Monday, 19 March 2012

UK road privatisation? The big issue is who pays

According to the BBC (and numerous other UK media outlets) the UK government wants the private sector to invest more in highways in the UK. A speech from the Prime Minister has said that while tolls are one option, there needs to also be consideration of how the private sector can finance roads over time.  In short, he is laying the foundations for potentially radical reform in how England's national highway network is funded and managed (given that Scotland, Wales and Northern Ireland all have devolved authority over their networks).

Of course the conventional idea is that the classic PPP model is adopted, whereby a private company finances, builds, operates and tolls a new road, enabling the entire project to be self-financed. The M6 toll road is a perfect example of this.

This is all very well for entirely new roads, but the business case for entirely new roads is tough. It requires land purchases and planning permission for a new corridor, which can be onerous as there are groups (such as Friends of the Earth, and the left-wing environmentalist Campaign for Better Transport) which dedicate resources to opposing any road improvements. The antipathy and lack of enthusiasm from many local authorities (including Transport for London) for any new road corridors effectively snuffs out interest in many cases.  Building new roads is difficult in the UK, which given the surfeit of bottlenecks is interesting.

Beyond new roads is the case of upgrading existing corridors, such as widening an existing highway, building a bypass or the like. In such a case, one option under consideration appears to be allowing the government to lease part of or the whole road to a private investor, which would pay a sizeable sum in return. The investor could then be paid by any combination of the following ways:

- Direct tolls: The investor could simply introduce tolls on the road, or even just new sections (or new lanes), to fund the improvements;
- Shadow tolls: The government pays the new owner on a per vehicle basis, with some variations based on type of vehicle, time of day, or other factors;
- Performance payment: The government pays the new owner on the basis of meeting targets in terms of network performance including maintenance, congestion and safety.

Bear in mind that the UK government already gets around £32 billion a year from fuel duty and vehicle excise duty from road transport now (that excludes VAT on top of tax). So there are sources of revenue to pay a future private owner.

The Prime Minister said that tolls would only be possible for new roads, although it does raise the curious issue of tolling for new lanes. What this does mean is that there is likely to be more options coming from the proposed feasibility study into “new ownership and financing models” being carried out by the Treasury and Department for Transport. 

It is with such a report and potential options that there is potential to truly unlock much more potential than simply new sources of capital. 

The big elephant in the room, and the issue which much of the media (and public) is speculating on, is what does it mean for how people pay for the roads and how much?

UK motorists currently pay for road use in up to four different ways, with a fifth one about to appear for large trucks:

1. Vehicle Excise Duty (often mislabelled "road tax"): This is essentially a tax on owning a vehicle in the UK, and is simply to vehicle registration or licensing fees in other countries. This tax raises around £6 billion per annum. This is broadly equivalent to the total budget of the Highways Agency, and trunk road spending in Wales, Scotland and Northern Ireland. However, this is treated as general government revenue, it is not hypothecated.

2. Hydrocarbon oil duty (fuel duty): A conventional fuel tax rated at just under £0.59 per litre for diesel and petrol. Most of this is paid by road users and generates around £26 billion a year from road users. None of this tax is hypothecated.

3. Tolls: A handful of crossings plus the M6 toll road have direct tolls. These generate revenue for the owners of each facility. The M6 toll road is the largest, whereas the smallest include very old private toll bridges in various parts of England.

4. Congestion charge: Strictly speaking, there are three “congestion charge” zones in the UK. London is the most well known, but there is also one in Durham and the Dartford Crossing toll is now officially a congestion charge. All of these generate revenue for the authority levying the charge (and is meant to be hypothecated for transport spending).

5. Heavy vehicle vignette: Announced recently, the UK government intends to levy a vignette for vehicles over 12 tonnes wishing to use the entire UK road network. It intends to reduce vehicle excise duty for such vehicles, so that almost all UK truck owners do not pay more. The vignette is based on buying access to the UK road network for anything from one day to one year.

