Tuesday, 15 January 2013

UK highway reforms split on road charging

The emphasis has been on the strategic road network for England - the network of motorways and major highways managed by central government through the Highways Agency (highways in Wales, Scotland and Northern Ireland are the responsibility of the devolved administrations).  The purpose has been to find ways to get more investment in improving the network, both through greater efficiencies in potentially restructuring the Highways Agency into a more independent commercial enterprise, and to attract private investment into the network.

However, whilst it would appear that the objectives are clear, there are divisions in government about to how to progress them.  A recent Financial Times report indicated that it is explicitly about road charging, with the Chancellor of the Exchequer (no doubt backed by Treasury) advocating allowing tolls to be introduced on existing motorways, whilst the Prime Minister wants nobody to be "worse off" (i.e. nobody should pay more than they do now).  

The fundamental problem is clear - how does the Government get more capital spending on roads?  Given the tight fiscal situation, there is little appetite to expand government spending on roads beyond what has already been committed.  Similarly, the political cost of increasing existing motoring taxes (none of which have any link at all to what is spent on roads) appears to be too risky, given the Government seems unable to increase fuel tax, even though the increase recently cancelled was actually set by the previous Labour Government.

The Prime Minister's initial speech that talked about highway reform and later statements about reform gave the impression that the private sector could ride in and rescue the network, pour lots of capital into it and get a return, but the problem with that is how to pay the private sector back in the absence of tolls.

One idea that was floated was to restructure vehicle excise duty (commonly and misleadingly referred to as "road tax"), the tax on vehicle ownership, into a two-tier duty.  All motorists would pay a universal lower rate for access to the road network generally, but a top-up second tier would be voluntary for those wishing to access the motorway network.  In effect the second tier would be similar to the vignette systems in operation in several continental European countries.  The expectation would be that this could provide a revenue stream for a restructured strategic road network, with private owners having a hypothecated stream of revenue based on such charges (Austria's ASFINAG gains its revenue from light vehicles on this basis).

The obvious problem with this is that there would be a diversion from the motorway network onto local roads, which in some cases would create significant congestion as people avoid the motorways to save money.  Furthermore, the option would mean revenue would have a low relationship to network usage (except at the level of regularity of access, as regular users would probably pay for a year of access, whereas occasional users may buy access for a day or more at a time).  It also inverts the capital costs of the different parts of the network, given that the marginal infrastructure costs of using the motorways (given the sheer volume of traffic to spread costs between) are lower than that of the local road networks.   However, it is clear that the unintended consequences of such a proposal would be the sudden emergence of new bottlenecks that would mean exemptions being granted to use many parts of the motorway network to fix them, which would be a political liability.  In addition, there would be a drop in revenue as significant numbers of motorists would suddenly decide they don't need to use the motorways regularly (i.e. many in cities), plus something would have to be done for those in Wales, Northern Ireland and Scotland (as the tax is levied across the UK, but Westminster does not manage roads in the other devolved "countries").

Having seemed to have moved away from this, the thought has turned to conventional tolls.  The initial announcement by the Prime Minister was that tolling would be allowed for new capacity, but the problem is that most projects on hold for improving the highway network are not conducive for tolling.  Tolls need a major new corridor or a substantial length of new lanes to be technically (let alone economically) feasible.  The project highlighted as being able to be toll funded - the A14 corridor upgrade - will only be able to recover a fraction of its capital costs from tolls.  The simple truth is that tolling really only works if the route to be tolled is a significant improvement to the untolled capacity so that motorists are willing to pay the extra. 

So now discussion has moved to whether something can be done to allow tolling on existing capacity.  There is one view held by some that, despite UK fuel taxes being amongst the highest in Europe, that if tolls are taken into account, some motorists in Europe pay notably more per mile than those in the UK (Italy has tax on petrol at around EURO 0.02 less than the UK, but tolls would easily be more for those using the motorways).   That may well be true, but it is obvious that any approach to introduce tolls on existing roads, without some countervailing reduction in other motoring taxes, would be politically suicidal.

This is in the context of the Government having been unable to increase fuel tax because of the political price it would pay for doing so, and the poor reputation of existing tolled roads, in part because of policy that smacks of bureaucratic short cuts rather than any attempt to treat those who are paying as customers.

I've written already about one approach that I think has merit, but there needs to be a very clear distinction between five components of any new policy.

- Institutional reform:  Commercialising the Highways Agency should proceed, as this will encourage efficiency improvements and create an incentives structure to improve performance and be more dynamic and innovative.  A similar approach should be taken to local authority roads, at least in the major conurbations.  Such new entities should be allowed to introduce tolls on any new capacity if viable and propose new relationships with the private sector.

- Funding framework:  If it is accepted that motoring taxes, in their present form, will remain for some time, then there should be some hypothecation of a portion of existing revenue, dedicated to an independent regulator/funder to buy improvements and maintenance of roads from the new highways companies.  This will also incentvise efficiency and can enc

- Regulator:  The new highways companies will need a regulatory framework to govern tolls, to seek funding from existing sources and to set standards.

- Private sector involvement: Until this new structure is established, the initial role of the private sector will be in a new generation of PFI projects, but this will evolve to include taking control and be part shareholders in parts of the highway network.  However, this cannot readily happen until the public sector governance framework is established.

- Charging:  Allowing tolling on new capacity is obvious, but there should also be a framework to allow tolling on existing capacity with a system to refund part of vehicle excise duty and part of fuel duty.  Again, this cannot readily happen until the public sector governance framework is established.

There is little doubt that to achieve all of this means a lot of work, it is akin to the "deregulation" and privatisation of the telecommunications, water and energy sectors, and should be treated as such.  My concern is that there has been the impression given that there are quick solutions, when there are not.

The slow progress is a good sign, because it shows some degree of caution and consideration being given about what to do and how to move forward.  Highways are assets worth tens of billions of pounds (hundreds if you include the local network) and generate tens of billions of pounds for the Treasury every year.  Reform will be a big job, and it should be done in stages.

There can be reform that extracts more efficiencies from the sector, changes the incentives structure and provides a long term framework to allow more tolls  in due course (and enables private investment).  However, nobody should pretend that the private sector can provide the answers without a suitable funding framework especially in the absence of either more road charging or some hypothecation of existing revenue over the longer term.

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