News briefs - Australia, Denmark, Indonesia, Italy, USA

Australia - Heavy vehicle charges review starts

Transport and Logistics News Australia reports on how the National Transport Commission is consulting on proposed changes to the heavy vehicle charges system (most of which are about how the charges are calculated).

The article is perhaps more interesting for its summary of how Australia charges trucks to use its roads. It is not road pricing or tolls, but a reasonable means of trying to be as efficient as possible in using fuel tax and ownership taxes.

Rather than the widely used non-system of political/bureaucratic guesses as to what might be charged, it involves calculating costs attributable to heavy vehicles, costs attributable to all vehicles and then setting charges to recover from heavy vehicles their share of infrastructure costs. 60% are recovered from fuel tax and 40% from vehicle ownership taxes.  Fuel tax is collected at the Federal level, but ownership taxes at the state level.

The principles applied are as below:

• Full recovery of allocated infrastructure costs while minimising both the over and under recovery from any class of vehicle;
• Cost-effectiveness of pricing instruments;
• Transparency;
• The need to balance administrative simplicity, efficiency and equity (e.g. impact on regional and remote communities/access);
• The need to have regard to other pricing applications such as light vehicle charges, tolling and congestion;
• Ongoing cost recovery in aggregate;
• The removal of cross-subsidies between vehicle classes.

Now without distance and weight based charging, the system is going to be very much second best, but this system for setting charges is more advanced than that used to set charges in much of North America and Europe.   It is, at least, based on setting clear objectives with the need for transparent economic analysis to be used to base charges, and it does provide a framework which could be easily adapted to weight/distance based road user charging.

Denmark - Environmental Economic Council calls for road pricing to replace ownership and purchase taxes

The Copenhagen Post reports that the head of Det Miljøøkonomiske Råd, the environmental economic council, Hans Jørgen Whitta-Jacobsen, has suggested replacing the extortionate vehicle ownership taxes with a distance based road pricing system.  Vehicle purchase taxes cost 105% of the purchase value of a car up to 79,000 DKK (US$13,778) and 180% for every Kroner of value above that.  This imposes an enormous tax on the purchase of a new car.   Ownership taxes start at DKK120 (US$21) for the most fuel efficient diesel cars up to DKK15090 (US$2632) for the least efficient.  All of this makes car ownership expensive, and so doesn't target driving on the most congested roads (so penalises rural areas and those who without jobs accessible by public transit, walking or cycling).   His biggest concern is that such taxes discourage motorists from buying newer, more fuel efficient low emission vehicles.

Indonesia - PT Jasa Marga expecting increased revenue from growing network

The Jakarta Post reports that PT Jasa Marga, Indonesia's largest state owned toll road company, is expecting a 16.1% revenue increase this year, worth a total of US$671 million.   It has a network of 545km of toll roads with four new toll roads to open this calendar year (Nusa Dua-Ngurah Rai-Benoa road in Bali, Kebon Jeruk-Ciledug road in Jakarta, Gempol-Pandaan road in East Java and the Ungaran-Bawen road in Central Java). 

Jasa Marga is looking to facilitate up to 1.2 billion vehicle trips nationwide in 2013, 9.1 percent higher from the 1.1 billion vehicles last year.  80% of trips are on toll roads in greater Jakarta, indicating the sheer density of usage in that city.  Notable in the report is the roll out of the new e-Toll pass, which involves the use of a DSRC on-board unit, and a contactless smart card with prepaid credit that can be topped up.  Only 11% of transactions are at present using this technology, the intention is to lift this to 30% within two years.    Now the toll booths with this technology are not free flow, the tag activates the barrier arm, but the intention is to expand the number of toll booths that are electronically equipped to 111 by the end of 2013.   I would have thought that given the chronic congestion in Indonesia, lifting up take of electronic tolling to 50% of trips within two years should be a realistic goal.

Italy - Atlantia diversifies into airports

According to Reuters, Atlantia, Italy's largest toll road operator, is to buy Gemina, the airport operator best known for owning Aeroporti di Roma (which owns Rome's Fiumicino and Ciampino Airports).  The report said:

The deal will allow Atlantia, which also operates about 1,800 km of motorways in Brazil and Chile, to branch out into airport concessions in Latin America. It will not, however, generate meaningful cost synergies, a Milan-based analyst said.

USA - California- Santa Clarita (LA) looking at tolls to help fund new lanes

The website of radio station KHTS reports that Santa Clarita city (part of the LA metro area) is investigating whether to accelerate the widening of the I-5 freeway (the main northern freeway out of LA) between Highway 14 and Castaic by tolling the additional lanes.   The project would cost $310 million and the city has 75% of the funds needed to progress it (when divided over 30 years), and is hoping tolling the additional lanes may provide the remainder.  The proposal is to make the project into a PPP, with a private concessionaire recovering the cost over 35 years, using tolls on the new lanes only. The intention is for pricing to be dynamic maintaining a minimum speed of 45mph.  Curiously, the proposal maintains the HOT lane concept, by keeping the lanes free for vehicles with three or more occupants, which seems crazy if the key desire is to raise revenue.  The only purpose to keep HOT lanes is consistency, but beyond buses there is little good reason for new lanes to be free for any cars.   There is sense in applying the HOT principle if the lanes are underutilised HOV lanes, but why should well occupied cars occupying the same road space get access for free?  What evidence is there that this actually changes behaviour on any meaningful scale?  (besides a car with three people in it can split a toll three-ways surely)?

USA - Texas - Cintra wins concession for North Tarrant Express expansion

International Construction reports that Ferrovial subsidiary Cintra has won the concession to build the North Tarrant Express expansion in Texas.  Cintra is to be responsible for developing a 6.5 mile extension, with the state responsible for another 3.6 miles, but Cintra responsible for the tolling, operation and maintenance of the lot, with the total cost of both segments being US$1.38 billion.   The contract involves building two new managed lanes which will be tolled, but also the maintenance and operation of the untolled lanes.

The report says that "the Cintra-led consortium, NTE Mobility Partners Segments 3 LLC, also involves Meridiam Infrastructure and Dallas Police and Fire Pension System"

Why are New York mayoral candidates ignoring congestion pricing?

Capital New York reports with a question - why are the 2013 Mayoral candidates treating congestion pricing "like a third rail" (i.e. avoiding it as being too dangerous to talk about)?

