there is no evidence to indicate that they are -- the subsidies paid for urban transport in Victoria should result in lower prices.  This is not in fact the case.  Public transport fares in Melbourne are the highest of any system in Australia, ⁽⁶⁸⁾ and, for trips of equal distance, on par with those overseas. ⁽⁶⁹⁾  The overwhelming reason for the large losses in Melbourne's passenger transit system is pervasive and chronic inefficiencies -- not the perceived existence of environmental and other external benefits.  In fact, the benchmarking studies indicate that the losses in Melbourne's mass transit system could be substantially reduced in ways that could enhance this congestion, pollution and other benefits.  In transport, as in most industries, efficiency improvements appear to be the environment's best friend.

The use of subsidies to mass transit authorities is a very ineffective and inefficient means of addressing road congestion and pollution.  It is far better to tackle the problem directly through correct pricing of road use, rather than by under-pricing public transport -- a point taken up later in this study.

The external benefits created by the non-urban passenger and rail freight forms of public transport are -- relative to urban transport -- very small.  Noise and atmospheric pollution as well as congestion are predominantly urban phenomena.  The total cost from road noise in Australia was estimated to be $534 million in 1989-90, of which $389 million or 73 per cent was generated in urban areas. ⁽⁷⁰⁾  Congestion is also principally a problem for urban road users.  Although it does occur on non-urban roads, its magnitude there is minuscule in comparison with the congestion-induced delays experienced on city roads. ⁽⁷¹⁾  The Inter-State Commission estimated that in 1989-90, road transport generated atmospheric pollution costs of $786 million, of which as little as $4 million was caused by interstate and rural traffic.

The external benefits generated by non-urban forms of public transport clearly do not justify the level of subsidies provided in Australia and particularly in Victoria.  In 1989-90, freight and non-urban passenger activities of public transport systems in Australia lost around $1,200 million, even before accounting for capital costs. ⁽⁷²⁾  These losses are over 9 times the total estimated cost of pollution and congestion resulting from all non-urban road traffic in Australia.  Given that public transport accounts for a small proportion of non-urban transport tasks (2 per cent of non-urban passenger kilometres ⁽⁷³⁾ and roughly 3.5 per cent of freight -- see Chart 2), the subsidies exceed many fold the possible pollution gains from the use of public transport.  If, then, capital costs are brought to account, one can only conclude that there is no justification on pollution or congestion grounds for the operating subsidies provided in Australia to non-urban public transport services.

This conclusion applies most emphatically to Victoria, which provides the highest level of subsidies and provides public transport services with a relatively low level of external benefits.  The greatest external benefits are generated by the use of rail to transport bulk commodities, with rail generating one third the level of CO₂ emissions per tonne-kilometre as does road.  Victoria, however, has a relatively small amount of bulk freight.  In terms of non-urban passenger services, the largest gains flow from the use of buses rather than rail, with buses on non-urban services generating less than half the CO₂ emissions per passenger-kilometre than rail. ⁽⁷⁴⁾  In fact, rail emits only 18 per cent less CO₂ than cars, while buses emit 67 per cent less. ⁽⁷⁵⁾  Victoria, however, uses rail more extensively in the provision of non-urban passenger services than any of the benchmark systems referred to above, and as such Victoria's system -- on the basis of the existing data -- generates a lower level of external pollution benefits than those other systems.

Victoria's relatively large public transport subsidies cannot be justified on equity grounds.  Project Victoria accepts both the need for State Governments to assist persons who are genuinely in need of assistance (due to low income, or physical or intellectual incapacity), and that this assistance must, at least in urban areas, include the provision of a certain level of passenger transport services.  Accepting such welfare goals does not, however, justify subsidies -- at least of the form and magnitude provided to public transport services in Australia and in particular Victoria.

Public transport services are used by all sections of the community and not just the disadvantaged.  The available evidence shows that, because of the central city orientation of the system, middle- and higher-income people use public transport more heavily than lower-income groups, and, accordingly, they receive the lion's share of the subsidies.  As shown in Chart 8, expenditure on public transport in Melbourne increases steadily with income, with the highest income group spending three-and-a-half times more on public transport than the lowest income group.  The distribution is even more skewed for rail services, with the highest income group spending seven times more on rail fares than those in the lowest income group.  The data also show that as income increases, there is no change in the proportion of expenditure spent by households in Melbourne on public transport.  (The same relationship generally holds for all capital cities in Australia.) ⁽⁷⁶⁾  These data are supported by research in Adelaide which found that "... households with incomes above the average received 59 per cent of the total rail subsidy (that is, the general subsidy plus reimbursements paid to the State Rail Authority for concession fares).  Excluding reimbursement for concessions, the percentage of general subsidy which accrues to high income households is even larger." ⁽⁷⁷⁾

Public transport is also generally not the best medium to support the transport needs of lower-income groups.  Those groups are much more dependent on cars than on public transport, with households in the lowest-income group spending 17 times more on motor vehicle transport than on public transport. ⁽⁷⁸⁾  These patterns reflect to a considerable extent traditional Australian work/transport patterns, whereby lower-income workers for the most part live in outer suburbs, and commute in arcs across the radial spokes to other outer suburban locations.

Chart 8:
Melbourne -- Average Household Expenditure per Week on Public Transport Fares,
1988 (by gross income quintiles)

Source:  ABS, unpublished data, 1993.

Thus Governments' equity or welfare goals would, in general, be best achieved by targeting motor vehicle transport rather than the various public transport modes.  For example, the transport needs of the lower income groups would be better met by reducing the cost of petrol or reducing the price of cars (not least, the tariff component of car prices) than by cheap public transport.  Moreover, taxes on petrol and motor vehicles, which fall heavily on lower-income groups, are used for subsidies to public transport, which in turn largely benefit those not in need.

Although "need" is a relative concept, not all (in some cases, even most) of the uses of public transport are necessary.  A very large share (around 67 per cent) of passenger journeys on non-urban public transport faculties are for recreational purposes. ⁽⁷⁹⁾  It is difficult to believe that borrowing money and thereby imposing higher taxes on future taxpayers -- many of whom will be in real "need" -- to subsidise the vacations of a lucky few can be justified on welfare grounds.

Again, a large proportion of public transport subsidies in Victoria goes to freight services.  Although the maintenance of these rail operations may help a few communities, they impose costs on many others;  and, given the regressive nature of the State tax base, these costs are borne disproportionately by the less well-off.

Most importantly there are ways of providing welfare support for transport services other than through public transport authorities.  Welfare is a function of government but not necessarily the PTC.  Government has many instruments available to it to provide those in need with transport services, including transport vouchers and cash payments.  Such mechanisms are far more efficient, generally and in specific equity terms, than social provision through across-the-board subsidies for transport authorities such as the PTC.

4.5 P.T.C. REFORMS

Historically, the level of government influence over the operations of the PTC has led to inefficient work-practices, loss-making services, inefficient management structures (see Figure 1) and, ultimately, negative rates of return.  If the public transport sector is to be an asset and not a financial drain on the State, significant reforms to the PTC are required.

Figure 1;  PTC Organisation Chart (30/6/92)

4.5.1 Current Strategy

The Government's and the PTC's current strategy is to lower the operating costs and reduce the losses of the PTC while improving the standard of services it provides.  The actions which have been taken and the reforms which have been implemented in the past nine months to achieve these goals are significant.  They include:

• transferring regulatory responsibility for train and bus services from the PTC to the Department of Transport.

• appointing a new management board.

• restructuring the PTC along corporate tines (see Figure 2).

  Separate Business Units (BUs) responsible for Freight, MET Tram, MET Train, MET Bus and V/Line Passenger services have been created.  Business Units operate as trading entities with bottom line ownership.  They are designed to make the PTC more customer responsive and cost effective, and senior management more accountable.

  Three Commercial Service Groups (CSGs) have been created, responsible for:

  • Infrastructure;
  • Rail Vehicle Maintenance;  and
  • Central Services (which includes property management, training, administration, catering and revenue protection).

  CSGs are designed to provide support services to BUs.

  While distinct trading entities, neither the BUs nor the CSGs have been corporatised.

  A Corporate Headquarters group has also been established, responsible for developing policy, standards and co-ordinating strategic direction.

  Figure 2 -- PTC Organisation Chart (announced 29/7/93)
  

• privatising the provision of transport services.

  Transport services previously provided by the PTC which are now provided by the private sector include:

  Country Passenger Rail Services:
  Melbourne - Shepparton (Hoy's Roadlines)
  Melbourne - Warrnambool (West Coast Railways)

  Metropolitan Bus Services:
  Ringwood, Templestowe and Clifton Hill (National Bus Company)

  Country Bus Services (replacing trains)
  Ballarat - Dimboola
  Ballarat - Mildura
  Melbourne - Leongatha
  Sale - Bairnsdale
  Seymour - Albury (weekday service)
  Shepparton - Cobram
  Swan Hill - Bendigo (Friday service)
  Swan Hill - Mildura

• terminating services which are no longer viable.

  Amongst the services terminated are country train services from Ballarat - Dimboola, Mildura - Swan Hill, Melbourne - Leongatha/South Gippsland and Shepparton - Cobram, the Northcote - Thornbury tram service and the Jolimont Workshops.

  According to the Minister for Transport, Mr Alan Brown, introducing private country rail operators, closing certain country rail services and replacing some with coach services will result in savings of $30 million per annum.  Expanding the private provision of metropolitan bus services is expected to produce additional savings of $10 million per annum.

• contracting out services ancillary to the provision of transport services.

  These include:

  • accounting services;
  • automated fare collection; ⁽⁸⁰⁾
  • catering services;
  • civil maintenance services including painting of stations, gardening, general plumbing and carpentry and graffiti removal;
  • cleaning;
  • information technology;
  • internal audit services;  and
  • property management

• introducing new transport services.

