Monday, 7 November 2011

Kauffman Foundation article proposes privatised roads with road pricing

Robert E. Litan, Vice President of Research & Policy, Kauffman Foundation has written an article published by the Huffington Post where he proposes a new approach to highway management and funding.

The article criticises the Obama Administration’s approach by saying how it neglects pricing:

the overall plan presumes that the first answer to congested roads and bridges is always new construction, when we know that roads, like electricity and telephone lines (more about them soon), are used most heavily in peak periods, but are almost always uncongested in off-peak hours. If congestion were priced to reflect this variation in demand, then economic activity would shift to different times of the day so that traffic is smoothed out. Yes, this would mean varied and staggered work hours at many locations, and yes for this and other reasons, congestion pricing is not wildly popular with the public. Yet, this is largely because voters have not been confronted with the choices involved.

Quite right, but of course any move towards better pricing is more complex than just building something, and so requires more sophisticated debate than politicians are often willing to undertake.

He think that voters need to be told either taxes go up or congestion pricing can be introduced, and that they might be more convinced of the merits if the choices are presented like that:

the initial evidence on high-occupancy-toll (HOT) lanes indicates that motorists in all income groups value the option of paying a toll to get to their destinations faster.

Yes, although extending the principle to currently untolled roads is always more difficult. However, he believes the wider solution is privatisation, because the private sector is better able to apply efficient pricing:

Relative to governments, privately owned infrastructure is likely to be more efficient and innovative because private owners have much stronger incentives to reduce costs and respond to users' preferences to maximize profits.

private owners are likely to encounter less opposition to congestion pricing than governments, since customers are used to paying for premium service from other types of private businesses (such as airline and train travel, credit cards, and so forth). Moreover, private firms are likely to apply congestion pricing to cater to users' varied preferences for speed and reliability -- for example, offering a few lanes with high tolls and little delays and lanes with lower tolls and more delay.

From a social perspective, greater use of congestion pricing provides a signal to help insure that only truly essential infrastructure projects are built.

This is perhaps one of the more neglected points, besides reducing congestion and being a new source of revenue, congestion pricing can help signal what new investment should occur. The other advantage of private ownership is innovation.

The challenge is dealing with concerns over monopoly power, and how local streets are part of public space, unlike other network utilities. Issues that will need addressing, but they are not reasons to dismiss Litan’s points outright.  He acknowledges this:

It is also possible that the experiments may reveal that governments may need to regulate the prices of some transportation links where drivers or fliers have few alternatives, but this should be the exception, not the rule, since price regulation introduces its own distortions (especially when it is based on a measure of costs, since this is likely to lead to gold-plating).


Sophisticated pricing is something many of us are used to in a multitude of areas of life, there is no reason to presume that eventually roads may well be treated the same way.

Litan is optimistic:

A new private industry, one centered around the ownership of roads, bridges, airports, and other formerly publicly owned facilities is thus waiting to be born, if policy makers at all levels of government will do everything they can to birth it with carefully designed experiments in selected cities, as a precursor to making this national policy.

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