Give fare hikes are unpopular, is it so much more unpopular to charge vehicles for driving into Manhatten?  If so, does this indicate that motoring is just too important to New York City to introduce higher charges, compared to increasing fares (of course some may point out that if the financial issues are around public transport, then raising extra money from the users may be justified).  

It points out Bloomberg's failure, but noted that he didn't do much to build a coalition of support at the state level, nor was enough done to sell the idea to New Yorkers (e.g. it ought to be have been possible to get support from Manhatten residents and businesses, cyclists and public transit users).

However, Sam Schwartz's excellent toll reform plan has also not caught on, although I'd argue it is superior to the plan of Bloomberg (which was far closer to what London has done).

Kathryn Wylde, CEO of business lobby group, Partnership for New York, says tolling the bridges on East River Bridges just "mobilizes Queens and Brooklyn to go crazy", but that a cordon around Manhatten would be "more tenable".

The article seems to conclude that this should be sold as an idea, perhaps part of a wider environmental agenda.  

That may be one approach, but I think it has to be more of a quid-pro-quo that has some reason behind the charging (Schwartz's plan has a rational basis to it), that is able to be seen as equitable (which means a charge somewhere across the north of Manhatten), but pays for improvements to roads (there is an enormous backlog of deferred maintenance across the network) and offsetting reductions in general tax contributions to transport.  Of course there is going to be fear that using some form of road pricing will see funding from other sources dry up, that needs to be worked through with the state.

The case for congestion pricing of some kind in New York is compelling, it would improve access by improving trip reliability, improving speeds for freight, buses, taxis and cars, reduce pollution and raise funds that can be used to improve the entire road corridor - and indeed, that is what should be the focus.  

Less congestion, better quality infrastructure and with alternatives in the forms of public transit, active modes and shifting travel times (having different charges for peak and offpeak trips is critical).

However, it would appear that politicians don't have the intellectual fortitude to confront kneejerk opposition, and concern that it looks like a new tax which will be wasted.  No sound argument can be made for New York State to raise the gas tax to pay for the city alone, although there are sound arguments to use competitive tendering, commercialisation and private contracting to reduce public transit costs.   Given the existence today of tolled access to Manhatten on some routes, but not others, the case for equity is strong, but the case for efficiency is stronger still.

Candidates on the left with an environmental bent should be able to argue for this, particularly if it means funding other modes and reducing tolls beyond Manhatten.  Candidates on the right with a bent for reducing congestion and improving competitiveness, should be able to argue for this too, if it is about improving existing roads and even reducing other taxes (if there is no interest in a net increase in revenues).

Do they simply fear whoever argues for it first gives an automatic issue to argue against for the others?

UK highway privatisation/reform stalled... again

The Financial Times reports that the Budget is unlikely to see any announcement around highways privatisation, for fears of a political backlash.  The intention instead is to publish a "green paper" in summer outlining options, which effectively means no substantial reform will be completed before the general election in two years' time.

Whilst privatising the strategic road network in England (motorways and major A roads) is not necessarily difficult, the problem is in guaranteeing a stream of revenue for any private investors.  Options under consideration have ranged from allowing tolls to be introduced (which the Government is prepared to accept for new roads and "new capacity" (e.g. additional lanes), to reforming Vehicle Excise Duty (the tax on owning vehicles) by splitting part of it away into an optional motorway vignette, which would then be dedicated to paying for that network.

The Prime Minister has made it clear that no option should leave anyone worse off, effectively constraining tolls to new capacity only (and given the issues of diversion, this is unlikely to mean tolls are going to be feasible except for comparatively few projects).   

Understandably, some Ministers and MPs are baulking at the Vehicle Excise Duty reform option.  The appeal to officials is that is attempts to replicate what has existed in some European countries for many years, when vignettes were introduced to pay for their motorway networks.  However, by offering the option of not paying, it is likely to cause some motorists to divert short trips on motorways onto local roads, creating localised congestion issues.

Motorists are likely to be fairly open to reforms of the Highways Agency that may commercialise it or even privatise it, but when it is about paying to use the roads, it becomes different. 

The reason to introduce a vignette was seen as a way of transparently introducing a user charge for motorway use, so that money for that network could be readily identified without the need for hypothecation of a tax that is also being used for other purposes.  Of course later it could be reformed into a more usage based charge over time.

Yet it neglects the local road network, and doesn't create a cohesive structure to reform the highway sector as a whole.  Ignoring local roads, where much congestion is and where maintenance issues (and capabilities in asset management) are the most serious, is simply absurd.

I've written before about what I think of this option and what I believe should happen - which is to commercialise the Highways Agency and incentivise local authorities to do the same (including creating multi-council joint ventures), set up a regulator to "buy highway services" on behalf of motorists, funded by hypothecating Vehicle Excise Duty and part of Fuel Duty, and then allow the commercialised entities to attract private equity, and progressively be privatised (and to set up tolls that allow motorists to choose to contract out of paying existing taxes).

Previous articles:

- UK highway reforms split on road charging

- Reforming Britain's highways, my views and CBI's views

- Radical privatisation of UK highways proposed by thinktank

- Higher road tax for UK motorways?

- UK government announces feasibility study into highway privatisation options

News briefs - Argentina, Australia, Chile, London

Buenos Aires and Santiago both consider forms of congestion pricing

Drew Reed in Transportation Nation writes about how Buenos Aires and Santiago are both at least discussing the concept of charging more to use roads at peak times.  He cites various articles in Spanish, but the key points are:

Buenos Aires:  The city is increasing tolls on three existing toll roads.  However, it is particularly increasing tolls at peak times, being 0700-1000 and 1700-2000. Tolls during those periods will be 25-60% higher than at other times.  Motorcycles also pay, and will face charges being up to double during the peak compared to the off peak.  More details here in Spanish.  This isn't particularly revolutionary, but is an obvious step to take with toll roads.

Santiago:  Santiago already has an extensive toll road network, so this proposal goes further and proposes a congestion charge around the central city effectively to charge non-residents for commuting from out of town.  It is an academic proposal, although the article curiously notes that Steer Davies Gleave did a study for congestion charging for Santiago but appeared to come up with small cordon for the historic centre (I'd have thought Santiago had the potential for something much more ambitious given the highly efficient toll road system already in place).   The Spanish article is here.  Although the idea is interesting, I again think the real potential must be to build upon the existing toll road network.