  In addition to the country bus services already mentioned, these include the Midnight Nightrider Bus Service (providing Melbourne with 24 hour public transport) and the construction of a new City Tram Loop.  Additional projects include:

  • the electrification of the rail line to Cranbourne;
  • upgrading the Geelong railway line;
  • upgrading the Hallam, Narre Warren and Berwick stations;
  • upgrading Dandenong Railway Station, its car park and interchange;  and
  • extending the Plenty Road tram route.

• signing a new four-year working agreement with the public transport unions.

  This agreement is between the Government, the PTC and unions involved in the provision of public transport.  Unions party to the agreement include the Federation of Industrial, Manufacturing and Engineering Employees, the Australian Rail, Tram and Bus Industry Union (Public Transport Union), the Automotive, Metals and Engineering Union and the Australian Municipal, Transport, Energy, Water, Ports, Community & Information Services Union (Australian Services Union).

  The agreement covers such matters as the provision of country and metropolitan rail services, freight and workshop savings, rostering (including driver-only trams), catering, training and cleaning.  While it provides for the continued provision of in-house infrastructure services (at best practice levels to be established through regular benchmarking against outside competitors), it allows for competitive bidding for all major capital works projects.

  Under the terms of the agreement, the Government and unions endorsed the objective that the PTC operate at international best practice levels of efficiency and performance.

• introducing priority bus lanes.

• commercialising stations.

  Expressions of interest have been sought for private sector use of 21 country rail stations where the PTC no longer has ticket selling staff but facilities for people waiting for trains and buses will still be available.  The locations of these stations are Birregurra, Winchelsea, Beaufort, Stawell, Horsham, Dimboola, Maryborough, St. Arnaud, Redcliffs, Kerang, Swan Hill, Echuca, Murchison East, Numurkah, Euroa, Benalla, Springhurst, Chiltern, Stratford, Korumburra and Leongatha.

  At Korumburra, Redcliffs, St. Arnaud, Kerang and Numurkah the station facilities have been offered for the use of local communities.  The Horsham station has been offered to the Horsham Transit Group to provide passenger services, while a model railroader has been offered the Birregurra facilities.

  Interest from commercial, community and artistic groups have been received with respect to numerous other stations.

• restructuring freight operations.

  These reforms have included:

  • increased use of containers;
  • the consolidation of the Melbourne Parcel Office and the Melbourne Freight Terminal;  and
  • contracting out road operations, data input functions and freight handling at country freight-gates.

The speed and scope of these reforms is laudable.  Emphasis has been placed on the provision of ancillary services by the private sector.  Some private sector provision of transport services has also been encouraged.  Staffing levels have been reduced from 32,000 four years ago to 18,000 at present.  In total, a 65% reduction in staffing levels, to a target of 10,000, is envisaged.

According to Ian Dobbs, Chief Executive Officer of the PTC, once the reform package has been fully implemented the PTC will achieve its stated aim,

"... to combine a deficit reduction of $245 million per annum and at the same time rebuild patronage through improvements." ⁽⁸¹⁾

4.5.2 Project Victoria Strategy

While many positive steps have been taken, the current restructuring process still fails to address some of the fundamental structural issues confronting the PTC, issues that are not unique to Victoria.

Once the reform process currently being implemented by the Government and the PTC is complete, the PTC will still be responsible for the provision of metropolitan rail and tram services, the majority of country passengers rail services, ⁽⁸²⁾ all intra-state rail freight and some metropolitan bus services.  It will continue to own the tram and train track networks, stations and depots.

While the PTC will certainly be operating on a more commercial basis, the provision of public transport services will continue to be subject to government interference.  Opportunities for greater competition in the provision of public transport services by the private sector will also be limited.  Under the reforms proposed in this study, these problems will be dealt with by transferring ownership of transport infrastructure and responsibility for the provision of transport services to the private sector.

In making these proposals, Project Victoria recognises the achievement of the current administration in implementing reforms which will reduce the PTC's operating deficit by $245 million per annum by 1994-95, particularly given the political difficulties associated with reform in the transport sector.

However, given the size of the PTC, the extent of the PTC's operating deficit and the scope of improving the PTC's performance, the Government objective of achieving savings of $245 million over three years is not adequate.  Project Victoria recommends the Government increases its target to achieve annual savings of $400 million by 1994-95.

The PTC is a very large organisation, with operating expenditures (including interest) of around $2.0 billion in 1991-92. ⁽⁸³⁾  As such, the Government's savings target of $245 million represents only around 12 per cent, and Project Victoria's recommended target of $400 million represents only 20 per cent, of operating cost.  These are levels of savings achieved by many private sector firms over the last few years.

The PTC has a very large and unsustainable operating deficit.  As discussed above, there is confusing variety of estimates of the PTC's deficit, and unfortunately the Government's strategy adds to this confusion.  Using the CGC estimate of $1.5 billion, ⁽⁸⁴⁾ the Government would reduce the deficit by only 16 per cent.  Project Victoria's savings target of $400 million per year amounts to only a 27 per cent reduction in the level of taxpayer subsidy to the PTC.

Government and Project Victoria Savings Targets for the PTC ⁽⁸⁵⁾

	Savings Target ($ million per annum by 1994-95)	Relative to 1991-92 PTC Operating Costs	Relative to 1991-92 PTC Operating Deficit
Government	245	12%	16%
Project Victoria	400	20%	22%

Even if the savings recommended by Project Victoria were achieved, Victoria would still have an annual public sector transport operating deficit in excess of $1.1 billion.  The Government's strategy will only improve the PTC's abysmal level of cost recovery from 24 per cent to 28 per cent.  The savings target recommended by Project Victoria will bring the level of cost recovery up to a still low 31 per cent. ⁽⁸⁶⁾

PTC Cost Recovery ⁽⁸⁷⁾

Year	Revenue/Operating Cost (%)
1991-92	24
1994-95   Government Strategy   Project Victoria	28 31

The Government's transport strategy has clouded the issue of the PTC's operating deficit even further, by using the CGC's estimates to develop its case for reform, but then using a partial and poorly defined measure of the PTC's deficit as the reference point for its savings target.  Specifically, the Government's strategy targets the reduction in the "recurrent annual operating subsidy", which appears to be only one, (albeit the largest) of eight separate cash appropriations made in the Victorian budget to met the PTC's operating losses.  In 1991-92, the "recurrent annual operating subsidy" was $503 million.  However, in the same year an additional $475 million was appropriated in the Victorian budget under different votes to meet public transport costs.  Further amounts, estimated to be approximately $600 million, ⁽⁸⁸⁾ relating to the servicing of borrowings by the PTC and its predecessor agencies were appropriated to the Treasury.  Thus the Government's chosen deficit target relates to only a fraction of the total subsidies provided to public transport operations.

It is likely that the savings identified by Project Victoria using CGC and other benchmarking data covers a wider range of items of expenditure than are included in the Government's strategy.  For example, the CGC data includes cost associated with debt servicing, and repair and maintenance of capital, which do not appear to be included in Government's transport savings targets.  There may, therefore, be a problem of comparability between Project Victoria's target and that of the Government.

Nonetheless, the most appropriate target is the overall operating deficit, rather than portion thereof.  Not only must the Government and the PTC directly address all the PTC's costs, they must also put forward a target that is transparent and free from manipulation.

In light of Victoria's continuing poor budgetary performance, this study believes a reduction of $400 million per annum from the annual public transport sector operating deficit by 1994-95 should therefore be the financial target of continuing public transport sector reforms.

It is consistent with the findings of the Victorian Audit Commission, which concluded:

"The Government has announced measures which it estimates will lead to annual budget savings of $245 million in three years time. ... These savings should be viewed in the context of an annual public transport cost to the Victorian Community of $1.8 billion.  Not all these costs can be avoided, particularly in the short term.  However, the Commission believes that the Government can achieve savings beyond its present target and can increase revenue so that public transport's call on the State budget is reduced.

The Victorian Government should aim to achieve savings of at least $400 million -- the extent by which Victorian public transport expenditure exceeds that estimated by the CGC as being required to provide the same level of service as the average of all States and Territories." ⁽⁸⁹⁾

It is also strongly supported by the Public Transport Users Association -- a large group strongly committed to improving the quality of public transport services in Victoria -- which concluded in a recent review of the PTC that "the PTC's operating costs could be reduced by at least a third, or $350 million, without any reduction in service to the public, or even any driver-only trams or destaffing of stations!" ⁽⁹⁰⁾

In seeking to achieve this target, the proposed reforms put forward in this study have therefore been designed to ensure that the present and future public transport needs of Victoria are not only met, but they are met efficiently and equitably and at the minimum financial cost to the Victorian taxpayer.

As stated from the outset, the basis for this study's strategy is that, in determining a suitable structure for the provision of transport services, it is necessary to create a framework which offers a reasonable balance between:

1. benefiting from the efficiencies which typically flow from a competitive environment;
2. moderating the outcomes that would be produced by the market in the interests of equity;  and
3. recognising that the regulatory and state ownership process tends to be captured and to bring outcomes not originally intended.

Mass Transit Services

Consistent with the philosophy of ensuring rival private sector transport service providers to generate economies and seek out new needs, a fundamental priority is to eliminate, as far as possible, all entry barriers that prevent those who consider themselves to have a valued transport service from providing it.

Mass transit services are presently provided by the PTC through the use of three modes of transport:  trams, trains and buses.  In addition, the majority of metropolitan bus services and a number of country bus services are provided by private operators under contract with the Department of Transport.  Some country rail services are also privately operated.

