Friday 2 December 2011

National road pricing in the UK - a different approach

The argument for road pricing in the UK has long been compelling. From the Smeed report in the 1964 which said that charging vehicles according to use, varying by time and location could generate up to £150 million (in 1964 values), to the 2004 Road Pricing Feasibility Study which concluded that a national road pricing scheme could generate over £10 billion p.a. in benefits, policy makers and (in private) politicians have been convinced of the merits of road pricing.

The difficulties of road pricing at first were technical. Even though the Smeed Report made leading edge proposals to develop technologies that had barely been conceived of at the time, road pricing was, until the 1990s, about manual tolls. Given most of the benefits that have been identified come from reducing congestion, that obviously would never work.

Modern computing and telecommunications technologies changed all this. So road pricing in the UK went through four distinct phases:

1. Local body empowerment: Local authorities were given the right to introduce congestion charging schemes, with the unprecedented requirement to spend net revenues on local transport schemes. Durham was first (with a tiny historic centre scheme), closely followed by London (where Ken Livingstone was elected Mayor promising to introduce congestion charging). Edinburgh foolishly asked the public about a more complex scheme, and in a referendum saw 74% vote no. Then despite studies in several cities, interest waned. Local authorities decided politically that it would be too unpopular to charge motorists more, even if the money raised could be spent on improving transport networks.

2. Lorry Road User Charging (LRUC): Treasury through HMRC started a programme to introduce a national road pricing scheme for lorries. They were to be charged on all roads, by distance. Countervailing this would be a reduction in annual vehicle excise duty and fuel tax. The initial focus was to raise revenue from foreign vehicles, but the business case started to fall apart when the volumes of foreign vehicles turned out to be small, and there were grave fears that the scheme would face a massive cost blowout. Issues around the procurement approach and risks of complex large government led IT projects saw the scheme scrapped.

3. National Road Pricing/ Transport Innovation Fund (TIF): The official line was that LRUC was being rolled into a national road pricing programme that would include cars. However, the LRUC programme was suspended and the programme shifted to the TIF. TIF essentially linked increases in local government transport funding to an introduction of congestion charging. Councils were being incentivised to introduce local road pricing schemes. The thought was that if several major cities introducing congestion charging, it will be more commonplace and be a step forward towards national road pricing. However, few local authorities were up to it. Manchester’s authorities were convinced, but foolishly decided to hold a referendum which saw nearly 79% vote no. Again Mancunians didn’t like what looked like central government telling them they had to swallow a new tax in order to get money for an improved tram network, especially at the same time as government was starting to bail out financially troubled banks. In the end, the TIF programme wound down as the Manchester failure was followed by Cambridge suspending interest. A online petition against road pricing “signed” by 1.8 million people showed the depth of feeling against road pricing by this time.

4. LRUC Mk. II and tolls: With the change in government after the 2010 election, the Conservative/Liberal Democrat coalition agreed to a modified version of LRUC, which looks like being a version of the time based vignette systems that operate in some countries on the Continent. Investigations into that option are underway now, but appear likely to involve a cut in annual vehicle excise duty in exchange for lorry owners having to pay an annual, monthly, weekly or daily charge to access at least the trunk road network. Meanwhile the government is considering the use of tolls to help fund new roads where viable. Not exactly radical.

It is fair to say that the idea of national road pricing in the UK is political poison. The chief problem is that motorists don’t trust government to treat them fairly. The UK has one of the highest fuel taxes in the world, and up till this year would increase fuel taxes above the rate of inflation since 1993. This extra revenue was not used to improve roads, in fact the backlog of major road projects (identified by the RAC Foundation in the “Keeping the Nation Moving” report) is as much as £10 billion, whilst potholes have become commonplace as maintenance gets neglected. In such a climate, motorists are suspicious that a new road pricing system would mean they pay more, and not get any reductions in existing taxes. That is one simple reason why most politicians do not talk about it. It doesn’t help that the main reason given for considering road pricing is to reduce congestion, which, rightly is interpreted by motorist as meaning “you’re going to price me off the roads”.

A few more toll roads is a good thing, and there is certainly scope for that. The proposed LRUC vignette system will generate a small amount of revenue from foreign lorries and be a very small step forward, but no more than that. Furthermore, no city will introduce a new congestion pricing scheme in the next few years. Even London has recently closed the Western extension to its congestion charging scheme, and shown little real interest in any expansion of the current scheme. I propose a very different approach.