Could BrisConnections have done more to attract toll road users?

In October, the Herald Sun reported on an online poll undertaken by the Courier Mail on what it would take for Brisbane motorists to use the now bankrupt AirportLink toll road.   Although far from scientific, it suggested that maybe up to 15% would consider using it, if there was a package to pay for both it and the connecting Clem7 toll road, with around 20% interested if there was a capped charge (not uncapped as the article suggests), so that users would only pay up to a set limit (presumely because certainty about how much one would pay reassures users).  53% said nothing would induce them to use it.

Of course we now know that no such package to use both roads was offered, and although there is a capped charge option, it was probably too high to induce interest.  No doubt the receivers will be keen on figuring out how to attract more customers, but also want to maximise yield.  Package deals may help both roads, given how closely related they are, but that would require receivers to talk to each other.

London- Liberal Democrats call for annual inflation adjusted congestion charge

According to Mayorwatch, the Leader of the London Liberal Democrats group in the London Assembly, Caroline Pidgeon, is calling for an annual increase in the congestion charge to reflect inflation because it "is far too low when you consider the adverse impacts that driving has on other Londoners".

All very well, except that the charge itself has doubled since its introduction in 2003, which is far in excess of inflation (which would take it to about £7 today).  It was £5 when it was introduced and is £10 now (£9 for registered users). 

A far better argument would be to suggest that the charge is too low, rather than an easily dismissed claim about inflation proofing it.   It may be better to consider a return to the original later operating hours (6.30pm end period rather than 6.00pm).

Atlantic Cities writes about the enduring public perception problem of congestion pricing

The article by Eric Jaffe is worth reading, and largely reflects on the survey by the Capital Region Transportation Planning Board in Washington DC and its environs.  He makes the valuable point that people do not believe congestion pricing would be effective.  That seems astonishing to anyone with a basic understanding of economics, but is true.  The researchers suggest a trial would make a difference too, by demonstrating success.  However, I think there are other issues.  One is that people need to know and trust where money raised is going.  Another is whether people think they are taxed too much already (which is either true, or if not true, needs to be explained why in this context).  Finally, congestion pricing needs to be designed to have finesse, to target individual roads in specific directions of travel and times, so that it avoid charging others unnecessarily.   Putting circles around city centres is so last decade, and really only suits cases where such centres are severely congested and major attractors for traffic that can mode shift.   Far too often it is seen by engineers as the convenient solution, and far too few actually realise that the city that first did congestion pricing was Singapore - which still has by far the most elegant approach, because it charges individual congested corridors, pricing each of them distinctly.   However, to do that well you need economists, and to be careful about your use of traffic models that have never been designed to reflect the collective impact of pricing dozens of individual road links. 

Virginia replaces fuel tax with fuel and general tax

I wrote in January about how Virginia Governor Bob McDonnell proposed replacing the state's fuel tax with an increase in sales tax, as a way of covering the desperate need to raise more revenue to pay for deferred maintenance and a range of capital projects.

Well, according to the Washington Examiner, the Virginia State Senate agreed on Saturday 23 February to a compromise solution, that effectively raises US$3.5 billion over five years with two rather peculiar solutions.   

It raises the state's general sales tax from 5 percent to 5.3 percent across most of the state and to 6

percent in Northern Virginia and Hampton Roads.   Effectively meaning that everyone buying anything in the state subsidises the roads, regardless of whether they drive, walk, stay at home or run a whole fleet of vehicles.  A blatant transfer from non-road users to road users, penalising those who use roads the least to reward those who use them the most.

The second step may on the face of it seem more sensible, that being to replace the 17.5c/gallon (4.62c/l) gas tax with a percentage gas tax of 3.5% on petroleum and 6% on diesel.  Sounds great right?  More money as prices go up, effectively inflation busting?  Well yes, it does become an escalator on the price, which is fine as long as prices go up.  If it drops, due to a combination of shale oil and the appreciating US$ (largely as it is treated as a safe haven in the short-medium term), then so does revenue.  Presumably the higher rate for diesel is some sort of attempt to reflect the higher damage that trucks cause to the roads, I'm guessing because there is no such thing as light diesel vehicles in Virginia and the fourth power rule (pdf note on this) is beyond the wit and wisdom of politicians.

Clever?  No, not really.  It really is public policy from the dark ages.  It is pure political expediency, because from tax policy and transport policy perspectives, it doesn't make sense.  The only economic merit will be how the money is spent, and unless a comprehensive long term asset management programme is put in place, and new capital works are measured purely against some form of independent cost-benefit analysis, you can't be sure of that either.

The economic effect of these measures will be incremental of course, it wont mean an increase in traffic or mode shift of any scale, but it sends a sign.  Virginia is happy to tax residents and businesses to prop up the highway system, and happy for road users to get subsidised use of it.  Presumably Virginia will start offering people cheap electricity paid for by an increase in sales tax, or maybe phone calls, or water. 

Whilst much of the United States and the world shifts towards road users paying to use the roads, and paying for the costs of maintaining and renewing the roads they use, Virginia is taking a step backwards, sharing the cost of a ubiquitous utility with everyone, regardless of how much they use it.  It's the sort of approach that some politicians would call socialism if it were applied to other sectors.

What it could have done may have required more political courage and maybe the ability to communicate some basic economics, but it would have been:

- Use tolls where it is feasible and makes financial and economic sense;

- Raise the existing gas tax by enough to combat inflation and avoid arbitrage behaviour (people shopping for fuel from neighbouring states);

- Undertake a comprehensive study on transport costs and charges, to determine the long term needs for public spending on highways, the existing gap between costs and taxes, and options to move forward.

You see the replacement of the gas tax can't be gas tax and sales tax, it has to be an option that involves charging vehicles for actually using the roads.  However, VMT/MBUF/distance based charging seems alien to the state.

Instead it adopted an approach that, from the outside, looks less rational and has little regard for economics at all. 

Brisconnections goes into receivership - another victim of toll road optimism bias?

It has now been reported by various Australian news outlets that Brisconnections, the company behind the AirportLink toll road in Brisbane, has gone into receivership following the withdrawal of support from the company's financial backers.  