These services are operated as an integrated system, that is, the nature of services provided in all three transport modes is centrally fixed.  As has been shown by the reforms implemented in the past nine months, even as an integrated system, tram, train and bus services are capable of being operated independently, each by different operators.  It is also possible that, for each mode of transport, more than one operator could provide services.

Allowing numerous operators encourages competition and efficiency, particularly if opportunities for control of future operations depend on the efficiency with which existing operations are run.  Depending on the transport mode, this can be best encouraged by allowing either:

• open competition;  or
• a system of franchise agreements.

Open Competition -- Buses

A system of open competition allows the participants in the market to determine what transport services are provided, and by which operator.  Competition can be within and between modes, as the type of transport mode used and the nature and frequency of routes would all be dictated by demand.

An open competition system is easily applicable to bus services.  Unlike trains and trams, buses do not operate on a fixed, single-track network.  The range of routes which can be offered, and the number of operators who can enter the market, are practically unlimited.  Furthermore, there is no significant capital sunk into particular bus routes.

Under the present system, routes are specified by the Department of Transport and contracted out by tender.  Effectively, a system of franchises is in place. ⁽⁹¹⁾  By allowing franchises for bus services, we prevent existing and prospective bus operators who do not hold a franchise from providing new and competitive services.

The effects of opening bus services to competition are likely to include:

• lower prices, which will test the viability of cars, tram and train services;  alternatively, they will demonstrate how adequate services can be provided without recourse to public subsidies;
• increased patronage, which will reduce road congestion to the degree that it shifts people from car usage, and increase road congestion to the degree it diverts patronage from trains;  and
• independent provision, which may make it difficult for multi-modal ticketing and which will mean a lack of an independent schedule co-ordinator.  For some services this will mean that dovetailing of arrival and departure times will require negotiation rather than direction.  Such dovetailing systems operate very effectively across activities ranging from freight transport to car assembly, where independent businesses are required to co-ordinate their activities.

Franchise Agreements -- Trains And Trams

With regard to train and tram services, the issues are more complex because of the existence of purpose-specific infrastructure, particularly the rail and tram track networks.  Victoria's rail and tram infrastructure is predominantly owned and controlled by the PTC.  It includes the train and tram track networks, stations, depots, rolling stock and trams. ⁽⁹²⁾

The networks of tracks and lines of Victoria's railway and tram systems make up the largest part of this infrastructure.  Although train and tram track networks could be used as common carriers to enable open competition, with numerous operators purchasing access to the network, the nature, capacity and technological constraints of these networks limit (though don't preclude) the opportunity for such intra-modal competition.

Franchising arrangements, however, allow multiple operators to provide tram and train services.  Through such arrangements, ownership and control of infrastructure and the right to operate services on that infrastructure may be either jointly or separately held.

In determining whether responsibility for the provision of transport infrastructure and the provision of transport services should be separated, consideration must be given to the manner in which train and tram operations function.  The viability of transferring ownership of infrastructure to numerous operators should also be considered.

Furthermore, the train network, due to its physical nature, forms a natural monopoly where train services lack a modal competitor.  Where train networks form natural monopolies, they need to be kept under regulatory discipline or government ownership.

Given the large capital inputs needed to maintain tram's and rail's competitive viability, for example, to upgrade the Melbourne to Sydney track to allow the operation of fast double-deck container freight trains, it is likely that some form of private ownership will be necessary.  Ownership may be transferred completely from the public to the private sector, or alternatively placed in a holding company with a mix of public and private ownership.

It is beyond the scope of this study to determine, if ownership is to be transferred, whether the network should be transferred in entirety, or whether it should be divided up.

Although physically similar in nature to the rail network, the tram network has limited natural monopoly elements because, in most areas, bus and tram services are potentially competitive.  The tram network is therefore suitable for private ownership.

While this study favours private ownership of the tram network, it is again beyond the scope of this study to determine whether the network should be transferred as a single entity, or whether single lines should be transferred separately.  Single lines may be transferred and deregulated where there is adequate inter-modal competition, and where it is justified by operational economies.

If the tram network is broken up, the nature of the existing route system would require that certain elements, for example lines along St Kilda Road/Swanston Street, be designated common carriers.

Where ownership of the whole or part of a network is transferred, the right to provide services on the network must be specified.  In a system of open competition such access would simply be determined by negotiation.  Due to the problems associated with open competition on train and tram networks (referred to above), this study believes a franchise system is more suitable for promoting intra-modal competition for train and tram services.  Under a franchise system, the right to provide services is limited to franchise holders.

Under either competitive system, where responsibility for infrastructure provision and service provision is separated, the relationship between infrastructure providers and service providers must be specified in detail.  It is necessary that the responsibilities of both parties in relation to such areas as maintenance and liability are clearly delineated.  This is achievable by negotiation between the parties involved.

Transferring ownership of core infrastructure such as the rail and tram networks need not involve the sale of land upon which that infrastructure is situated.  Land upon which tram and train networks are situated has alternative uses, for example communications (through the placement of optic fibres), which are compatible with the presence of transport infrastructure.  In determining whether the sale of land is appropriate, these alternative uses must be considered.  Complex property rights issues also arise, particularly in the case of the tram network which operates primarily on land used for roads.

The sale of New Zealand Rail to a private consortium headed by Wisconsin Central, an independent American rail operator, which was finalised at the end of September, 1993, incorporated the sale of the railway track network.  Ownership of the land on which the tracks are laid was retained by the New Zealand Government.

Stations, depots, rolling stock and trams make up the remainder of PTC-owned transport infrastructure.  Where operation of the track network cannot be delineated from the operation of station and depot services, those assets are best classified as part of the track network.  However many stations and depots are capable of being operated independently of the track network and have very little or no monopoly elements.  While the Government may regulate the manner in which these assets are used in the provision of transport services, ownership can be transferred to private enterprise.

The ease with which this is achievable depends heavily on the quality of the assets being transferred.  In some cases, for example country rail stations, the cost of upkeep and repair prevents easy sales.  Transferring ownership of stations to the private sector is, however, likely to encourage their re-development for multiple-purpose use (subject to the relevant planning regulations).  This coincides with the stated aim of the Minister for Public Transport, Mr Alan Brown. ⁽⁹³⁾

Much of Victoria's rolling stock has already been sold to the private sector under arrangements entered into by the previous Government.  While Project Victoria supports the concept of privatisation, the sale and lease-back arrangements entered into during the 1980's were finance-raising exercises, and did not alter or improve the way transport services were provided in Victoria.

Where ownership of transport infrastructure is transferred to the private sector, determining the manner in which ancillary services, such as signal operations and many aspects of track building, cleaning and maintenance, are provided becomes the responsibility of the new owners.  Where the PTC retains ownership of transport infrastructure assets, the provision of these ancillary services can, and should, be contracted out (as is occurring under the PTC's current reform program).

Franchising Arrangements for Tram and Train Services

Franchises can either be granted for regions, with the franchisee responsible for providing integrated services within those regions, or for specific services.

The specification of a franchise region would have to take into account probable passenger flows.  Future demand for public transport services will differ from present demand.  Though presently under-utilised, the large amount of empty central city office space will be filled when leasing costs are commercially viable, which in turn will increase the need for radial public transport.  At the same time, growth in industries outside the central city district -- such as recreation, tourism, wholesale, retail and education -- will lead to more complex travel patterns and increase the need for tailored services.

This study favours a system of franchises for specific services over a system of franchises for regions because franchising specific services better enables multiple suppliers to provide services, thereby encouraging greater competition.  Furthermore, it enables easier comparisons between franchises, which encourages improved performance, particular where future franchises depend on current performance.

Where there is inadequate inter-modal competition, franchise agreements should address minimum service requirements, such as frequency of service, capacity, vehicle quality and security.  Ticket pricing caps may also have to be negotiated in conjunction with any government CSOs and minimum service requirements.  These price caps could incorporate inflation by allowing increases based on the CPI less a fixed percentage.

As the majority of train and tram services operate at a deficit, some government subsidies will be required or franchising will not be commercially viable.  As has been discussed previously, such subsidies can be paid to the transport provider through a system of transparent, costed and reviewable CSO subsidies.  Alternatively, subsidies can be provided to transport users in the form of travel vouchers.

To attract franchisees, it may also be necessary for the Government to limit franchisees' accident liability by capping potential claims.  This would be consistent with the approach taken to liability for road accident victims.

Transfers between franchises, particularly at transport hubs, would have to be detailed to ensure maximum customer convenience when passing from one transport franchise to another.  For example, passengers wishing to travel across a number of transport franchises do not want to purchase separate tickets.  The benefit of being able to purchase one ticket for an extended trip over a number of different transport modes is a major strength of an integrated transport system.  In a system of transport franchises run by different companies, this benefit could be reproduced by a revenue sharing agreement between franchisees, similar to airline tickets.  Under such an agreement, franchisees would share ticket revenue on the basis of the actual service provided to the passenger.

A transport operator with a franchise to provide a specific service may be able to offer additional innovative and cost-effective services to attract higher patronage levels.  For instance, they may integrate new mini-bus services with a franchised tram or rail service to provide specific work or shopping related transport systems.

Role of the P.T.C.

Public transport operators could, in theory, operate these types of services.  However, they have traditionally been constrained in their business options by government policy.  Furthermore, due to public service regulations and government financial processes, they lack the flexibility of the private sector quickly to reorganise human and financial resources to meet a change in operating environment.  The public service manager has little incentive to innovate or take risks.

Due to these constraints and the potential of wider government interference, this study believes that the PTC should divest itself of the transport operations, infrastructure and the remaining ancillary services which it provides.  The expertise which is present in the public transport system can be readily incorporated into the private sector, where it will be able to operate with greater flexibility and free of external influences.

The restructuring of the PTC into Business Units (BUs) and Commercial Service Groups (CSGs) has facilitated this process.

