Category: Economic Regulation of Transport

263 | The fuel levies are not enough to fund transport infrastructure, safety and modes

The emerging debates about what the fuel price is, the size of the levies, and how much of it actually funds roads and safety makes me wonder whether we really understand how much more transport investment we need.

Beyond the fuel levies, most road users cannot pay more than they already do, but a small share might just tip the scale. 

Thinking about the Basic Fuel Price

South Africa uses inflation targeting as a key monetary policy instrument, that is the Monetary Policy Committee decides on the lending rate, or repo rate, in order to influence borrowing and spending of money. This helps keep our inflation rate between 4% and 6%. 

This policy framework is debatable, the are other mechanisms, but what is important for now is that we have been doing this for quite some time to stabilise our economy. 

The model that the MPC uses is quite vast and comprehensive, it accounts for exchange rates and anticipates the price of Brent Crude Oil for instance. 

When looking at the Basic Fuel Price, there are many marine specific, logistical, currency and market related variables embedded in the calculation—some of which were under review recently in order to account for improved port, and other logsitical efficiencies. 

By and large, the BFP is influenced by international exchange rates, the OPEC + compliance rates and production targets and many other international factors. This is because the OPEC agreement for cooperation argues for a balance in demand and supply to minimise eroding the value of oil, maintaining suitable supply and ensuring predictable revenues (among other reasons). 

As a result, looking at the BFP over time we need to look at the difference between our estimate that accounts for inflation and the one in the market. Furthermore, putting the BFP in the same basket as the levies from an analytical perspective doesn’t provide an accurate picture. 

The pressure group, Opposition to Urban Tolling Alliance or recently the Organisation Undoing Tax Abuse (OUTA) published an article on the Daily Maverick using inaccurate representations of data to support their argument. It is unclear how this passed the editorial as the same type of presentation is on the OUTA website.A cause to wonder what other erroneous calculations they have made without scrutiny

Fuel, Road Accident Fund and other levies

However, when we look at fiscal policy measures they need to be brought to context.

Between June 2008 and 2018 the vehicle population grew by 37% from 8.2 million to 11.3 million self-propelled vehicles on our roads. Private cars accounted for 65% of the market share. 

According to the South African Road Federation (SARF), direct and indirect fiscal revenues generated from the motor vehicle industry rose from R 113bn to R166bn between 2010 and 2014, the fuel levy and the Road Accident Fund only accounted for 29% and 13% of this total respectively. 

The overall revenue growth is still within the broad 31% range based on the available data. When adjusted for inflation, the range is 12% narrower with fiscal revenues growing slower than the vehicle population is (assuming that this data was not adjusted for inflation). 

Based on the SARF analysis, in 2014, R99bn was collected directly from road users and a R120bn was spent in road infrastructure, that is for every vehicle kilometre travelled R0.62 was collected from road users and R0.74 was spent on road infrastructure. 

The Fuel Levy and RAF Levy only accounted for 70% of the direct income, and 58% of the spending. 

At last week’s Parliamentary Committee Meeting for Mineral Resources and Energy, issues related to the Basic Fuel Price and the state of refineries in South Africa were discussed. 

The Department of Mineral Resources and Energy presented the BFP model and other issues as per the legislation, however they could have invested more effort in dealing with the more contentious issue related to the regulation of fuel prices and the empowerment model for the industry. 

An interesting presentation from the Automotive Association of South Africa argued that levies cannot be eliminated, for now, but the calculation of the BFP needs review; the Road Accident Fund may need to be restructured as an SOC in order to better manage their R320bn deficit; and improving road safety reduces the need for compensation. I’ve mentioned this before, road safety can be greatly improved at a local level.   

One key outcome from the discussion was that while domestic refinery capacity may improve the BFP structure, the advent of electric vehicles and sustainable energy in the automotive sector is a long-run risk for high capital investments. 

The fuel price is not all taxes

The pressure group, Opposition to Urban Tolling Alliance or recently the Organisation Undoing Tax Abuse (OUTA) published an article on the Daily Maverick using inaccurate representations of data to support their argument. It is unclear how this passed the editorial as the same type of presentation is on the OUTA website.A cause to wonder what other erroneous calculations they have made without scrutiny. 