Regular readers will remember my previous articles about the AirportLink toll road, which is now the second major toll road project in Brisbane to effectively go bankrupt.  They are below in chronological order, telling a sad tale of a road that faced construction cost overruns, but has been doomed by optimism bias in demand forecasting.

New Brisbane Airport Link toll road may include loyalty programme

Brisbane's latest toll road to open under clouds of scepticism

Brisbane's Airport Link toll road demand may give cause for caution

Brisbane Airport Link looking almost as bad as Clem 7

Brisbane Airport Link debacle down to incentives and value of time

It has looked increasingly doomed (at least financially) since it was opened. It is, of course, technically superb.  

Brisbane Airport Link's complex interchange at Bowen Hills

The road cost A$4.8 billion (US$5 billion) to build and has been open for seven months.  It was meant to have an average of 135,000 vehicles a day by now, but the Sydney Morning Herald said only 47,000 a day on average used it in December (a little unfair, given the Christmas season will mean numbers are down with a lack of business traffic).  Even if you take that into account, traffic numbers are around 40% of what was forecast.  ARUP, the demand modellers in this instance, will be getting legal advice and checking its insurance for fear that it may be in front of a court as AECOM now is over the Clem 7 toll road.  You can review ARUP's report to investors on its demand modelling here, on page 110.   That is worthy of a look, as you can see some of the assumptions used look now, in hindsight, to be worthy of questioning (i.e. comparing toll prices on a per km basis with other toll roads, which is not how people value time and trips, and treating historic traffic growth as reflecting future growth).

Bear in mind that the toll on the road right now is at a discount of around 45% on the full estimated price, and it still can't get the demand levels that were forecast (it is expected that the price would increase in April 2013 to about halve that discount, and increase again in October 2013, both increases testing the elasticity of demand).

The report said "a consortium of 10 banks, including ANZ and European heavyweights Deutsche Bank and BNP Paribas, finally appointed PPB Advisory as receivers on Tuesday. The banks lent about $3.3 billion to BrisConnections, and stand to lose a sizeable chunk of their money."

Of course, the road remains open.  The asset is fixed and there is nothing else that can be done with it, beyond some incremental cost trimming and some price incentives to encourage demand.  The road's true market value will be below its construction and financing costs, suggesting that it simply wasn't an economically viable project.   It would be interesting to see if there was a recent public sector comparator cost-benefit analysis to compare with the financial business case, which now looks dire.

The Courier Mail reports that Professor John Goldberg of the University of Sydney claims the modelling was used to "work backwards" from expected returns to what figures were needed, which is an outrageous assertion to make.   He has himself undertaken his own financial modelling (pdf) of toll road PPPs in Australia and is suspicious of the entire approach. However, his call for a Royal Commission to investigate this is ludicrous, as it is not a matter for the government to be specifically concerned about private companies making malinvestments and losing money.  It would be preferable for the state, if it wishes to promote specific projects as PPPs, to commission its own demand forecasts based on determining if a project is worth proceeding with.

The Product Disclosure Statement claims that debt servicing can withstand a 40% reduction in forecast traffic each year.   What happened is 60%.

What now for AirportLink?

Not much, it will continue to operate.  The receivers will commission a review of its performance to find a way to maximise revenue and minimise costs.  It will remain a prime piece of infrastructure for Brisbane.

The question is whether any legal action will occur, and what long term owner it will have.

What now for future toll road PPPs in Australia?

10 years of London's congestion charge - a success or disappointment?

I, along with thousands of other policy, economics, consultancy and transport planning professionals watched the news from London closely today 10 years ago.  That was because, although Singapore had pioneered fully electronic congestion pricing five years beforehand, this was London.

Singapore's stunning success was seen, perhaps a little unfairly by some, as reflecting more a culture of obedience towards officialdom, and a democracy that has been unafraid of being authoritarian when it was thought of as being in the national interest.   So London was seen as the acid test.  If that old-world major city could introduce a congestion charge, it would mean it would be possible for others.  

What happened, of course, is now well known.  It worked.  It cost a lot of money, it reduced the numbers of charged vehicles entering the charged zone by around 20%, and raised a little money.  It's become a political non-issue, with there being little dispute that retention of the charge makes sense.

Since then it was extended to the west for four years, and that extension was abolished, because of local opposition (including genuine concern about effects on businesses in more suburban areas).  The price has doubled in nominal terms, but the system has evolved from being entirely declaration based (all users having to pay, in advance, whether or not they drove in the charging area during charging times) to offering a detection based account (whereby for an annual charge, you get an account billed automatically for driving within the charging zone).   The system costs have dropped significantly, partly due to technology (a shift from using live video to digitised images, and improved accuracy of ANPR) and partly due to a change in contractor (as the initial contractor Capita understandably charged a lot to ensure that the system would be working in a tight time frame).  

However, after ten years some key questions should be asked.  

Has the congestion charge reduced congestion, sustainably?

Has the congestion charge made a lot of money for Transport for London?

Has the congestion charge positively or negatively affected business in London?

Did the success of London make it easier for other cities to introduce congestion charging?

What next?

Vehicle taxation reform with little measurable benefit

Once again, news media in the UK have been reporting on the ongoing discussions within government to reform motoring taxes in the context of wider reforms of the highways sector. Yet, once again they are reporting on proposals that will deliver virtually nothing in terms of the two key objectives of road user charging - that being more revenue, and better management of traffic demand (one can also argue that it is about better resource allocation as well).

The Daily Mail reports on what it calls a £150 a year "motorway charge", being the idea for a vignette for light vehicles for access to the motorway network only.  The idea actually being considered is to cut vehicle excise duty (commonly called road tax) by about the same amount, although the report doesn't make that as clear as it could, as virtually all comments on the website are the predictable "damned if I am paying more.. how dare they" outrage, which anyone reading the article in a cursory way would understandably feel.

Once again, communication of anything to do with motoring taxes is damnably difficult, a factor the government should bear in mind before doing anything that creates more heat than actual gains in policy.

Yet it isn't about raising more money, because it couldn't do so, or at least not by sufficient amounts to get policy makers excited.  A bit of rejigging of vehicle excise duty might see some low emission vehicles paying the vignette (given the vehicle excise duty they pay now is less than that amount).  It may be easier to sustain inflation adjustment of a vignette than the current vehicle excise duty, but that's about it.

