Why we need a user-pays model to fund transport infrastructure

Dr Matthew Birchall
NZ Herald
20 June, 2024

How New Zealand funds and finances infrastructure is a billion-dollar question. In Budget 2024, the Government forecasts that more than $68 billion will be spent on infrastructure over the next five years – a significant capital investment in roads, rail and other projects. Given the sums involved, it matters how this money is spent.

Unfortunately, the recent past paints a grim picture of New Zealand’s ability to invest wisely in infrastructure. The New Zealand Infrastructure Commission notes that despite spending around 5.5 percent of GDP on public infrastructure—higher than Australia and the OECD median—New Zealand ranks near the bottom 10 percent of high-income countries for infrastructure efficiency.

In a recent speech to the Local Government New Zealand Infrastructure Symposium, Minister for Infrastructure Chris Bishop noted that New Zealand faces a suite of gnarly infrastructure challenges. Decades of underinvestment, poor pricing signals, and a lack of private capital have left our roads, rail, and water systems struggling to keep pace with the demands of a growing population.

Nowhere is this more evident than in our transport network. Congestion, maintenance backlogs, and a looming funding crisis threaten its very foundations.

The root of the problem is that New Zealand's approach to transport funding is outdated. For too long, the country has relied on fuel excise duty to pay for roads. However, as vehicles become more fuel-efficient and electric cars grow in popularity, this model is no longer fit for purpose. Waka Kotahi NZ Transport Agency estimates it will face an annual shortfall of $4-5 billion over the next decade.

New Zealand needs a new approach to transport funding – one that is fairer, more efficient, and more sustainable. In his speech, Minister Bishop hinted at the solution: road pricing. He noted that Transport Minister Simeon Brown has a "massive programme of work underway to use better pricing on our roads," including tolling and congestion charging. This is a welcome development, and a theme that I explore in depth in my forthcoming report for The New Zealand Initiative, Driving Change: How Road Pricing Can Improve Our Roads.

The economic rationale for road pricing is clear. Directly linking charges to road use ensures that those who use the roads the most (and impose the greatest costs through congestion and wear-and-tear) pay their fair share. And we already do this through higher charges on heavier diesel vehicles. This approach would send clear price signals to encourage more efficient use of scarce road space, reduce congestion and unlock productivity gains. It would also provide a stable revenue stream to fund much-needed infrastructure investment. 

International evidence supports this approach. Cities like Singapore and Stockholm have successfully used congestion charging to reduce traffic and improve air quality. Japan’s extensive tolled expressway network, meanwhile, offers a model for how road pricing can fund the development and maintenance of world-class highways.

Of course, any mention of new charges is bound to raise concerns. Minister Bishop acknowledged this in his speech, noting that some of the Government’s infrastructure funding and financing plans will be “edgy” and “controversial”. But as he rightly pointed out, we cannot afford to shy away from tough decisions any longer. The costs of inaction – in terms of lost productivity, reduced quality of life, and forgone economic growth – are simply too high.

In Driving Change, I propose a future-oriented solution to New Zealand’s transport funding woes: a comprehensive road pricing model for New Zealand called Smart Road User Charges (Smart RUC). Under this system, fuel excise duty would be gradually phased out and replaced with distance-based charging for all vehicles. Users would choose between an automated “pay-as-you-drive” system or a pre-purchased RUC license similar to the existing diesel RUC system. Crucially, charges would vary based on factors like vehicle type, weight, and time of travel, ensuring that costs are allocated efficiently and equitably.

I will not give away more of the report’s recommendations here. Suffice it to say that a transition to Smart RUC would need to be carefully managed, with a staged approach, robust public engagement, and best-practice privacy safeguards. But as Minister Bishop’s speech made clear, the Government is open to fresh ideas and innovative strategies.

Implementing road pricing is just one part of the broader changes needed to address New Zealand's infrastructure challenges. The New Zealand Infrastructure Commission wisely notes that we cannot simply build our way out of these problems. Instead, we need to make better use of the infrastructure we already have. This means embracing new approaches to pricing, funding, and demand management.

Road pricing is not a silver bullet, but it is a proven tool that can help New Zealand create a transport system fit for the 21st century. And it may just help us get more out of that $68 billion.

To read the full article on the NZ Herald website, click here.

Stay in the loop: Subscribe to updates