The error, however, is a common one: not adjusting data for inflation. But it has substantive impact on their idea that the levies are “unsustainable”. 

When adjusting for inflation we are moving from the “nominal” economy to the “real” economy. The “real” economy is what we feel in our pockets today—hence we adjust the past to fit the present day. 

However, for the fuel price issue, we can only really adjust the levies because they are regulated. 

A fuel levy of R1.27 in 2008 is R2.10 in 2018 when adjusted for inflation. This is broken down in detail, and one can see that when adjusting 2008 prices to 2018 prices the actual increase in the Fuel Levy was 50%, which seems large until one accounts for the increased fuel efficiency of combustion engines between this period. As engines get smaller and more efficient, every litre of fuel yields more kilometres. 

The Road Accident Fund Levy more than doubled, and this may have been propelled by the disproportionate distribution of accidents affecting lower income households in addition to the backlog inherent in the fund’s design. 

When OUTA argues that the 40:60 split between the levies and the BFP is inverted to a 60:40 split they are largely misled by the external nature of the BFP and its fluctuations. 

As it is influenced by external factors, the BFP component needs to be observed in this context with a pinch of salt by observing the real 2008 prices at 2018 prices: R8.69. This was a 31% decrease compared to the BFP in 2018. 

In other words, by the time all the components are added together the volatility of the BFP creates an impression that there’s a tip in the scale toward a 60:40 split—this is not true. Making the BFP constant at R8.70 to compare the two periods would result in a situation where the fuel price at the pump was R16.50 in 2018, creating a 47:53 split. This too is imperfect, but there’s one other neglected element that is important. 

The ratio between the Fuel Levy and the RAF Levy has changed in favour of the Road Accident Fund: for every Rand collected in the Fuel Levy R 0.37 was spent on the RAF in 2008. By 2018 this had increased to R0.51, revealing an improvement in the ratio and thus changing the underlying composition toward a near 50:50 split between the Levies and the BFP. 

Are road users paying enough?

It is rather clear that if the levies were a primary source of funding for road infrastructure it would not be a sustainable situation. Taken further, we must perhaps begin to explore how else transport infrastructure could be funded.

Especially given the probable impact on electric vehicles on our roads, but not at our pumps. In one report from Eskom, they indicated that if 50% of all vehicles were electrified, it would only result in a 7% increase in energy demand—only 4.88% of peak demand. 

These vehicles will still use road infrastructure, contribute to road risks and thus still require infrastructure—the fuel levy would lag behind substantially.  

With regard to OUTA’s report we need to be weary of is unadjusted financial data presented in a manner that appeals to a group sentiment, rather than accurately and objectively explores what the data and evidence means.  To draw the conclusion that the fuel price is “all taxes and very little paid for the actual commodity” is appealing but erroneous. 

Motorists are already starting to question the levies in the fuel price, but little do they know that to invest in our country’s future infrastructure and road safety needs these levies are not enough. The AASA and the SARF have continued to argue that we need a better model to finance roads—one could argue that distance based levies are probably part of the future. 

However, few road users have room to pay more for road infrastructure, unless if there is a morally sound reason, packaged transparently and with benefits for the country in immediate terms: AASA, SARF and OUTA agree on this issue. 

Our Reserve Bank Govender always includes a statement that fiscal policy is key to addressing the structural issues in the South African economy, monetary policy can only do so much. 

Perhaps it is time to revisit the conversation around road pricing, and congestion charging in South Africa.  This time it needs to be different: a specific emphasis on separating sensational myths from the fact that to invest in public transport, safer roads and infrastructure general taxes won’t do the trick. 

We generally don’t have enough, but if we were more specific and intentional, a small share of road users would pay for a more efficient alternative route. Ideally, they would be funding the maintenance of the more efficient alternative and the improvement of the options that are a public goods (not priced) increasing the welfare gains. 

The big basket at Treasury might not be as effective as Provinces in this regard, especially when they can borrow from the state and private sector and have users help pay back the loans (that’s part of how the Gautrain was funded, by the way). 

One catch: there should be a reasonable alternative route or mode of transport for every investment under the user pay principle. This catch implies that the state makes the first move, openly, transparently and quickly. Who will pay for that?

Thank you for reading.