Another article, from an insurance company claims that charges would vary by weight and emissions ratings, which is exactly what vehicle excise duty does now, in part because it tries to reflect the greater wear and tear that heavier trucks impose upon the road network. 

The impression may be that the story is a deliberate "leak" to test public opinion.  If so, it is hardly likely to be given a positive response, in part because nobody could believe that the reason for doing such a reform is legitimate.

What is the UK government wanting to do?

The key outcome sought is to generate more investment in improving roads, most particularly the English strategic road network (Scotland, Wales and Northern Ireland are outside the scope of this, and there has been little said of local roads, although they are in a far more needy state than the motorway network).

The interest is in getting private companies to invest in capital improvements, but given that they wont be allowed to toll these roads (except for a handful of cases where new capacity is provided and it is technically feasible to toll), there needs to be another source of revenue.

What options are there?

Given that tolling existing capacity has effectively been ruled out, there are two ways to ensure a revenue stream for private investors.

The first one is for any new private equity investor to be offered a concession which involves contractual payments, similar to the Private Finance Initiative (PFI) schemes that already exist in the UK highways sector (e.g. for the M25 and M40).   However, as this typically is used for case by case projects, it is not seen as being flexible enough to cover companies literally taking over parts of the network for extended periods.

The second one is to take part of existing motoring taxes and effectively change its status so that it becomes a dedicated stream of revenue from motorists.  That in itself could be achieved in two ways.  The simplest way would be legal hypothecation, so that a set amount of the tax collected or proportion is placed into a legally defined roads fund, that would be allocated for the privately managed roads.  International best practice in doing this would mean a separate funding board be set up, which would manage the fund and be legally required to spend the proceeds on bids for funding.  

However, the UK public service has long been suspicious of hypothecation, for fear that it changes the status of taxes into user fees, and means that it would be a precedent for new hypothecated taxes, even though  evidence from developed countries with hypothecation does not seem to support this though (I come from New Zealand which has successfully managed a transition to a fully hypothecated land transport fund, which the World Bank has long considered to be international best practice).

So the alternative is to split an existing tax, making part of it a fee that can be accessed by the new private investors in the roads.  The Vehicle Excise Duty would remain, at a lower rate, but the new "access fee" would be voluntary (in that it was only paid for using the motorways), and could be regionalised. 

Will this raise any more money?

No.  Unless the private investors are given the right to set the charges of the fee, and presumably would have control over a road or set of roads to justify it (and enforce payment of the fee for those roads).  This seems unlikely, unless the government reforms charges so some pay more.  

Will splitting Vehicle Excise Duty deliver behavioural change that will improve outcomes?

No.  It is a tax on ownership, not road usage, and whether it is redefined as an access charge for motorways or not, the most that might happen is that a little traffic may redistribute from the motorways to local roads, by those who choose not to pay the "access charge".  It wont be charging for congestion (although it would be possible to introduce Brian Wadsworth's proposal regardless of such a change), and it wont result in motorists thinking twice about the costs of a trip.

So why do it?

Well it appears to be a compromise between the traditional antipathy to hypothecation and actually undertaking serious reform.  Vehicle excise duty is at best a tax that recovers some of the fixed costs of the road network, and provides modest incentives to own low emission vehicles, but little else.  There is little good reason to impose a vignette for cars without the presence of large numbers of visiting non-national cars (which there are not).   Meanwhile, the proverbial elephant in the room is fuel duty.  Treasury and some politicians see this as a tax, and want to blank out any linkage of it to usage of the roads.  This is disingenuous, as the revenue generated would simply not exist if the roads were not being used.  Beyond part of it potentially being justified as an environmental tax (albeit to be used as general revenue), it is difficult to not see it as a tax on using the roads (especially given the varying exemptions and different categories of fuel and taxation levels available for different uses of fuel).

Calling it an "access charge" implies that it could transform into a usage based charge into the future, which is true, but it is not as if this makes it that much easier.

What should be done?

If this is just about providing a secure source of revenue for private investors, in the absence of tolls, it would be simpler to avoid changing anything for motorists and just hypothecate Vehicle Excise Duty (and the forthcoming HGV vignette) in its entirety and use it to set up an independent roads fund that would "buy" road "services" on long term contracts to public and private providers of roads.  That would also include bids from the devolved transport bureaucracies in Wales, Scotland and Northern Ireland, and local authorities.  Now the total revenue from Vehicle Excise Duty and the HGV vignette is less than what is spent on roads by central government through various outputs, but it would be enough to guarantee funding for private investment in the strategic road network.  I'd also argue that a small portion of fuel duty should also be hypothecated, because it is a form of user charge, and it provides at least some of the revenue for a roads fund based on usage (which would grow in the event of growth in traffic).

Then any investors in roads could be allowed to contract out of the fund, by charging motorists directly and then offering them full refunds in the fuel duty component and a partial refund in vehicle excise duty.

Until fuel duty is confronted, this whole area cannot be reformed in a way that is satisfactory to motorists, because you cannot hide from the point that motorists know fuel tax is high and so they link that to paying to use the roads.  Meanwhile, unless you are going to reform road charging to increase revenue or improve the efficiency of the system through behaviour change, I do not know why you would bother.

Transurban half year results positive, but what are the details?

Australian toll road investor Transurban has released its results for the six months ended 31 December 2012, which report an increase in the proportional EBITDA of 3.8%, compared to the prior corresponding period, but a reduction in the statutory net profit of 16%.  The difference between these is due to the exclusion of five assets in which Transurban has a partial shareholding in the statutory net profit.  Costs are up 10.5% overall, largely attributed to the launching of the I-495 express lanes.

It is a good result with "A distribution totalling 15.5 cents per stapled security will be paid on 14 February 2013 for the six months ended 31 December 2012. This will be made up of a 12.0 cent distribution from Transurban Holding Trust and a 3.5 cent fully franked dividend from Transurban Holdings Limited".  There is also a A$5 billion pipeline of investments for the group (being the Hills M2, I-95 Express Lanes and M5 widening projects

However, it's worth having a look at Transurban's portfolio of assets to see what they are looking like, and what it teaches future investors about the profile of such investments, compare to the full year results for 2012 which I reported on here.   Transurban's presentation is the source of much of the following conclusions.

