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Budget 2007: Funding for transport improvements

Hon Dr Michael Cullen
Minister of Finance
Hon Annette King
Minister of Transport


Funding certainty for transport improvements

Budget 2007 paves the way for regions to raise funds through a regional fuel tax for specific transport capital projects that would otherwise not attract funding within the timeframe that regions might desire.

Finance Minister Michael Cullen and Transport Minister Annette King said today that the first region to benefit from a regional fuel tax is likely to be Auckland, where a 10 cents a litre regional fuel tax on petrol and diesel could raise about $120 million a year and could support a debt of about $1.5 billion over 30 years.

“We know there is a great deal of interest in Auckland in the advantages offered by a regional fuel tax,” the Ministers said. “A regional fuel tax will allow the government to support Auckland’s transport priorities, which includes electrification of the Auckland rail network, other public transport initiatives such as additional buses and integrated ticketing, the Western Ring Route and Penlink."

In addition, the Ministers said that the government would target an increase in Auckland’s public transport patronage to around 60 boardings per person per year by 2016, up from 41 at present. This would mean substantially improving the quality of Auckland’s public transport services, with funding to be shared between the government and the region, they said.

“Electrification of the rail network is only part of the story”, they said. “Improving the quality of services across the board, including buses and ferries, is critical to achieving a world-class public transport system.

“This is great news for New Zealand’s largest city. In order to transform the economy, it is absolutely essential that Auckland develop a world-class transport infrastructure.

“Our commitment to improving public transport infrastructure is also a critical part of the government’s drive for environmental sustainability.”

Dr Cullen and Ms King said all regions would have the opportunity to consider their own regional fuel taxes. “For example, a regional fuel tax in Wellington
could become a significant contributor to Transmission Gully if the region chose that option.

“Regions need to put up proposals for the government’s consideration, and while approval will be subject to evaluating the merits of a particular proposal, the government is strongly committed to working positively with regions around the country.”

The regional fuel tax will be applied as required to cover the costs of the projects undertaken.

In a further move to give certainty to land transport planning, the Ministers have announced that consideration is being given to permanently directing all revenue generated from fuel excise duty towards land transport expenditure, including public transport.

“This would mean that the Crown would no longer retain any revenue from the sale of petrol for general government revenue and would ensure that every cent of excise duty collected from motorists is used for land transport projects.”

Note:
Budget 2006 increased investment in transport improvements to ensure over the following five years that the government was spending more on land transport than it takes by way of excise duty, road user charges and motor vehicle registration fees.

Questions and answers: regional fuel tax

Why is the government enabling a regional fuel tax?
There are a number of projects that are high priorities for regions that cannot currently be funded, often due to their cost or other higher priorities. Regional fuel tax is a tool, which will be available to regions for high priority projects that would not otherwise get funding within the timeframe desired by the region.

What will the regional fuel tax be used for?
The regional fuel tax will only be approved for new roading and public transport infrastructure.

Why limit the regional fuel tax to new infrastructure?
It is important that motorists who do pay the extra regional fuel tax are able to see a clear benefit from doing so in the form of additional roads or public transport that the region would not otherwise get. As such, the regional fuel tax cannot be used to meet the cost of existing services.

What projects does the government have in mind?
The projects will be up to each region to determine if they decide to implement the regional fuel tax. A regional fuel tax will most likely assist with funding the electrification of the Auckland rail network including the new electric rolling stock and other station improvements and could be used to fund other transport projects that benefit the entire Auckland region.

In Wellington, a regional fuel tax could be used to contribute to the cost of the Transmission Gully Motorway if that is considered to be a regional priority.

Other regions may have priority projects, which they will wish to discuss with government.

How big will the regional fuel tax be?
The maximum regional fuel tax is yet to be finalised but will be around ten cents per litre. The actual level of the regional fuel tax within that maximum will be up to each region to determine if it chooses to implement the tax. A maximum of 5 cents per litre will be available for roading projects. The government will have the power to vary this limit in certain circumstances.

Why should a regional fuel tax be used to fund public transport improvements?
Public transport improvements assist all road users by providing alternative sources of transport. Increased public transport usage can reduce congestion for motorists and also plays an important part in increasing the sustainability of the entire transport system.

