Roads to Recovery, or Roads to Purgatory?

Abstract: More money is not always a blessing. If spent unwisely, it can lead to major problems in the future.

In 2000, the Federal Government announced a 4-year programme of road grants to local government totalling $1.2 billion. The grants were designed to address the backlog of maintenance work, particularly in rural areas. Jeff Roorda gathered data on the costs of maintaining and renewing both gravel and sealed roads as part of an ALGA-led study. Jeff joined me in this article to explain why the new road grants may be a blessing or a curse for local government, depending on how the funds are spent. The figures, tables and pictures have been excluded here, but you can find them in Strategic Asset Management, Issue 55, February 9, 2001.

A modified form of this article was published in Public Works Engineering, Jan/Feb 2001, and the Western Australian Roads Board included a copy of it in their annual review for several successive years.

What if we use the new funds to seal gravel roads?

The Temptation. Councils using grants to seal gravel roads will save on the ongoing costs of maintenance, grading and re-sheeting. The studies show that this results in average savings of about $1400 /km/yr, so not only can roads be maintained and service levels increased, but funds are also freed up to spend on other items! However, sealed roads have to be patched, repaired, and re-sealed at some point, and the results of the studies show that, over its lifetime, the average cost of maintaining and renewing a sealed road is about $5,500/km/yr.

So, the Net Cost of Changeover is an extra $4,100 per km

Although councils save about $1400 by not maintaining a gravel road, they pay about $5,500 to maintain the sealed road that has taken its place, resulting in a net increase in funding requirements of $4,1000. So sealing roads provides some short-term breathing space, but it does so at a very large ongoing cost, plus extra risk and liability if the new seal is not maintained. Neglecting to maintain a sealed road carries more liability for council than neglecting to maintain a gravel road — pot-holes are dangerous, whereas a lack of gravel just results in uncomfortable driving.

Summary: If you use the new funds to seal gravel roads, your costs rise from an average of about $1,400 /km/yr for gravel roads to $5,500 /km/yr for sealed roads.

Who will meet the increased costs?

Will the federal government increase the size of the annual road grants to meet the higher service levels? Will councils be required to meet the needs out of their own funding and possibly higher ratepayer contributions?

Where it pays to seal

Where upgrading generates council revenues (or generates maintenance and re-sheeting savings) sufficient to cover the extra costs, there is no problem.

Example 1: Increased revenues, savings

For example, some coastal tourist roads are difficult and costly to maintain because of high usage and scarce, low-quality road-making materials. There is high demand in peak tourist seasons, which reduces the maximum life to only 6-7 years before a total gravel resurfacing is required. Extensive and regular grading is required, with water tanks and rollers, to maintain the surface between resurfacing. As the availability of high-quality material reduces and the level of service requirement increases, unit maintenance costs rise. In the example above, road materials require water and rolling because of the quality of the available material. This can double the historical unit rates for maintenance grading. In these circumstances

1. There is the potential for revenue increase through tourist traffic into the area, and

2. There is the potential for cost savings because of the higher-than-average cost of maintaining the existing gravel road.

Example 2: Benefits exceed Costs, but they are not translated into extra revenues.

Maintaining rural roads in remote areas is a significant challenge. Without regular grading, the gravel surface rapidly deteriorates. As the gravel layer deteriorates, maintenance costs rise to sustain an all-weather surface needed for the rapid transport of goods by road trains. It may be that the benefits to the national road network justify the costs of upgrading, although the extra revenue or cost savings to the council would not be sufficient to justify sealing. Where upgrading generates benefits greater than the extra costs but does not translate into extra council revenues, there may therefore be an argument for subsidy at a regional, state or national level. However, ‘value for money’ at the national or regional level needs to be demonstrated.

Where it doesn’t pay to seal

While temporary ability to seal applies, and the council wants to satisfy the many demands for better roads that are placed on it, or simply to look ‘progressive’ , if sealing does not generate its own cost savings or extra revenues, nor gather extra support from other levels, then Councils that use the road funds to upgrade rather than maintain their roads are digging a very large financial hole for themselves. Their situation can only get worse.

What to do

Councils need to prioritise and demonstrate value for money from each project. This protects individual councils from spending unwisely. Treating the extra road grants as if they were lottery winnings could see councils worse rather than better off. Purgatory rather than Paradise.

What Should Be the Total Level of Road Grants?

The grants have been positioned as ‘catch-up grants’. Over the years there has been much debate about how grants should be distributed but almost none about what the total level of those grants should be. This has been due to a lack of understanding of the principles of grant funding and a lack of information about councils’ real costs. Current studies by the ALGA and Victorian and South Australian councils are helping to tackle this information issue.

Monitoring of Grants

The Commonwealth has stated that it will monitor the spending of the grants to ensure that they are used wisely. This could provide an opportunity to extend the ‘catch-up’ grants into something more permanent if councils can demonstrate that they are spending wisely and that their needs are real.

Jeff’s analysis has shown that the spread of costs is noticeably wide for both gravel and sealed roads. Reasons include:

• The cost of re-metalling or re-sheeting may vary (if there is a local quarry the cost of re-metalling may be quite low, whereas for roads in national parks, where councils may need to truck inmetal long distances, the cost can be very much higher).

• The life may vary for reasons of usage, desired standards, climatic variations, or operating conditions (eg the road may be next to an irrigated area and be affected by the overflow or runoff).

• There may be variations in the type and cost of maintenance done to prolong the period between re-sheets or re-metalling to suit the local situation.

These are all avoidable costs in the sense that if the road were not there, the costs would cease.

Overhead Costs

In addition, there are overhead costs. Overheads include administrative costs, on-costs, and perhaps a share of the CEO’s time. These are valid costs to include in the overall costs. But if the road were decommissioned, these overhead costs would persist – they would simply have to be shifted to other assets. So, when deciding to switch from a gravel road to a sealed road (or vice versa), only avoidable costs should be considered, not overheads. That is, use only the direct costs.

Note: Council practices in what should be included in overheads and how those overheads are allocated to different assets and services vary widely between councils.

Image by Dorothe Wouters from Pixabay