Melbourne Citylink

Proving that a major urban motorway can be a profitable investment that delivers enormous benefits to a metropolis, Citylink continues to be the "jewel in the crown" of Transurban delivering nearly half of all of its toll revenue.  Traffic growth has been 2% in the past year and toll revenue growth 4% (EBITDA 3.9%) including an adjustment for the bedding down of a new billing system, which added short term costs.

The key prospects for this project are in a related proposal, the East-West Link, which would connect Melbourne's Eastern Freeway with the Western Ring Road interchanging with Citylink.  Transurban is targeting this as an obvious potential enhancement to its portfolio.  There are also plans to upgrade Citylink.  Bear in mind Melbourne Citylink is the corridor between the city and Melbourne's major airport (there is no rail link), and is the only decent east-west corridor at present.  It is strategically vital, but thrives as a privately owned toll road.  Concession ends in 2034.

Revenue of A$267.1m, costs of A$52m, depreciation/amortisation/financing costs of $A100.8m, leaving a profit before tax of A$114.3m

Sydney Hills M2

This motorway has suffered due to extensive roadworks to add new interchange capacity, which has deterred trips because of lower speed limits.  Traffic volumes are down 2%, with toll revenue down 1.7% (EBITDA 1.9%).  The works are expected to be completed mid 2013, with the hope that traffic volumes will recover.  The M2 is a core part of the Sydney orbital toll road network, connecting the northern suburbs to the west, and so has affected the results of two other Transurban assets.  It is more of a suburban motorway that needs orbital urban traffic to thrive, so will be dependent on how there is growth in suburb-suburb commuter and leisure traffic (which is not conducive to public transport usage, which is high in Sydney for trips to the downtown area).  It is expected to deliver significant growth in 2014, as temporary speed restrictions are removed.  Concession ends in 2046.

Revenue of A$73.4m, costs of A$15.9m, depreciation/amortisation/financing of A$52.9m, profit before tax of A$4.6m.

Sydney Lane Cove Tunnel

This part of the main route north from Sydney has seen static traffic with a small increase in toll revenue (0.3% - EBITDA 4%).  Bear in mind the history of this project in that Transurban bought it from the receivers for around 60% of the cost of constructing it, after traffic and revenue numbers did not meet forecast expectations.  A key project is to consolidate and reduce costs in maintaining Transurban's Sydney highway assets, which may partly reflect the better EBITDA figures.  Lane Cove Tunnel does have an untolled alternative, so is sensitive to pricing, congestion levels on the surface streets and limited competition from rail.  Concession ends in 2037.

Revenue of A$31.7m, costs of A$13.4m, depreciation/amortisation/financing of A$22.1m, meaning a loss before tax of A$3.8m

Sydney M1 Eastern Distributor

This is the highway that connects Sydney Airport to the city and the harbour crossings.  It has seen a small decrease in traffic (0.4%), but a 8.2% increase in toll revenue (EBITDA 8%) due to 9% toll increases ($A 0.50), indicating low elasticity of demand on this key corridor (which also has intensive rail competition, and parallel inferior surface streets).   Transurban has a 75.11% shareholding in this road.  Given the time sensitivity and the constraints in corridor expansion along this route, it can be expected that this investment can deliver more over the long term.  Concession ends in 2048.

Revenue of A$51.3m, costs of A$13.7m, depreciation/amortisation/financing of A$48.3m, meaning a loss before tax of A$10.7m. 

Sydney Westlink M7

The M7 runs north-south along the western end of the Sydney orbital ring road, and so is a core part of Sydney's bypass, but also connects the northwest and northern suburbs with the south, avoiding the need to use the harbour crossings.   It has seen a 2.4% increase in traffic, and 3.2% increase in toll revenue (EBITDA 3%).  A stable route, growth being dependent on growth in housing and employment at Sydney's periphery promoted by the location of growth nodes at either end of the motorway.  50% owned by Transurban.  Concession ends in 2037.

Revenue of A$106.6m, costs of A$23.8m, depreciation/amortisation/financing of A$177.2m, meaning a loss of A$94.4m before tax.

Sydney M5 SouthWest

The M5 is Sydney's main motorway south-west towards Canberra and Melbourne.  It has seen a small (0.4%) decrease in traffic, but 10.1% increase in toll revenue (EBITDA 11.4%) due to toll price increases.   This road is 50% owned by Transurban, and has its own widening project underway, which means an additional lane each way (from 2 to 3 lanes in each direction).  It also has the eccentricity of a taxpayer funded rebate scheme for regular users, which was a 1995 electoral bribe by the then Labor state government.  It means that vehicles that are owned by a New South Wales resident, registered in the state for private, pensioner or charitable use, and are equipped with an electronic tag, are eligible for toll refunds.  "Business vehicles" are not included.  As such, there is obvious long run potential if the state finances get to the point where this is to removed.  Concession ends in 2026.

Also in Sydney, Transurban is pursuing a potential project to connect its M3 to the F2 freeway (which leads to Newcastle).

Revenue of A$103.1m, costs of A$14.2m, depreciation/amortisation/financing of A$51m, meaning a profit of A$37.9m before tax.

USA I-495 express lanes

These lanes opened in November, as reported here.  However, Transurban is reporting that traffic is below expectations, but systems are working well.  Obviously two months are too early for any assessment of trends.  It will require both marketing and patience to see if motorists become more willing to pay to bypass congestion on this route, which is the key south-west quadrant of Washington DC's orbital freeway network.  Concession ends in 2087!

So far revenue of A$1m, costs of A$3.2m, depreciation/amortisation/financing of A$9.1m, so a loss of A$11.3m before tax.

USA Pocahontas 895

If Citylink is the Jewel, Pocahontas is the fools gold.  It is 100% owned by Transurban and has been 65% below traffic forecasts.  The results have seen a 5.1% increase in traffic and similar (5.3%) increase in toll revenue (6% EBITDA), but it remains a seriously underperforming asset (which Transurban wrote down last year by A$138 million).  Problems with this asset have included the cancellation of a major property development that would have been served by the road, which was expected to generate up to 35,000 additional trips a day (the timing of the project coincided with the financial crisis and the US property market crash).  It has been suggested that the loss of Interstate status didn't help, but this point is insignificant.  The likelihood is that Transurban will hope that property development will be reignited so that the road will come into its own in due course.  Concession ends in 2105.