How much money is the Government committing to improve Auckland’s public transport services?
Over the next 10 years, the Government is providing $2.1 billion to fund public transport in Auckland. Together with the region’s contribution of $1.6 billion, this means a total of $3.7 billion will be invested in Auckland’s public transport system. Further work is needed to test whether this level of funding is sufficient to achieve the target of 60 boardings per person per year by 2016.

How much could the regional fuel tax raise?
The total amount raised is dependent on the number of regions that elect to use this tool and the rate of regional fuel tax they choose. The table below shows the potential revenue if Auckland and Wellington were to have a regional fuel tax of ten cents per litre:

Estimated gross annual revenue raised from a 10 cents per litre regional fuel tax Estimated debt that can be supported by this revenue
Auckland $120 million $1,500 million
Wellington $35 million $430 million

How will the regional fuel tax work?
Proposing the regional fuel tax
A body representing the region (most likely a regional council) will approach central government seeking to fund a project or projects via a regional fuel tax. Such an approach would include an initial scope of projects and an assessment of their benefit to the region. If the government agrees to the development of a formal proposal, a development agreement will be negotiated with the region that sets out:
 the respective roles of the representative body and central government;
 the information needed by central government and/or local government sufficient to justify the case for a regional fuel tax.
 any consultation processes either required by statute, or deemed necessary by either party; and
 any other issues that require resolution. For example, if a project relies on a contribution from another funding source (e.g. developer contributions or the National Land Transport Fund) as well as the fuel tax, the certainty of that funding source may need to be confirmed.

Once the items specified in the development agreement have been satisfied, a finalised case will be put to the government for approval. Following this, the Ministers of Finance and Transport will prepare an Order in Council to give effect to the regional fuel tax.

Implementing the regional fuel tax
The regional fuel tax will be collected on both petrol and diesel. To keep administration costs low, the regional fuel tax will be paid by oil companies to Land Transport NZ, who would then distribute the funds to the relevant party. A refund system will operate in a number of circumstances where the fuel purchased is not used for on-road travel purposes.

When will the regional fuel tax be implemented?
Following consultation with regions on the design of the regional fuel tax, the government envisages passing enabling legislation as soon as practicable. Once legislation is passed, the implementation will be determined by the regions that choose to apply to use this tool.

What regions will the regional fuel tax apply to?
The decision on a regional fuel tax is one for each region to make in consultation with the government. It is proposed that regional boundaries will be based on the boundaries used for the collection of the existing Local Authority Petroleum Tax.

Didn’t regional petrol taxes fail in the 1990s because oil companies ended up spreading the tax across the whole country?
The previous regional petrol tax was 2 cents per litre and at this level it was easy for oil companies to spread the cost nationally. At 5-10 cents per litre this is less likely to happen as it is not as easy for oil companies to spread a larger differential across the entire country. It is possible that there may be some price spreading but that may be dependent upon the number of regions that choose to take the opportunity to fund major infrastructure projects in this way.

Why charge diesel users?
Diesel vehicles account for 18% of the vehicle fleet, travelling 24% of on-road kilometres. A diesel tax ensures almost all motorists who buy their fuel in a region are contributing to the cost of regional priorities. The diesel tax will be levied on the fuel rather than through the Road User Charges (RUC) system to limit out of region purchase of RUC for diesel vehicles that do the majority of their travel within a region that elects to levy this regional fuel tax.

How will the public know the regional fuel tax is spent on important projects?
Because the regional fuel tax can only be levied on capital projects, the public will be able to see the outcome in the form of tangible assets. There will be a requirement on regions proposing the regional fuel tax to undertake public consultation processes required by law, or deemed relevant by either the region or the government. This will enable public input into the regional fuel tax and the projects.

Why is the Auckland proposal more advanced than other regions?

The Auckland Regional Council (ARC) has advocated the use of a regional fuel tax for some time as a means of advancing projects that are regional priorities. The ARC and government have agreed that the electrification of the rail network is a very important project for the region, and in order to improve the Auckland rail network as soon as possible, both parties have worked together to advance both electrification and the means to fund it.

ENDS

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