As all vehicles are charged for use of all roads now, with a fuel tax that is high by global standards (although not quite the highest in Europe), the scope for tolls on top of that is more limited. Bear in mind that of those sources of revenue, the first two currently involve no relationship at all between what road users pay and what is spent on roads. However, consider the concerns of road users that government spends only a quarter of what it collects from those taxes on roads now.

The connection is even looser because fuel duty is not hypothecated to road or transport spending, like it is in the US, New Zealand and several other countries. The UK Treasury is ideologically opposed to hypothecation because it limits the government’s scope for using revenue from any taxes for any purpose. In essence, Treasury wants to advise directly on government spending in all areas, not to have one area of spending set aside based entirely on revenue collected from those who use it.  Yet if there is to be a shift from tax to user pays, there needs to be a way to transition it.

Given that a private road owner can only levy tolls, the big question must be whether any change in ownership will provide scope to either:

1. Pay a new owner a share of the revenue generated from existing motoring taxes; or
2. Allow existing taxes to be reduced for anyone paying a toll on a privatised road.

In New Zealand, it was proposed in the late 1990s to transfer all roads, both central and local government owned ones, to a series of commercial companies (with central government and local authorities as shareholders), which would operate at complete arms-length from political interference. Initially, it was expected that these companies would bid for funding from a user funding agency which would receive the equivalent of fuel tax and vehicle excise duty and buy road services on behalf of motorists (e.g. maintenance, bridge replacement and upgrades).  It was thought that if existing taxes were frozen in perpetuity, then growth in revenue would have to come from road companies offering better service, and indeed over time, inflation would erode existing motoring taxes with a greater emphasis on user charges.

That meant there could be the option for a trucking company to pay to use the roads directly, and not pay taxes to government for using the roads. Products would be available for road users to pay for road use, and be refunded fuel taxes or other motoring taxes. 

In other words, it provided a mechanism for the road provider to contract directly with the road user and for the road user to get taxes back in return.  The proposed reforms floundered in New Zealand because of a change in government (which was friendly to local government concerns over losing powers).

The advantage of charge vehicles directly through tolling and other forms of direct road user charging is it can mean the amount that is charged is related to usage, and that it can reflect the infrastructure costs, and can also vary according to demand (to manage congestion). However, to realise this potential, the entity setting the tolls needs to have the flexibility to respond to demand.  Dynamic road pricing is more likely to come from the private sector than the public sector.

The greatest concern of road users is that they may pay more with a private road owner tolling a road. This can be ameliorated by the providing offsetting motoring tax reductions like I mentioned above, and by having an independent regulator to avoid price gouging (and indeed having any privatisation done in a way that may encourage competition where viable).

It is inevitable that debate over road privatization in the UK will be clouded by the anger by motorists that they “already pay too much”, which when you consider the 4:1 ratio of motoring specific taxes over road spending, is an understandable position to take. Some will fear foreign takeover (with the BBC already implicitly appearing to stir up such fear with this headline).

However, regardless of structures or sources of finance, the core to any reform in the UK will be the answer to the question “How will motorists pay for the roads?”.

Unless the answers involve better use of existing taxes or replacing existing taxes with direct charges, the likelihood is that there will be considerable public resistance, because the current system doesn’t deliver the standard of service users want at a price they see as fair.   Meanwhile, there are groups that happily oppose any new road capacity or road improvements, and see tolling as a way of punishing motorists (and higher fuel taxes the same way).  

Yet by far the biggest problem is one of trust.  Motorists in the UK do not trust politicians.  From 1993 to 1999, fuel tax was increased with an "escalator" that raised it by inflation plus 3-5%, so that the tax taken from road users increased far beyond road spending.  Meanwhile, local authorities claim there is a £10 billion backlog of potholes needing repair.

Any change needs to change that relationship, to be one where what is paid is seen as generating value for motorists.  Like with any road pricing, unless what is paid is related to what is used, it will be resisted.

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