Revenue of A$7.4m, costs of A$3.1m, depreciation/amortisation/financing of A$16.7m, so a loss of A$12.4m before tax.

USA I-95 Express lanes to come

As Transurban's US investments are all in Virginia, it is logical that it has also put money into this HOT lane project.  It is under construction and will be completed in late 2014, and involves a 49km of new reversible 2-3 lane set of lanes south of Washington DC within the existing corridor.

Toll rate variations

The full report (PDF) includes some interesting data on the caps (if any) on toll rates for Transurban assets, as follows:

M5 South West Motorway - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

Hills M2 - Escalated quarterly by the greater of quarterly CPI or 1%. 

M1 Eastern Distributor - Escalated quarterly by the greater of a weighted sum of quarterly Average Weekly Earnings and quarterly CPI or 1%. 

Westlink M7 - Escalated or deescalated quarterly by quarterly CPI. 

Lane Cove Tunnel - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

CityLink - Escalated quarterly by the greater of quarterly CPI or 1.1065% (being 4.5% p.a. as a quarterly compound rate) for the first 15 years, then quarterly by CPI. This is subject to a cap of annual CPI plus 2.5%, which cannot be exceeded. 

Pocahontas 895 -  Fixed rates until 2017 and then escalated by the greater of CPI, real GDP or 2.8% p.a.

495 Express Lanes - Dynamic, no cap. 

Finally, an interesting interview with Transurban CEO Scott Charlton, reported in Business Spectator has him talking about the extension of concessions, and the payment of cashflow in dividends before reducing debts.   He talks of combining into one back office for all Australian operations.   He mentions the interest in applying dynamic (demand) driven pricing into Australia (which isn't possible under current concession conditions).  Transurban seems supportive of a shift towards more distance based tolling and shifting from fuel tax towards tolls more generally.   He confirms that Transurban isn't enthusiastic on the AirportLink or Clem7 tollways in Brisbane, but more interested in the Queensland Motorways assets.

Conclusion

Looking beyond Transurban, which has a range of assets from the remarkable to the unfortunate, one can see statistics which demonstrate some of the real opportunity costs of building major new motorways.  These being costs not conventionally seen in government procured projects.  That is seen in the financing costs, as these (and the capital asset value of the road) are largely hidden or written off, as they are seen in budgetary deficits as roads may be financed either by specific or non-specific public debt, or through "pay as you go" annual budgeting.

Large highways are expensive, they involve a lot of capital.  They depreciate, and it is through the accounts of companies like Transurban that we can see, transparently, what they cost.  The revenue they generate is clear (and it would be interesting to consider fuel taxes on top of that), and the operating costs (including maintenance) is also clear, but the big portion of costs is servicing that capital over the depreciated life of these assets.  A road isn't "paid for" until those costs are paid for, and then the long run capital cost of the road is the capital renewal cycle for it, which is a very long time.

Intelligent debate about the costs of highways, relative to other modes, cannot be had until there is more data on the relative costs of highways, compared to other private investments, and other parts of the economy.   Of the seven highway assets owned or part owned by Transurban in full operation, three make a profit and four have been making a loss (before tax), the losses are due to financing costs not been recovered from revenue from users.  One of those had a major refinancing in the past year, others have localised issues, but Pocahontas is a road that shouldn't have been built when it was, and I suspect had the project been entirely led by investors - not a government promoting the road on its own, it would have been quite different.

Some projects would thrive, Melbourne Citylink saves a fortune in time and fuel for those who use it, and has unlocked significant benefits for Melbourne in relieving congestion to and from the airport and across town.  Others would not be built.  That is how it should be.  Tolling, of course, provides a good proxy for whether a road should be built, notwithstanding the two distortions not reflected in this - the presence of fuel tax (which doesn't pay for the road) and the existence of parallel untolled routes (which get more demand than they should).  

Intelligent fuel taxation?

As jurisdictions in North America and elsewhere look at what to do about the future of fuel taxation, one suggestion has been put forward by independent transport policy advisor, Phil Carey, who used to be had of the Road Pricing Framework Division (when it existed) at the UK Department for Transport and previously led the transport policy review for the Prime Minister’s Forward Strategy Unit.

It was circulated by the RAC Foundation (not prepared for it), and is another cut on the options available to the UK government for reforming vehicle taxation. 

The report is here, below is a summary of the key points.  Essentially, it is a way of applying the technologies available for road pricing, but in a way that uses fuel duty to affect behavioural change.  The philosophy behind it is described in the executive summary:

rather than trying to levy an extra charge on reluctant drivers, the flexibility of fuel duty means the government could instead go down the easier route of offering a rebate: less fuel duty to pay if the vehicle has been driven on less congested roads. This aligns well with the current focus on  behavioural economics, i.e. rewarding people for desired behaviours. If the numbers are to stack up for the Treasury, fuel duty would clearly have to rise to better reflect the costs of driving in congested conditions. However, almost all drivers would then get some rebate – modest in cities, potentially substantial in rural areas. The net effect is a more finely-tuned ‘intelligent fuel duty’ (IFD), collecting a fairer charge based on how motorists actually drive, and acting in a much more economically efficient way.

Proposal

Fuel duty should be increased so that in real terms it charges at a level equivalent to a congestion charge, but all vehicles can choose to be equipped with devices that enable them to claim a rebate for not driving at peak times on congested roads.   Those that do not get equipped, would pay the full price.

Fuel duty is, in effect, pre-payment to use roads, so the rebate system would be rewarding the use of roads at times when the full duty should not apply.  

"A simple, well-publicised banded structure assigns different levels of rebate per km driven on different types of road at different times; there is no discount for driving on urban roads at peak periods."

It becomes a reverse congestion charge, so that motorist would know they would get a greater rebate driving in the off peak.  The technology used is not detailed, but could involve a smart phone linked to the vehicle, or a bespoke GPS device.  What would matter is that it was able to identify driving outside the charged times and roads, as long as it could do that, then the discount would apply.  

