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 Heavy Vehicle Road Reform project led by the Commonwealth Department of Infrastructure and Regional Development.
Heavy vehicle charges are set to recover the costs that heavy vehicles incur on the road network. These costs include road construction, maintenance and operations.
Under the existing 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 use the prototype model to provide advice to governments on how this model would compare with the existing PAYGO system under a range of different future scenarios.
We will advise the Transport and Infrastructure Council on our findings in late 2017.
This project will also be informed by the outcomes of the Cost Allocation Review project that is also underway.