Pricing is a tool used almost always by commercial entities selling goods and services. It isn’t just used to manage demand or recover costs, but sends signals to service providers as to where to invest. The price signal informs both consumers and producers, whereas the main emphasis has been on the former, not the latter. It is also best established as a dynamic instrument , so that it varies as demand (and supply) changes.

However, roads are not provided in a commercial environment in the UK. Trunk roads are the responsibility of an executive agency of the Department for Transport, other roads are up to local authorities. The investment programmes of all of these are subject to political decisions, as are the funding programmes. There is virtually no link between revenue from road users and what is spent on roads. There is no customer relationship between these agencies and motorists. It is a classic central and local government delivered monopoly. Not a structure conducive to either the efficient setting of prices (or responses to prices and demand) nor to offering a service to customers.

That’s why I propose (as summarised in today’s CITY AM newspaper in London) that motorways, trunk roads and A Roads in the UK be transferred from such bodies to commercial companies, with shares held by central government and local government. These arms length companies would initially be funded through an independent purchasing authority (which would be responsible for a set amount of revenue from existing motoring taxes) which would buy road services on behalf of motorists. That authority would prioritise buying well maintained roads, then buying improvements that are valued the most by motorists. The road companies would be independent from politicians and would bid for funds from the funding authority.

However, what about road pricing? Well the road companies would be entitled to commission new roads in partnership with the private sector (which could offer finance) that could be tolled, providing an independent source of income. More importantly, road companies could start to contract directly with motorists. That would involve motorists being able to get refunds from at least part of existing motoring taxes, and paying directly to the road company, probably by paying according to distance, weight, time and location. As the roads companies would seek to receive revenue directly from users rather than a bureaucracy, they would target regular users first, like lorry and bus fleets, taxi fleets and others. There may be multiple service providers selling road pricing packages, but any motorist would only need one contract. The Irish model of multiple companies offering compatible tolling accounts to use on different roads could be one approach. Perhaps new vehicles could be sold with the default option of a road pricing contract offered by the retailer.

What are the benefits? For a start no large government IT programme. Road pricing would be introduced by commercial companies incentivised to get it right, to be operationally efficient and to be customer oriented. Secondly, it would be customer led. As customers would be opting into road pricing, they would do so only because they perceived a benefit in doing so. That could be accelerated if government continued to raise existing taxes. Thirdly, it would enable pricing to inform investment as well as demand. It would be driven by companies seeking to optimise service to road users, not only in traffic management but investment.

Yet there are obvious disadvantages. Until very large numbers of vehicles are on road pricing systems, congestion management will remain difficult. Although nothing about this option would stop congestion charging being introduced on specific roads. There may be concern about monopoly pricing, yet there could be regulatory oversight to avoid such risks. Finally, it would prove difficult to be certain that road pricing would develop as policy makers expected.

However, what is the alternative? The only way I see road pricing advancing significantly in the UK is for motorists to get something in return. It cannot be on top of existing charges, primarily because these are already more than three time what is spent on the infrastructure and above reasonable estimates as to externality costs. I cannot see central government being able to set up a customer service payment system for over 30 million vehicles, dynamically set and adjust prices on the entire road system efficiently or effectively. It doesn’t do it for airlines, telecommunications companies, supermarkets or even fuel, electricity or gas.

Ultimately road pricing is about moving roads from being seen as the tragedy of the commons to being like a service that road users buy, and decide whether or not to use (or when or where to use) based on price, service quality and their alternatives. In the UK, I believe that the size and complexity of doing this is such, that the only way of doing it effectively and efficiently, is to break up the task and to incentivise those who run roads into encouraging motorists to want to pay for road use that way.

Thursday 1 December 2011

Distance charging replacing fuel tax?

Only six years ago talk of road pricing in the US was rare beyond conventional tolls and HOT lanes. Now the big talk is about replacing fuel tax with some form of road pricing and today it is Oregon that has so far led progress on that front with its trials of a system that would charge per mile, and refund fuel tax at the petrol pump.  Such a system would be ideal in principle for a transition away from fuel taxes.