As distinct trading entities, it is relatively straightforward for the CSGs and the MET Bus BU to be corporatised and sold to the private sector.

If the separate provision of transport infrastructure and transport services is appropriate, some restructuring of MET Train, MET Tram, V/Line Passenger and Freight BUs would be required before they could be transferred to the private sector.

This would involve the creation of two Infrastructure Units (IUs), responsible respectively for ownership and control of train and tram infrastructure.

As an interim measure, relationships between each IU and the relevant BUs within the PTC structure could be arbitrarily set.  Once corporatisation of the restructured BUs and IUs has been completed, those relationships could then be determined by negotiation between private sector operators as the IUs (or assets contained in the corporatised IUs) and BUs are transferred to private ownership.

With BUs, IUs and CSGs transferred to the private sector, most of the PTC's present functions would be eliminated.  Under either open competition or a system of franchising the PTC's responsibilities might then be confined to:

• ensuring that minimum standards of equipment are maintained;
• ensuring that minimum service requirements are met (through a system of transparent CSOs);  and
• acting as a central body for registering timetables and information provision.

Where franchising arrangements are implemented, the PTC may also act as a licensing authority.  In this role, the PTC, in addition to instituting franchise agreements for the provision of existing services, could encourage and should allow private enterprise to introduce different and more specific services.  In the tram system, this may include a range of tourist trams and tram-restaurants.  In the railway industry, these could include:

• A large transport operator with its own rolling stock and locomotives providing entire trains as a complete customer service;
• Specialised operators providing locomotives on scheduled trips to haul different companies rolling stock or container trains.  (The NSW Government is currently considering leasing locomotives on an hourly basis.);  or
• An operator providing a service, for example a route, not currently being offered.

A major benefit of this approach is that specialisation would occur, one operator specialising in providing rolling stock, another in passenger operations.

The exact nature of the impact of allowing the introduction of new services to compete against existing services is uncertain.  It is possible, in fact likely, that some services currently operated by the PTC would not be supplied in such an environment.  It must, therefore, be specified that new services will be allowed and encouraged when franchise arrangements are being determined.

Implementation Problems

Industrial Relations

People working in the transport system would be affected by the structural changes outlined above;  in some cases these changes would be positive, in others negative.  To ensure that the necessary changes proceed smoothly it is important that the process of change be managed correctly.

Historically, attempting to implement changes to the transport sector which adversely affect employees has led to disputation.  However, in the past year the parties involved in operating the railway system;  the Government, the PTC, employees and the unions, have shown themselves willing and capable of working together to change and improve the system.  All parties have recognised the unsustainable nature of the current situation and the need to run the system as effectively and efficiently as possible.  A continuation of this co-operative approach is required if new strategies are to be implemented with the maximum benefit and minimum of disruption.

Inter-State Connections

While the Victorian Government would be able to implement a system of publicly-owned infrastructure and privately-run services within Victoria, the operation of private trains into other States would be more difficult to achieve.  It would probably entail changing the role of Australian National Railways from a vertically integrated railway organisation into a track and signal ownership company.  This would allow private companies to operate the actual train services.

It is likely that successful operation of this type of system within the State would have to be achieved before this change would be considered by the Federal and State Governments.  However, rail's fundamental cost structure suggests that passenger operations will only ever be viable along heavily populated corridors, i.e. Melbourne-Sydney-Brisbane, and freight operations will focus on containerised and bulk commodity movement.

Summary

This study aims is to suggest reforms to the public transport sector which remove the potential for government interference in the provision of transport services and encourage greater competition by private sector transport operators.

Option 1

As has been shown, greater competition in the provision of transport services can be encouraged by allowing open competition for the provision of bus services, and by implementing franchise arrangements to allow multiple operators to provide tram and train services.

Adopting these principles as the basis for change, this study has identified the following reforms which could be implemented:

1. Bus Services

   This study believes open competition for the provision of metropolitan bus services should be permitted.  One difficulty associated with the immediate introduction of such a system is the exclusive contracts which currently exist for the provision of bus services.  While the majority of these contracts terminate in 1997, the contracts made in 1993 between the Government and the PTC terminate in 1998, and the contracts made in 1993 between the Government and the National Bus Company terminate in 2000.  Open competition is therefore not feasible until 2000.

   As an interim measure, the sale of the MET Bus BU to the private sector is both possible and would be relatively straightforward.

   To ensure that open competition can be introduced in 2000, any new contracts providing for the exclusive provision of transport services should only operate until that year.

2. Train Services

   As a first step to introducing an extensive system of franchises for the provision of train services, the MET Train, Freight and V/Line Passenger BUs should be restructured so that the ownership and responsibility for train infrastructure is transferred to a separate entity, that is, a corporatised train infrastructure unit (IU).  This will allow the separate provision of transport infrastructure and transport services.

   As part of this restructuring process, the relationships between each BU and the IU will need to be established.  As an interim measure this may be done arbitrarily.  However, establishing these relationships via a negotiating process would more appropriately reflect the commercial nature of BUs and the IU.

   Once the appropriate structures are in place, a franchise system for the provision of train transport services could then be introduced.  Initially the BUs could compete against private sector transport operators while remaining within the overall PTC structure.  However, in the longer term it is envisaged that the BUs will be transferred to the private sector.  To encourage greater competition, when these transfers occur, it may be appropriate to split each BU into smaller units, thereby ensuring multiple private sector providers.

3. Tram Services

   The reform of the tram system would proceed along the same lines as for the train system.  As there is only one tram BU, the restructuring process required to create a tram infrastructure unit (IU) would be simpler than that for trains.

   Again a system of franchises should be introduced for existing services.  New services should also be encouraged.

   As for trains, the manner in which the IU is sold will depend upon whether tram infrastructure is best operated as a single network or on a line basis.  If the former is the case, the IU should be transferred in entirety.  In the latter case, assets will be disposed by the IU on a line basis, with some lines being specified as common carriers.

   If the infrastructure is sold on a line basis, it should be possible (though not mandatory) for franchisees providing tram services to own the track upon which their franchises operate.

Option 2

As considerable inter-modal competition is possible, an alternative and far simpler approach to reforming the transport sector would be simply to transfer transport operations as they are currently being provided by the PTC directly to the private sector.  The restructuring of the PTC into BUs with distinct responsibilities for train, tram and bus services has facilitated this process.

As the benefits of open competition in the provision of bus services are clear and easily obtained, this study does not believe this approach is suitable for bus services.  However transferring train and tram services in entirety may be appropriate if the problems associated with implementing a franchise system -- i.e. questions of liability, political risk and the difficulty in determining multiple relationships between infrastructure providers and service operators -- are sufficient to deter private sector operators from offering transport services.

This may entail a transfer of PTC BUs in entirety, or it may involve a restructuring to separate the provision of transport infrastructure from the provision of transport services.

Where train and tram infrastructure and the responsibility for the provision of tram and train services are transferred in entirety, there will be a need for regulatory discipline where there is no intermodal competition.  As discussed previously, this is more likely in the train sector than the tram sector.

Adopting this approach to reform will enable private sector provision of public transport services, thereby reducing the scope and potential for government interference.  However, it will not encourage the same degree of intra-modal competition as would the introduction of a system of franchises.

It must be noted that under either Option 1 or Option 2, this study envisages a far more limited role for the PTC:  as a regulator and licensing authority, rather than an infrastructure owner and service operator.

Increased private sector provision of services and competition between transport modes is likely to lead to some under-utilised services being terminated.  Some rail and tram lines may be closed and their traffic diverted to road transport.  Whilst this may increase road traffic in some areas, it will also release government funds from operating losses that can then be used to improve the road network.

It will also release valuable land assets, which can be realised, and the funds then used to repay some of the PTC's existing debt.  That such assets are still held by the PTC simply reflects the failure of the previous system to address adequately Victoria's changing transport demands, and points to the inappropriate capital decisions which have been made previously. ⁽⁹⁴⁾

Freight Services

Either franchise arrangements or open competition could be introduced with respect to the freight services currently operated by the PTC.  The impact of either system is uncertain, particularly in light of the establishment of the National Rail Corporation (NRC).

In the very competitive, small-freight handling environment, for example, it is difficult for rail freight services to compete.  Rail only has a natural competitive advantage in the transportation of high volume and weight commodities and containerised goods.  Private sector provision and competition are likely to result in such services being terminated (though, if it is deemed necessary to maintain particular services, a system of subsidies could be implemented).

The PTC's role in the provision of freight services needs to be completely reviewed given the establishment of the National Rail Corporation (NRC) to take over interstate rail freight services.  This study recommends that such a review take place.  It is likely, given that the losses inherent in the present system, that intra-state rail freight should be discontinued.  Only where the costs of using road transport and improving roads to handle the extra traffic outweigh the costs of maintaining lines and operating trains could rail freight justifiably be maintained.

---

5 ROADS

The reforms to the public transport sector proposed in the previous section are designed to ensure the effective and efficient provision of public transport services.  However they will not lead to the optimal allocation of resources in Victoria's transport sector unless there are complementary reforms in the road sector.

Roads are used by the public transport sector;  for the provision of bus services.  They are used by private road freight operators competing with rail.  They enable commuters to choose between private vehicle use and mass transit services.

Unless the level of road funding adequately reflects consumer demand and the system of road charges accurately targets all beneficiaries of roads and reflects the total cost of road use -- including construction, congestion, pollution and road damage costs -- inter-modal competition will be distorted.

It is on this basis that we now consider the issues of road funding and road charges in Victoria.

5.1 ROAD FUNDING

Although road expenditure represents a significant proportion of the Victorian Government's Budget (slightly over 4 per cent of budget sector outlays), ⁽⁹⁵⁾ the State Government has limited discretion over the level and use of road spending.

