Forward looking cost base prototype
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We are conducting a research project aimed at developing a working prototype of a Forward-Looking Cost Base (FLCB) model for setting heavy vehicle charges. This prototype model will be used to inform advice to governments under the Land Transport Market Reform project (LTMR - formerly Heavy Vehicle Road Reform project) led by the Commonwealth Department of Infrastructure, Regional Development and Cities.
Heavy vehicle charges are set to recover the costs to the road network that are attributable to heavy vehicles. These costs include road construction, maintenance and operations that reflect the characteristics of different heavy vehicle classes and the wear they cause on the roads.
Under the existing pay-as-you-go (PAYGO) system, these costs have been calculated using a backward-looking approach, that is, heavy vehicle charges recover the reported historical expenditure of building and maintaining the road network.
Other network infrastructure (e.g. electricity, water, telecommunications) typically uses a ‘life-cycle’ approach based on ‘forward-looking costs’ to measure the costs of their investments and operations. This is also known as the ‘building block’ model. Under this model, costs are recovered over the time in which assets are used and consumed. For example, a newly commissioned 30-year asset would be paid for over the 30 years it is in service.
A forward-looking cost base uses the current asset values and future operating costs to establish a forward looking revenue requirement (or cost base). All assets are ‘paid for’ over their economic lives, while operating expenditure is recovered in the same period that it is provided.
Funding assets over their economic life, rather than immediately in the year that they are constructed, also helps to smooth the revenue requirement, or cost base, over time, especially when asset expenditure is lumpy or cyclical.
One of the most important potential advantages of this approach is that asset owners receive greater certainty about future revenue whereas users get greater certainty around future charges.
We will work with state and territory governments, as well as the Commonwealth Government, to develop and fine-tune the FLCB model.
We will finalise our report in late 2018 which will be considered by the Transport and Infrastructure Council as part of its deliberations on the Land Transport Market Reform project.