Oregon is progressing investigation of the introduction of a distance tax on electric cars, as a first step toward dealing with the long run erosion of fuel tax revenues because of the growing efficiencies of the vehicle fleet. Oregon sees the obvious first place to start being vehicles that don’t pay fuel tax now, followed by those that pay much less than others (i.e. plug-in hybrid vehicles).  The other point being that it need not worry about the complication of introducing a refund for fuel tax for vehicles that either don't or hardly pay any fuel tax now.   Office of Innovative Partnerships and Alternative Funding Manager Jim Whitty of Oregon Department of Transportation is now recognised in the US as being one of the leading officials in driving this programme at the state level, and the efforts there are being keenly watched by states as far apart as California, Minnesota, Texas, Florida and New York

What is driving this? Quite simply a combination of the political unacceptability of continually raising fuel taxes, and chronic levels of underinvestment in much of the US road infrastructure. Maintenance, let alone major capital works are becoming more difficult for many states as they face declining fuel tax revenues, not just because of the economic situation, but because the vehicle fleet is getting more fuel efficient.

You might think the obvious response is to increase fuel tax, but this does not provide a fair answer for electric vehicles or hybrids, which use the road network but may pay half as much as conventional vehicles. It also doesn’t take into account the level of antipathy towards raising fuel taxes in a country where a significant proportion of voters do not trust politicians to spend such taxation wisely.

Yet distance charging obviously provides a platform with the potential to do more than just charge a flat rate for road use. It also would allow variation of charges by time and place, ultimately meaning congestion pricing could be introduced where viable. However, no US state is talking that far ahead. The acknowledgement is that while the potential is there to do truly efficient road pricing, for now the interest is in replacing fuel tax. The question I have is not why the US is having this debate, but why the idea of replacing fuel tax remains alien to Europe (where road user charging to date has always been in addition to fuel taxes), when it faces the same challenges of declining revenues due to vehicle efficiency. Is it just that European motorists tolerate very high fuel taxes more than Americans?

Australia is starting to have the same debate as the USA, and it is not driven by revenue problems per se, but the distortions inherent in raising more revenue from fuel tax.  Australia has barely noticed the global financial crisis as its economy has been buoyed by high demand for minerals from China, it has low public debt and its infrastructure is in good condition.  However, urban congestion in major cities has been getting more serious and whilst its three largest cities all have several toll roads (mostly using electronic free flow technology) that serve as major arterials, and extensive rail, bus (and in Melbourne tram) public transport networks, it is becoming clear that future revenues may be better obtained by a transition to network based distance charging.

Why?  Well besides the slow decline in revenues from fuel tax due to growing vehicle efficiency, it is a recognition that introducing congestion charging in new world cities the London, Singapore or Stockholm way is likely to be very limited in scope.  The reason being that travel and commuting patterns are not dominated by suburb-CBD movements, but by a massive cross cutting series of trips around, within and across the metropolitan areas.  A downtown congestion charge in central Melbourne would relieve traffic congestion in central Melbourne and on its approaches, but do precious little for most of the city.   To deal with wider congestion will require a network approach whereby all vehicles in a city pay according to the roads they use, not just for crossing an engineering driven cordon.  The key risk with cordons being the distortion they present for those making a short trip across them.

Furthermore, Australia recognises the value of shifting from fuel tax to distance charging for trucks, given the heavy loads and vast distances travelled on a network that, outside the cities has relatively low densities of usage. 

The most recent tax discussion paper from the Australian Federal Government raises both congestion charging and heavy vehicle road user charging.  I expect the Australian Federal Government to leave congestion pricing to the states, and hope they make the first move on doing what they can there, but for a bigger push to come on heavy vehicles across the country.   It is only the heavy vehicle angle that offers a chance to extend into light vehicles including cars in due course.  The appetite for localised congestion pricing schemes in major cities is not high, and if done would likely require a multi-zonal approach to try to avoid the distortions inherent in a single cordon type system.

Still, the important thing is that Australia is recognising fuel tax is achieving diminishing returns from road vehicles, and so the need to have a long term sustainable revenue source from road users is starting to come together with the long recognised economic arguments in favour of road pricing to ensure all heavy vehicle users pay their fair share of road infrastructure costs, and to help manage congestion.  Hopefully they will also understand the other half of the benefit of road pricing - better signals towards where investments in roads should go.