Since the 1920s the Commonwealth Government has provided funds for roads to the State and to local governments.  These funds have been, and continue to be, provided in the form of special purpose, or tied, grants under Section 96 of the Constitution.  Although Commonwealth road funding has declined in recent years, it continues to make up a substantial proportion of the State's expenditure on roads.  In 1992-93, the Victorian Government plans, through VicRoads, to spend $629 million on road programmes, of which approximately $446 million or 71 per cent will come with strings attached from the Commonwealth. ⁽⁹⁶⁾  The Commonwealth funding is almost exclusively targeted on, and therefore has a high degree of control over, road construction and maintenance activity.  In 1992-93 the Victorian Government plans to spend $503 million (80 per cent of its road budget) on road construction and maintenance, of which 87 per cent will be funded by specific purposes grants from the Commonwealth. ⁽⁹⁷⁾

The Commonwealth and the States have agreed to the rationalisation of road funding responsibilities as of 1 January 1994, which will result in a transfer of $350 million from tied road grants to general purpose grants.  This change, which represents a reduction of 20 per cent in tied grants, should result in the States' achieving greater control over road policy.  Nonetheless, the bulk of road funding will remain under the control of the Commonwealth.  Moreover, in the past the Commonwealth has exhibited a tendency to hold onto its powers in reality, despite any prevailing rhetoric.

The Commonwealth also has a grip on the road budgets of local governments.  The Commonwealth has, historically, provided funds to local governments in the form of tied grants.  In 1990-91 tied grants for local roads were converted to general purpose grants to allow local governments more discretion over road spending.  However, to date, the reality has been that sufficient strings have remained to ensure that these "general purpose funds" are used for specific purposes.

Given the control by the Commonwealth over the road budget of State Governments, there is very little scope for the Victorian Government to save funds by reducing spending on roads.  Nonetheless, the State Government does have the power to improve the efficiency of its road construction and maintenance activities, though the current funding arrangements provide little incentive to do so.  The State Government spends around $100 million on a large range of non-capital, road-related programmes, such as regulation of taxis, collection of taxes and fines, road safety and education programmes, and providing concessions, over which it has almost total discretion.  Substantial savings can be made in these areas by imposing user charges and by cutting back less-than-essential services.  It must be said, however, that relative to public transport, such savings available from the road budget are small.

5.1.1 Road Maintenance and Construction

Although there is undoubtedly scope to improve the efficiency of Victoria's road construction and maintenance activities, Victoria appears to perform at or above the standards of other States and countries.

The Business Council of Australia (BCA) ⁽⁹⁸⁾ recently released the results of the first international benchmarking study into road construction and maintenance activity in Australia.  The key findings of the study were that:

• although Australia as a whole had a relatively high level of expenditure per registered vehicle, Victoria had the lowest level of expenditure on roads among the Australian States and Territories (see Chart 10);
• road expenditure per network-kilometre in Victoria was below the level of all other States except WA, and below the level experienced overseas (see Chart 11);
• aside from the Northern Territory, Victoria had the highest proportion of construction and reconstruction road work contracted out (see Table 3);  and
• Victoria contracted out, in absolute and relative terms, a small proportion of its road maintenance work (see Table 4).

Chart 10:
Annual Roads Expenditure per Vehicle on Register, ($A)

Note:  Statistics not available (or the missing bars.

Source:  Reproduction of Figure 6.3 In Douglas C. Kneebone (1993), International Benchmarking Road Construction and Maintenance in Australia:  A Discussion Paper, BCA/PPK Consultants:  International Benchmarking Advisory Group, at page 36.

Chart 11:
Annual Roads Expenditure per Network-km

Note:  Statistics not available for the missing bars.

Source:  Reproduction of Figure 6.4 In Douglas C. Kneebone (1993), International Benchmarking Road Construction and Maintenance In Australia:  A Discussion Paper, BCA/PPK Consultants:  International Benchmarking Advisory Group, at page 36.

Table 3:
Percentage of Construction/Reconstruction Work ⁽¹⁾ Contracted Out
(1990-91 Values) %

State	Highways	Main Roads	Other Roads	Total
New South Wales	53.8	11.3	13.0	39.5
Victoria	72.3	-	64.9	(3) 70.8
Queensland	53.0	30.5	1.2	33.1
South Australia (2)	54.6	23.9	-	31.5
Western Australia	60.8	15.7	-	45.9
Tasmania	61.5	22.3	68.0	39.7
Northern Territory	100.0	100.0	100.0	100.0
ACT	n.a.	n.a.	n.a.	n.a.

Notes:

⁽¹⁾ Does not include costs incurred by SRAs in contract administration on private sector funded road projects.

⁽²⁾ Excludes $5.88m crushed materials supplied by contract.

⁽³⁾ Estimate only

Source:  Reproduction of Table 5.1 in Kneebone (1993), op. cit., at page 31.

Table 4:
Percentage of Maintenance Work Contracted Out ⁽¹⁾
(1990-91 Values)

State	Highways	Main Roads	Other Roads	Total
New South Wales	n.a.	n.a.	n.a.	6.2
Victoria	4.0	-	16.4	(4) 5.7
Queensland (2)	75	49	-	38
South Australia (3)	8.9	10.6	-	9.5
Western Australia	19.0	22.5	-	19.6
Tasmania	8.1	-	-	1.4
Northern Territory	98.7	96.1	75.6	86.3
ACT	n.a.	n.a.	n.a.	n.a.

Notes:

⁽¹⁾ Does not include costs incurred by SRAs in contract administration.

⁽²⁾ Periodic maintenance only.

⁽³⁾ Excludes $5.88m crushed materials supplied by contract.

⁽⁴⁾ Estimate only

Source:  Reproduction of Table 5.2 in Kneebone (1993), op. cit., at page 31.

The CGC recently published data on road maintenance expenditure by State and Territory, which indicated scope for reducing spending.  The CGC estimated that in 1991-92 Victoria spent about 6 per cent, or $19 million, above the all-State standard on road maintenance. ⁽⁹⁹⁾  However, given that road maintenance programmes are to receive a cut in funding of $18 million in the 1992-93 budget, ⁽¹⁰⁰⁾ opportunities for cutting expenditure identified by the CGC are limited.

5.1.2 Investment In Roads

As shown in Chart 12, expenditure on road construction has declined in real terms over the 1980s.  The decline is more pronounced after considering the marked increase in road use over the period (see Chart 3).

Chart 12:
Victoria -- Road Construction New Fixed Capital Investment in Real Terms,
1981-82 to 1991-92

Sources:  As for Chart 9.

However, even if the Victorian Government wished to increase expenditure on roads, it does not have the financial capacity to increase significantly its outlays on roads from its own revenue -- this is simply another legacy of the 1980s.  Nonetheless, the Government can increase road construction, and at the same time improve the efficiency and pricing of roads, by encouraging privately-owned and -operated toll ways.

5.2 ROAD CHARGES

As with all Governments in Australia, the Victorian Government collects more in taxes and fees from motorists than it spends on all road-use-related programmes.  Indeed it is likely that the taxes and charges levied on Victorian motorists by Governments exceed the full cost of providing roads, including congestion and pollution costs.  In other words, in aggregate, road users currently pay their way.

In 1990-91, Governments -- State, Local and Federal -- spent in total around $891 million on roads in Victoria. ⁽¹⁰¹⁾  In the same year Governments are estimated to have collected $1,366 million in taxes and charges on Victorian motorists in the form of State-based motor vehicle registration fees, road maintenance fees, drivers licence fees and petroleum franchise fees, and Commonwealth fuel excise taxes and motor vehicle registration fees. ⁽¹⁰²⁾  This would mean that, in Victoria, Governments collect $475 million, or 53 per cent more, in taxes and charges revenue than they spend on roads.

The Interstate Commission has estimated the cost of noise and atmospheric pollution in Australia to have been $1,350 million in 1989-90, ⁽¹⁰³⁾ which on a pro rata basis comes to around $330 million, in Victoria.  This means that the surplus revenue collected by all Governments from Victorian motorists probably covers the full direct and indirect cost of road use.

The Victorian Government by itself also earns much more from motorists than it spends on road-related programmes.  In 1992-93, the Victorian Government will spend around $213 million of its own funds, ⁽¹⁰⁴⁾ through VicRoads and other agencies, on road-related programmes.  During the same year it will collect around $541 million, resulting in a surplus of revenue over outlays of $328 million, or 153 per cent.

Even though road users in aggregate pay their way, government pricing arrangements impose a range of taxes and charges on motorists which bear little if any relationship to the rate, timing or extent of their use of road services, and therefore to the cost imposed by individual users.  For example, on the basis of road track costs heavy trucks with 7 or more axles and buses are undercharged, while, in general, all other commercial and passenger vehicles are overcharged. ⁽¹⁰⁵⁾  On the other hand, commercial and passenger vehicles are undercharged for the use of Melbourne's roads during peak period -- a period when the congestion and pollution costs are high.  These two examples illustrate the two major problem currently facing road management authorities:

• Introducing an equitable and efficient system of recouping the cost of road damage.
• Reducing congestion on major city roads.

Road Damage

The majority of damage done to roads is caused by heavily laden trucks.  The damage that a vehicle causes to the road is a function of its axle loadings ⁽¹⁰⁶⁾ and the strength of the road pavement.  Road damage is not a well-correlated function of fuel usage, which for trucks at highway speeds is more closely related to the vehicle's wind resistance rather than actual load carried.

Road damage is also a function of the strength of road pavement.  Roads are sometimes not built to provide the lowest life-cycle cost for the whole community.  In the USA it was found that the guidelines frequently used for heavy traffic interstate highway design were not optimised for all economic factors.  When all factors were properly evaluated it was determined that in the future concrete pavement for highways should be laid 2.6 inches thicker. ⁽¹⁰⁷⁾  While this increases the initial construction cost it would also more than double the effective life of the road's pavement.