Hypothetical fuel duty rebate rates

The report contained the table above, and several others as samples of how it could work.  As you can see, at peak times, motorways and urban roads may be deemed to be "congested" and see no rebate, but rural routes would have a reduced one.  Whereas mid and low charge periods would have various levels of rebate built in.   Of course, this is just a concept, and alternatives may suggest a minor rebate for motorways over urban roads, to encourage traffic to use roads at peak times that are better suited for it.

Principles

The key points of the proposal surround the weaknesses of fuel taxation, and the difficulties of introducing any new forms of road pricing, largely due to the political toxicity of the issue.  His key points are:

- It is unfair to keep increasing fuel tax in a way that bluntly adds to charges for all motorists, regardless of where and when they drive. "At a typical average fuel duty plus VAT cost of 5 p/km, rural driving on quiet roads ends up paying far more than all the costs it conceivably imposes. In fact analysis shows that at least 70% of all driving brings in more revenue in fuel duty than all the identifiable costs it imposes in congestion, pollution (including carbon) and accidents".  Indeed, some would debate that the costs are that high, but the key point is fair.  Increasing fuel taxes continues to overcharge the many, and undercharge the few, if one goal is to reduce congestion;

- He notes the advantages of the "Road Ahead Group" Brian Wadsworth proposal to reform Vehicle Excise Duty, but that it leaves fuel duty alone.  A point that I share.  Noting "At present we are caught by the  Treasury’s understandable desire to protect the current attractions of fuel duty and to target carbon reduction, and the political wish to avoid anything that smacks of extra charges for using roads. The result is paralysis in the face of the congestion challenge."

Problems

• The proposal rewards off-peak driving or driving on uncongested roads.  There would be some controversy about motorists who have filled their tanks, pre-paid at the full rate, but drive only occasionally, as they would only be "rewarded" if they drove to use up the fuel in their tanks.  In effect, it penalises occasional motorists because it may be some weeks or months before they get the rebate.  Given there is likely to be a cost to be equipped to facilitate the rebate, it imposes an additional cost on those users (although this could be overcome by some sort of subsidy).
• The long term strategy for such a rebate is unclear.  The long term issue of fuel efficiency isn't addressed, as those with the most fuel efficient vehicles still pay less, and those unable to afford such vehicles pay the most.  It certainly doesn't address the sustainability of revenues from fuel taxes.  Over time, rebates would need to be adjusted, and hybrid/alternatively fueled vehicles would face quite different incentives.
• There is a considerable amount of central government mandated technology and planning required, as roads would need to be designated as congested at set times on a case by case basis for this to be most effective.  This could be delegated to local authorities, but does contain risks of information being wrong if it is centrally managed.  
• Users would complain if things went wrong, so you would face considerable expense from "customers" seeking money back.
• Foreign vehicles would be a complication, as there are issues under EU law about not making this available to such vehicles on an equivalent basis (although there is no big reason to say no to offering it to foreign vehicles).

Then there is commercial vehicles, which are excluded from the proposal in theory, but in practice would face a real difficulty because fuel duty reform of this kind would necessarily have to include diesel.   So it would be wrong to not raise diesel the same as petrol (especially given the environmental impacts), but that would mean including all vehicles in the rebate scheme.  Not a bad thing in itself, but it is hard to see how the line can be drawn based on fuel.

Conclusion

I like the concept in principle, as it is one way of trying to address the toxic politics of road pricing, but delivering significant potential benefits in terms of behaviour change.

However, the prospects of increasing fuel tax to the level needed to create serious behavioural change are daunting, and I doubt it could be announced in advance and be politically acceptable.  We are talking here about a doubling of fuel duty, in effect, and telling all motorists to relax, they only need a government mandated device to get a rebate from it.  I do not think this is substantially less toxic than suggesting the alternative of offering people the option of paying less fuel tax by paying per mile.   

What is behind it is intelligent and economically sound, but the need to address the sustainability of fuel tax means that it would be better to consider how to approach some replacement of that tax, rather than find ways to increase it and then offer a rebate.

The congestion relief benefits from this proposal are potentially high, as they are for simply moving to road pricing, but it is because of the increase in fuel duty that this happens.

Furthermore, it has the more fundamental problem of needing to be centrally managed.  One of the object lessons of major IT projects in the UK is that they are to be avoided, for the risks involved in terms of cost, scope creep and poor quality procurement are considerable, and are not born by those making the decisions.  Far better in my view to look to devolve responsibility for these issues from central government to a set of highway companies who can best make these tradeoffs.  For this concept to work easily, it would see city centres or major corridors deemed "rebate free" at certain times, and the debates would come as to what those times are and what corridors it means.  This opens up a Pandora's Box of arguments that are impossible to resolve centrally, and which local authorities will be incentivised to adjust for their own ends.  I would be sure many would simply say their entire cities get the rebate, then the issue of hypothecation (which this proposal seeks to avoid) rears its head.  What incentives are there for local authorities to get that right, when there are political and business access issues that will, initially, be very loudly resistant to the concept.

If it did not target with that degree of precision, it would give rise to all sorts of accusations of being too blunt.

In that light, I prefer an approach that doesn't fiddle with fuel tax, but offers motorists options to pay per mile, and get a proportionate refund in fuel duty.

It does not address congestion, but starts to offer an incentive to move away from fuel duty to paying directly for road use, which in itself will influence demand. Over time, it would have to include some compulsion (i.e. all new vehicles automatically paying according to distance), and then it starts to be able to include some modest variations in charges based on time of day.  It has the advantage of a relatively low profile introduction, so has a greater chance of being accepted, and being able to protect against the erosion of fuel tax revenue.  It doesn't deal with congestion, but Brian Wadsworth's proposal (PDF) could, in parallel with this, contribute towards an incentive to avoid peak driving.

I can envisage a system whereby motorists opt in to paying by distance on all roads (perhaps cheaper on motorways than other roads, to reflect relative infrastructure costs), and get a proportionate refund in fuel duty, but also can earn a rebate on vehicle excise duty based on when and where they drive.  Both would be optional, but such a proposition could be made compelling for many motorists (although the Wadsworth proposal would need tweaking to incorporate HGVs in a way that is fair and does not breach EU law).

The key is for it all to be voluntary to be acceptable to enough people, and for trust to be built up that the new voluntary options actually involve getting some value from a system that most perceive simply rips them off.