The current system of registration charges and fuel taxes does not accurately target vehicles actually causing the most damage.  Only rarely does fuel usage, and therefore the fuel tax paid, approximate the axle weight/road damage relationship.  Generally it results in overcharging.  This is particularly true for trucks fitted with multiple axles which reduce individual axle loading and minimise road damage but increase fuel consumption.

Traffic Congestion

Traffic congestion is a major problem in many Australian cities.  In 1990 a Bureau of Transport and Communications Economics study estimated the cost of traffic congestion in Australia at $2 billion (1990) per year. ⁽¹⁰⁸⁾  More recently a study by VicRoads suggested that this figure was a very conservative estimate, and that the probable cost of traffic congestion in the Melbourne region alone is in the order of $2 billion per year. ⁽¹⁰⁹⁾  The cost of traffic congestion is mainly borne by business and commuters.

Experience in the USA, especially California and New York City, has shown that simply building more roads and freeways does not relieve traffic congestion.  In many ways building more roads encourages people to use their cars even more.  Therefore the primary means to reduce traffic congestion either should be through the use of alternative means of transport, primarily mass transport systems, or the use of congested city areas themselves must be reduced, for instance by encouraging the decentralisation of offices.

This reduction in traffic congestion -- and the associated costs to society -- can be achieved either by a complex process of government central planning, regulation and inducements, or by ensuring that users are charged the real price for all their transport alternatives and letting people and business decide which option is best for them.

This necessarily means that road charges should vary between times of day and places, and between various types of vehicles.

The problem is not, however, just the misallocation of resources within the roads sector, but also between the various modes of transport.  This is particularly so where inappropriate pricing is used to justify regulations and subsidies to prevent competition.  For example, one of the main reasons put forward for regulation which forces certain goods to be transported by rail, and for the need to otherwise subsidise rail, has been the underpricing of roads.

In choosing between using private cars and mass transport systems commuters are influenced by factors such as cost, convenience, transit time, comfort and personal safety (especially at night).  Services such as demand routing of buses, mini-buses connecting residential neighbourhoods with fixed transportation hubs and an effective system for multi-hiring taxis, all add to the comfort and convenience of mass transport systems and therefore encourage their use.

However, where the capital and fixed costs of car ownership have been paid, the marginal costs of using the car for commuting is low.  Unless the overall benefits of using mass transport equal or exceed that of using private cars, the use of mass transport will not increase.  While public transport has obvious subsidies from the Government, there are some costs that are not effectively charged to individual road users.  Ensuring that all transport users are faced with and aware of the real cost of their choice of transport would improve the effective use of all modes of transport. ⁽¹¹⁰⁾

Figure 3:
Government Road Revenue and Expenditure (constant 1990-91 dollars) ⁽¹¹¹⁾

Recent attempts to alter the structure of road-related charges (i.e. vehicle registration, road damage charges and fuel taxes) to deal with the problems of road damage and traffic congestion have met with considerable opposition.  Road users, particularly road freight operators, are wary that any proposal to introduce a new system of road taxes and charges is aimed simply at increasing government revenue, rather than dealing with the problems of road damage and road congestion.

This suspicion has grown in recent years as road users have become a significant source of revenue for Governments (see Figure 3), and been given added weight by the fact that road funding arrangements are neither transparent nor accountable.  Currently all moneys raised from road users are paid into the consolidated revenue for general purposes, rather than into VicRoads for roads purposes.  Road charges are thus treated as taxes not charges.  This, plus the very complex funding arrangements among Governments, means that road funding has a very low level of transparency.  It also undermines VicRoads' ability and willingness to take full responsibility for revenue-raising as well as spending.

The solution lies not with raising more funds from motorists but in rationalising the pricing or charging arrangements for roads.  Specifically, road user charges should be directly related to the costs imposed by individual users.

5.2.1 Structure and Pricing of Road Usage Charges

The current system of revenue raising for roads is flawed because it does not link actual road usage with road revenue funding.  In general, registration fees overcharge low kilometre road users and fuel based taxes are not directly linked to the amount of road damage caused by vehicles.  A system that explicitly charges for use of a particular road is superior because it directly links the cost with the benefits received.

An ideal system of road usage charges should allow for higher charges on better quality roads and excesses for using roads when they are congested.  Under this type of system users pay for the benefits that they receive.  Areas that do not have high quality roads -- many country areas -- would naturally have low road charges.

Road congestion can be priced in two ways.  The first method is a simple time-based system where different charges are set depending on the perceived relationship between road congestion and time of day.  A major problem with this type of system is determining what are the appropriate congestion time windows.  These would change as road users respond to the changes in road pricing.

A more flexible system based on the actual level of road congestion has been introduced in Cambridge (UK).  This uses a distance/time relationship to define when a road is congested.  This type of simple congestion charging system could be incorporated into a general road usage charge system, the congestion excess being added if average road speed over a specified distance fell below a set limit.  This automatic definition of "congestion" ensures uniform charging and avoids the problem of setting congestion time windows.

Congestion pricing could also be used to give road users a price indication of future road costs.  For example, an individual road's congestion charge could be based on the usage charge that would be applied if the capacity of the road was increased.  If such a congestion charge did not cause a reduction in road use, though alternate road routes or different modes of transport were available, road users would be indicating they are willing to pay the higher road usage cost in return for the convenience of using the road, even when it was congested.  This would show that, if feasible, additional capacity should be built.

For simplicity, and to minimise administration costs, road usage charges should generally only include major arterial roads, highways and freeways currently maintained by the State or Federal Governments.

Maintenance of local roads should continue to be funded via Local Council rates.  However, if particular local roads have large volumes of non-local traffic then road charges could be an option to recoup the extra cost of road maintenance and reduced road life expectancy.  The systems of vehicle identification used for road charges would allow for the billing of non-local users.  Local users -- who have already paid Council rates -- should not have to pay twice.  The impact of a system of local road charges on local shops and shopping centres must also be considered.

Road pricing information could be indicated to drivers by simple colour coded road signs.  It is envisaged that drivers could have a constant display of their road usage charge within their car.  Time charges and electronic vehicle identification have been implemented overseas.  Singapore has had CBD access charges and permits for a number of years and will introduce an electronic toll system in 1993.  Other countries such as Norway and the Netherlands have electronic tolls with a time varying charge. ⁽¹¹²⁾

The actual level and structure of road usage charges requires further investigation and modelling.

5.2.2 Implementation of Road Usage Charges

To be equitable and to reflect the real cost of road construction and maintenance, road pricing should consist of two separate charges:

1. A congestion-based charge, fully allocated to relieving the road congestion in the congested area;  and
2. A road damage charge.  Road damage is a function of axle weight so a distance charge with an equivalent standard axle (ESA) ⁽¹¹³⁾ multiplier would be used to pay for the actual road damage caused by the road user and to contribute towards the cost of road construction.

In the USA, 55% of morning and 72% of evening peak traffic in major metro areas were found to be non-work related trips. ⁽¹¹⁴⁾  Even if these figures were only partially applicable to Australia, they suggest that road usage pricing would encourage people to use different forms of transport, or plan their non-work trips for times when the roads were unlikely to be congested.

Any system of road usage charges (in replacement of registration charges and fuel taxes) must have low transaction and collection costs.  Modern technology is already capable of delivering a system of road usage charging with very low transaction costs whilst ensuring an accurate and efficient cost recovery system.

Two basic approaches can be implemented:

1. An electronic module can be fitted to the vehicle and read from existing in-road loops (as used for traffic lights), overhead sign gantries or roadside beacons.
2. The vehicle can be fitted with a small radio device which communicates with roadside transceivers.

While the simple electronic model would have the lower initial cost, the transceiver option is more flexible, and in the longer term it could be used for additional value-adding commercial services, such as parking and navigation information, which would reduce the cost of the system. ⁽¹¹⁵⁾  However, either system would provide accurate vehicle identification, ⁽¹¹⁶⁾ and allow either an account for road usage to be rendered (though this would increase collection costs) or alternatively a charge to be debited against a pre-paid user account.

Cambridge (UK) has implemented a different road usage charge system which incorporates the use of a "smart-card" metering system.  A pre-paid "smart-card" meter system is connected to the vehicle's fuel supply system.  Each time

1. the vehicle stops and starts more than four times in a third of a mile, or
2. it takes more than three minutes to travel that distance,

the "smart card" is automatically debited.  If the value on the "smart card" falls to zero the fuel supply is cut off.  It is unlikely that the expense of fitting such a system to every car in Victoria would be economically viable.

The technology used to introduce congestion charges may also be used to impose pollution charges, a problem associated with urban motor vehicle use.

ESA-based road charging is important because it ensures that vehicles pay the appropriate road charge.  It should be noted that vehicles will incur higher rates when loaded.  Presumably this is when it is earning income for its operator.  In addition to accurately charging users for road damage caused, rather than overcharging as is generally the case now, the system would be able to quickly detect overloaded trucks, which should minimise the road problems caused by these vehicles.  This is important since it has been suggested that one heavily overloaded truck can cause enough pavement cracking to accelerate significantly the deterioration of the road's substructure and pavement.

Technology to allow vehicle axle weighing-in-motion is currently available, ⁽¹¹⁷⁾ and has already undergone field testing by VicRoads.  Widespread use of this type of weighing technology would be required to implement an ESA based charging system.  A fully automated weighing and vehicle identification system minimises the road pricing system's transaction costs.

5.2.3 Equity and Privacy Considerations

Although a road usage charging system is an efficient way of applying costs to those who benefit from road use, there are certain equity and privacy considerations which should be considered.

A system of road usage charging will impact differently on different road users, depending on whether they live in the inner or outer suburbs, how far they have to travel to and from work and whether or not they work in congested areas such as the city.  It is possible that a low-income road user, living in the outer suburbs and working in the city, will be disadvantaged by a road usage charge system in the same manner as they are under the existing fuel charge system.

To overcome this problem, it may be possible for the Government to provide road usage subsidies to such disadvantaged people within the community.  Any such subsidies should not, however, be biased towards a particular mode of transport.

A further issue is that of privacy.  A road usage charge system requires an effective and automatic vehicle tracking system.  Such a tracking system, though potentially useful in certain police matters, could be used to impose severe restrictions on personal privacy.  If an automatic vehicle tracking system is introduced strict guidelines on the use of the system and the information it generates must be imposed, and vigorously enforced.

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6 OTHER TRANSPORT INITIATIVES

Additional transport initiatives which could be used by the Government in achieving its stated aim of reducing losses and improving the standard of the State's transport system include:

• Restructuring the taxi industry;  and
• Seeking alterations in the way airport services are provided.

6.1 TAXIS

The taxi industry is highly regulated -- in theory to protect the customer.  However, regulations imposed by the Government also tend to reduce customer choice and satisfaction.  While regulations regarding minimum vehicle safety are required, many others should be re-examined.  A more flexible tariff system allowing different levels of services and comfort to be offered by taxis and possibly hire cars would increase competition between providers and improve customer choice and satisfaction.

One method of implementing a more flexible system of fares would be to introduce a simple colour code related to the standard of service offered by the taxi, as part of the taxi's top identification sign.  This would be an easy visual cost indication for intending customers.  Each level of service would have minimum vehicle and driver standards.  A two or three level system would probably be enough to provide an optimum level of consumer choice and service.

"The Knowledge" required of London taxi drivers is another form of value-added service that could be associated with a segmented taxi market.  A graded system of driver knowledge, with financial incentives to make it worthwhile for drivers to increase their skills, would reduce the occurrence of the common passenger complaint -- "the taxi driver didn't know where they were going".  The introduction of a knowledge requirement would also be a balance against removing other barriers of entry into the industry.

Any system restricting the number of taxi plates, combined with regulated fees, reduces competition within the industry.  Why should the Government control numbers when it also controls the minimum vehicle and driver standards?  These should be sufficient barriers of entry into the industry.

Taxis could also be used for other transport services.  In New Zealand, taxis are sometimes used to operate fixed bus routes during off peak times. ⁽¹¹⁸⁾  If one taxi becomes full, another -- with proper knowledge of the route -- is called in to pick up the extra passengers.  This has proven particularly successful where a local taxi company or co-operative has become a bus route franchiser since it gives added vehicle flexibility while reducing costs.  Taxis have been able to do this in New Zealand because they may have up to twelve seats.  Lack of luggage space and boarding problems are issues that would have to be addressed before implementing this type of service in Victoria.

This type of taxi-bus system would be complementary to introducing franchises on train and tram tracks.  The franchisee could own or contract with this type of taxi to operate feeder routes to their fixed transport route.

6.2 Melbourne Airport

The role the Government is able to play in determining the provision of services at Melbourne is limited by the fact that Melbourne Airport, as are all Australia's major international airports, is owned by the Federal Airports Commission.  Therefore, while it is beyond the Government's power to implement reforms unilaterally, it should, wherever possible, press for changes to be made.

There are effectively three different sections to the terminal facilities at Melbourne Airport.  International travel is handled through flexible, generic gates with the airlines being limited to having their own check-in and special lounge facilities.  However, domestic travel infrastructure is divided between the two major airlines dedicated facilities.

This divided and single user terminal structure makes it difficult for any new competitor to become established, since it must lease terminal space in one of its rivals' facility.  Freeing up of terminal gates so that the domestic terminals operate in a similar way to the international terminal may be one prerequisite for realistic competition to succeed.

Ownership and control of Australia's major international airports by the Federal Airports Corporation does not encourage competition between the airports for traffic nor does it allow individual airports to offer specialised services.  While the ownership of the basic airport infrastructure should probably remain in public control, private ownership and operation of terminals should be considered.

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7 CONCLUSION

Victoria's transport sector, particularly the public transport system, has major problems which will only be overcome by the implementation of cogent and integrated reforms.

While the current Government has made progress in reforming the public transport sector it has not adequately addressed perhaps the fundamental flaw underpinning the existing system -- why should it be the Government which provides these services?

A large majority of the population has spurned the Government's inadequate transport system for the speed and convenience of private cars.  They will continue to do so until the quality, convenience and relative costs of public transport improve markedly.  These improvements will only occur by increasing the role of private enterprise.

Escalating private enterprise's role in the provision of public transport services does not mean community and welfare obligations should or would be ignored.  Where there is a genuine community benefit derived from delivering services, then the non-commercial costs of those services should be paid for by the Government.  However this must be done in a way that will not undermine the commercial viability of the transport service.

Transport consumers should be aware of, and pay (as far possible) the real cost of their preferred means of transport rather than be confused by a series of hidden costs and cross subsidies.  Ultimately this will ensure that transport services are delivered in the most effective manner for the whole community.

A fully integrated program of reforms looks at more than just public transport.  It must also, for instance, consider the provision of road services.  An effective system of pricing road usage is needed to ensure the full cost of building and maintaining the State's road system is borne by the users who actually accrue benefit from their use of the roads.  Whilst there would be technological and implementation issues to solve, it is believed that a fully automatic system of road pricing would make road users more aware of the true costs of their road usage.  This would encourage them to use the roads more effectively.

Victoria needs a transport sector which enhances its social and economic progress, not hinders it.  With this in mind Project Victoria has set out here a series of policies designed to overhaul, remove and replace existing structures with the objective of establishing an effective and efficient transport sector capable of meeting the ever-changing transport needs of the community.  Words, however, are rarely enough.  In this instance, where the need for change is so clear, it is action, locking in sustained reforms to transport in Victoria, that is required.

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ENDNOTES

1.  EPAC (1991), Urban and Regional Trends and Issues, Council Paper No. 46, January.

2.  Officer (1993a), Report of the Victorian Commission of Audit, Government of Victoria, Volume 1, May;  and Officer (1993b), Report of the Victorian Commission of Audit, Volume 2, Government of Victoria, May;  Stockdale (1993a), "Budget Strategy and Review:  1993-1994", 1993-1994 Budget Paper No. 2, Government Printer, Melbourne, September, 1993, pages 7-17.

3.  Officer (1993a), op. cit., page 17.

4.  NSW Treasury (1992), Budget Information, Budget Paper No. 2, September, Chapter 9.

5.  Qld Treasury (1992), Supplementary Budget Information, Budget Paper No. 4, September, Chapter 5.

6.  Stockdale (1993a), op. cit., Table 5.5, pages 5-16.

7.  As of July 1993, the Victorian government has a credit rating on domestic currency long-term debt from Moody's Investor Services of A1, which is the lowest of the Australian States, and a rating of AA from S&P-Australian Ratings of AA, which is the second lowest of the States.  See Stockdale (1993b), Restoring Victoria's Finances:  Stage 2, Victorian Government Printer, Melbourne, April, 1993, Table 7.3, pages 7-11.

8.  Officer (1993a), op. cit., Table 4.2, page 128.

9.  Ibid., page 17.

10.  Government of Victoria, Budget Paper No. 2, 1989-90, 1990-91, 1991-92 and 1992-93.

11.  ABS, Cat. No. 5220.0, 1991-92 Australian National Accounts:  State Accounts.

12.  This is discussed in detail in the Audit Report.  See Officer (1993a), op. cit., Chapter 2, pages 29-65.

13.  Ibid., Chart 4.1, page 129.

14.  Ibid., Chapter 2.

15.  Access Economics (1992a), Two Nations, Access Economics Monitor, July.

16.  Stockdale (1993b), op. cit., pages 7-4.

17.  Stockdale (1993a), op. cit., pages 4-3, 4-4.

18.  Officer (1993a), op. cit., pages 131-6.

19.  Ibid., pages 134-5.

20.  Victorian Treasury (1993), Budget Strategy and Review 1993-94, Budget Paper No. 2, Victorian Government Printer, Table 1.4, page 1-9.

21.  Stockdale (1993b), op. cit., Chapter 8.

22.  ABS 5220.0 and AOTC (1992) Annual Report, page 42.

23.  BTE (1990), The Transport Sector in the Australian Economy, Bureau of Transport Economic Information Paper No.22.

24.  ABS, Cat. No. 6248.0, Employed Wage and Salary Earners:  Australia, December 1992.

25.  ABS, Household Expenditure Survey 1988, unpublished statistics.

26.  IC (1989a), Government (Non-Tax) Charges, Industry Commission Report 422, Vol. 4, September, page 5.

27.  Victorian Treasury (1992), Budget Strategy and Review 1992-93, Budget Paper No. 2, Victorian Government Printer, Table 5.2, page 60.

28.  See IC (1991a), Rail Transport, Volume 1, Industry Commission Report No. 13, August., Table 10.4, page 251.

29.  There are no comparable data on the trips in total or by type of private passenger services.

30.  Author's estimates.

31.  Officer (1993b), op. cit., pages 159-164.

32.  Loc. cit.

33.  MTG (1992), Submission by Monash Transport Groups, Department of Civil Engineering, Monash University, to Industry Commission Urban Transport Inquiry, January, page 3.

34.  Loc. cit.

35.  Ibid., page 4.

36.  Access (1992b), Fast-Tracking Transport Reforms:  Introducing Competitive Pressures throughout Australia's Land Transport Industries, published by Business Council of Australia, September, page 3.

37.  Ibid., Chart 1.1.

38.  IC (1991a), op. cit., page 288.

39.  Officer (1993b), op. cit., page 177;  Officer (1993b), op. cit., Table 9.3, page 144.

40.  Ibid., Table 9.5, page 146.

41.  Ibid., Table 9.7, page 147.

42.  Victorian Minister for Public Transport, Press Release, 12 November 1992, reported in Officer (1993b), op. cit., page 144.

43.  CGC (1993), Report on General Revenue Relativities 1993, Volume III -- Appendices, Commonwealth Grants Commission, AGPS, Appendix A, pages 1-98.

44.  Officer (1993b), op. cit., page 148.

45.  Clare, R.;  Johnston, K. (1993) Financial Performance of Government Business Enterprises:  An Update, Background Paper No. 25, April, Table 6, page 18.

46.  Ibid.

47.  IC (1991a), op. cit., Volume 2, page 28.

48.  Ibid., page 152.

49.  Loc. cit.

50.  CGC (1993), op. cit., Attachment III, pp 383-387.

51.  NSW Government (1993), Budget Information 1992-94, Budget Paper No. 2, September, Table 8.1, page 8.16.

52.  Clare, R. and K. Johnston (1992), Profitability and Productivity of Government Business Enterprises, EPAC, August.

53.  BIE (1992), International Performance Indicators -- Rail Freight, Bureau of Industry Economics Research Report 41, AGPS, August.

54.  IC (1991b), Rail Transport, Volume II -- Appendices, Industry Commission Report, Appendix K, pages 138-151.

55.  PTUA (1993), Public Transport's Financial Crisis:  Will Victoria Ever See World-Class Mass-Transit?, A Discussion Paper by Public Transport Users Association, Melbourne, pages 10-11.

56.  IC (1991b), op. cit., page 86.

57.  CGC (1990), [Amos, P.F.], Commonwealth Grants Commission Report on General Relativities 1990, Working Papers, Volume 2 -- Appendices and Consultants' Reports, AGPS.  The data are discussed in detail in R.J. Wood (1990), Efficiency of States Spending, EPAC Background Paper No. 7, AGPS, December.

58.  IC (1991b), op. cit., pages 45-52.

59.  PTUA (1993), op. cit., page 9.

60.  Stoney, Ian F.X. (1993), "Improving Efficiency in Rail Freight Transport", paper delivered to Victorian Transport Infrastructure Conference, HR Conferences, Melbourne, June.

61.  Officer (1993b), op. cit., pages 179-188.

62.  PTUA (1993), op. cit., Table 9, page 10.

63.  Loc. cit.

64.  The author found that 39 per cent of the PTC's above standard level of expenditure, as measured by the Grants Commission, was caused by high debt charges (see R.J. Wood (1990), op. cit.).

65.  Stoney (1993), op. cit.

66.  IC (1991b), op. cit., Appendix G, pages 59-80.

67.  I.C., Report No. 13, Volume II:   Appendices, Annex I, page 92,

68.  Ibid., Appendix K, page 163

69.  PTUA (1993), op. cit., Appendix D.

70.  IC (1991b), op. cit., Appendix G, page 74.

71.  Ibid., page 78.

72.  Officer (1993b), op. cit., Table 9.5, page 146.

73.  BTR (1993), Domestic Tourism Monitor 1991-92, Bureau of Tourism Research, Canberra.

74.  IC (1991b), op. cit., Figure G7, page 71.

75.  Ibid., Figure G9, page 72.

76.  IC (1991a), op. cit., page 194.

77.  Loc. cit.

78.  ABS, 1988 Household Expenditure Survey, unpublished statistics.

79.  Ibid., page 231.

80.  The introduction of automatic fare collection, scheduled for 1994, will provide transport service operators wilh significant management information.  This will assist them in tailoring services and prices to demand.  It will also assist the introduction of multiple transport providers as automatic fare collection systems are capable of accurately allocating fares between independent service providers where a common ticketing system is used.

81.  PTC Staff Magazine "Turning Point:  From a System to a Service" Vol. 1, No. 8 1/7/93 p1.

82.  The country rail routes which will continue to be provided by the PTC V/Line Passenger BU after the current reform process is complete include Melbourne - Swan Hill, Melbourne - Ballarat, Melbourne - Albury, Melbourne - Stony Point and Melbourne - Geelong.

83.  Officer (1993b), op. cit., Table 9.5, page 146.

84.  Loc. cit.

85.  Source:  Data compiled by the the Commonwealth Grants Commission for 1991-92 published in Officer, Report of The Victorian Commission of Audit, Volume Two, Government of Victoria, May, 1993, page 145.

86.  Loc. cit. estimates of cost recovery are based on PTC operating expenditure, revenue and deficit compiled by the Commonwealth Grants Commission and are calculated to remain constant in real terms.

87.  Source:  Uses estimates of revenue and cost for 1991-92 compiled by the Commonwealth Grants Commission published in Officer, Report of the Victorian Commission of Audit, Volume Two, Government of Victoria, May 1993, page 145.

88.  Ibid., page 145.

89.  Officer (1993b), op. cit., page 195.

90.  PTUA (1993), op. cit., page 7

91.  Pursuant to recently awarded contracts, franchises have been awarded to the National Bus Company for seven years, and to the PTC for five years.  These contracts specify minimum services which must be provided.  Previous contracts between the Government and private bus operators run until 1997.  The duration, terms and conditions of these contractual agreements may hamper the introduction of open competition for bus services.

92.  Some rolling stock and trams are owned by the PTC.  However the majority are privately owned and leased by the PTC.

93.  PTC Staff Magazine "Turning Point:  From a System to a Service" Vol. 1, No. 7 17/6/93 page 3.

94.  According to the Monash Transport Group, while radial public transport services to Melbourne central business district are extensive, work trips to the central business district account for no more than 4% of all trips, and only approximately half of these are made on public transport.  In the much larger market -- suburban travel -- only 11% of all trips are taken by public transport

95.  Stockdale (1993c), "The Consolidated Fund 1992-93", 1992-93 Budget Papers, Government Printer, April.

96.  Officer (1993b), op. cit., Appendix G, page 381.

97.  Loc. cit.

98.  Kneebone, A.C. (1993), "International Benchmarking Road Construction and Maintenance in Australia -- A Discussion Paper", Business Council of Australia, June.

99.  CGC (1993), op. cit., Table III-61, pages 366-367.

100.  Stockdale (1993b), op. cit., page 84.

101.  BTCE (1992), "Transport and Communication Indicators", Bureau of Transport and Communication Economics, Bulletin 40, March Quarter.

102.  Author's estimate, which assumes that of the $3,300 million collected by the Commonwealth in fuel excise in 1990-91, $825 million, or 25 per cent, is paid in Victoria.  Source:  BTCE (1992), op. cit.

103.  IC (1993b), op. cit., Appendix G, Table 6.3, page 68.

104.  Officer (1993b), op. cit., Appendix G, page 381.

105.  See Inter-State Commission (1990), Road Use Charges and Vehicle Registration:  A National Scheme, AGPS, March;  Luck, D.P. and I.J. Martin (1988), Review of Road Cost Recovery, Bureau of Transport and Communications Economics, Occasional Paper 90, AGPS.  It should be noted that the figures upon which the Inter-State Commission relies do not include sales tax, stamp duty or State petrol fees and are therefore likely to underestimate the amount to which vehicle road charges exceed road track costs.

106.  Various sources suggest that the amount of damage caused to roads is related to the axle weight raised to the fourth power, although this varies for different road surfaces.

107.  Winston C., "Efficient Transportation Infrastructure Policy", Journal of Economic Perspectives, Vol. 5, No. 1, Winter 1991, page 117.

108.  Bureau of Transport and Communications Economics Bulletin No. 28, 1990, as quoted in EPAC "Urban and Regional Trends and Issues", op. cit.

109.  Miles J., The Costs of Congestion -- A Preliminary Assessment of Melbourne's Road Network, VicRoads Report IR 92-5.

110.  A New South Wales Roads and Traffic Authority study found the perceived cost of road use (what a driver bases his usage decisions on) was 19.4 cents/km whereas the market cost (the actual total money paid out by private car users) was 62.3 cents/km.

111.  Bureau of Transport and Communications Economics Bulletin No. 36, Table 1 & 4, March Quarter 1992.

112.  Reason Foundation, "Highways, Bridges and Tunnels", Privatization 1991, D. Haarmeyer (Ed.), page 24.

113.  Equivalent Standard Axles (ESA) is a measure of axle load and is often used as a basis of comparison, for example, the amount of road damage that a 4 ESA vehicle will cause is approximately 16 times that of a 1 ESA vehicle.  A 1.2 tonne car corresponds to 0.0003 ESAs.

114.  Gordon P., Richardson H.W., & Jun M., "The Commuting Paradox:  Evidence from the Top Twenty", University of Southern California School of Urban & Regional Planning, October 1989, as cited in Poole R.W., Private Tollways:  How States Can Leverage Federal Highway Funds, Reason Foundation Policy Insight No. 136, February 1992, page 8.

115.  Services such as road congestion and parking information, or navigation advice to drivers are currently being planned.  Another potential service is detecting buses and trams in the traffic stream and giving them priority through traffic signal control.

116.  The automatic vehicle identification (AVI) system installed in Hong Kong has an accuracy of 99.7% and its security features can detect attempted fraud.  As described in Winston C., op. cit., page 119.

117.  Poole R.W., Private Tollways:  How States Can Leverage Federal Highway Funds, Reason Foundation Policy Insight No. 136, February 1992, page 9.

118.  Baxter, B & Davis, R., "Passenger Transport Deregulation in New Zealand and the Emergence of the Bus-Taxi", Papers of the Australasian Transport Research Forum, Canberra, 1992, pages 409-426.