Monday, 26 November 2012

Reforming Britain's highways - my view and CBI's view

As announcements come closer as to how the UK government is going to reform the highway sector and allow for greater levels of private investment, the Confederation of British Industries, in association with Aggregate Industries has released a report calling for radical reform of the governance of Britain's highways network, and also proposed introducing road pricing to boost revenues, but also to somewhat replace existing charges.

Coincidentally, I made very similar proposals myself to a seminar here in London a couple of months ago

A new deal for British motorists

I suggest the following:
-  The Highways Agency be reformed into a state owned enterprise, required to make a return on capital, pay taxes and have the stated purpose of providing services to road users;
-  Reform the multitude of local authority road operations into similar road companies, incorporating at least all A and B roads;
-  Establish a highways regulator (OfRoads) to purchase highway services on behalf of motorists, prioritising what motorists prioritise based upon both economic return and quality of service (e.g. maintenance above major works, high value low cost improvements in capacity and safety);
- Hypothecate a proportion of motoring taxes (Vehicle Excise Duty and Fuel Excise Duty) to OfRoads to give it a guaranteed stream of funds, based at first on a minimum of 95% of the previous year's total central government funding towards roads, before becoming a set figure of tax;
- Require all highways companies to bid for funding from OfRoads every four years based on a programme of maintenance and upgrades, which will be appraised based on cost/benefit analysis and priorities for motorists established by OfRoads.  Funding will then flow based on the highest value expenditure identified in the programmes.  Programmes can be expanded if government chooses to increase the motoring tax revenue directed to OfRoads;
- Empower all highways companies to enter into PFI or privatisation deals with private companies to develop or manage infrastructure, realising the capital value of their assets to be reinvested in the network;
- Empower all highways companies to toll any new capacity or allow the private sector to acquire highways and toll any new capacity;
- Empower all highways companies to contract directly with road users on existing roads, to pay tolls directly in exchange for refunds of motoring taxation up to a set level, as approved by OfRoads.

Over the longer term, the private sector would look after more and more parts of the road network, where it can make a difference and where there are major capital works that it can finance.  Furthermore, the roads companies would be incentivised to contract directly with motorists and would offer toll packages that are attractive to major users, progressively eroding revenues to government used to pay for roads.  OfRoads would shift from being a purchasing agency to being regulatory.

Over time a tipping point might be reached, especially if the government freezes motoring taxes and real revenues decline, as highways companies would start to be more confident about pricing people directly.  At a certain point it may be that all newly registered vehicles are exempt from motoring taxes and pay highways companies (or third party highway service providers) directly.  Eventually, motoring taxation can be drastically reduced, with vehicle excise duty reduced to an administrative fee to cover the cost of maintaining the registration system, and fuel excise duty at the EU minimum level, which could be argued in part as being a carbon tax and part remaining a tax for government revenue (given that the current level of 59p/l is over five times what is spent on roads).   Meanwhile, tolls would be set at prices to recover the long run capital costs of roads, and include peak charging for congestion and off-peak charging to get better utilisation of the network.  If highways companies were also responsible for emissions from their property, they may also differentiate pricing on the basis of emissions ratings of vehicles (something existing taxation doesn't do well on the basis of usage or exposure to emissions).

What it does, is provide a transitional process whereby governance of highways is shifted onto a basis whereby the provision of roads is directly related to the usage and what people pay.   It provides a medium term path towards national road pricing, on a voluntary basis which will build trust with road users, and give road companies a chance to focus their spending on high quality maintenance and network management, rather than responding to political demands for high profile new capital works.  However, it also allows for high value major capital improvements to be developed on a commercial basis, while also ensuring pricing is used to manage demand.

CBI proposes regulated utility model

It proposes:

- A Regulated Asset Based (RAB) model of utility management for the highways sector whereby an "independent, price-setting regulator oversees investment from private operators for stable, capped returns";
- "It could provide a secure revenue stream through user charging – created initially by reclassifying vehicle excise duty but with the flexibility to explore other mechanisms, such as tolling, once established";
- "a roads regulator would champion standards for motorists and ensure value for money through its licences and capped charges".

The report emphasises the benefits that major road improvements have generated, although one may argue that Aggregate Industries has a vested interest in more road building, the primary case made in the report is sound.   Some of the key points include:

- Providing a long run sustainable revenue stream to provide confidence for investors;
- A clear pipeline of road projects would provide certainty on future requirements and allow investors to plan;
- System needs to be affordable with changes not having a disproportionate impact on frequent users;
- Any charging mechanisms need to be interoperable;
- A minimum service quality should be guaranteed;
-  A network audit should be carried out so that the quality and condition of the network is clearly understood on a common basis;
- The Strategic Road Network should be redefined and expanded;
- Current motoring taxes should be reviewed and a new charging mechanism adopted.

The most interesting recommendation on the latter front is the proposal to redefine Vehicle Excise Duty (VED) as a road user charge, and using its revenue as a dedicated source of funds for highways funding.  Given the total spending by central government on roads is more than the revenue generated by VED now, it would be an accounting exercise to do this.  Although I question exactly how a tax on owning a vehicle can be a sustainable source of revenue for roads, compared to that on using roads.  Yet I understand that Treasury will fight through thick and thin any claim on fuel excise duty for road funding.

The New South Wales State Financial Audit claimed that the state's equivalent of vehicle excise duty imposed a deadweight economic cost on the state of US$492 million per annum, and indicated that a shift to distance based road user charging could eliminate that cost and generate significant economic benefits through reducing congestion.  It would be most interesting if a similar piece of analysis was undertaken for the UK.


Great minds think alike, although I think my approach is slightly bolder, yet perfectly achievable.  What both proposals require is a long run commitment to a guaranteed funding stream for highways and structural reform of the sector.

In a few weeks time it is expected there will be a major announcement on highways reform in the UK.  I will not be surprised if some of the ideas I have outlined above are a part of that, but I will be surprised if they are embraced to the extent I think is necessary to deliver reform across the sector (as I think government will only address the Strategic Road Network - the roads governed by the Highways Agency).  

The really big leap forward in my view, will be to develop a system that engenders trust, so that those paying motoring taxes see that value is derived from them.  The clearest and most economically valuable way to do that would be to encourage long run capital investment in maintenance and recovering the most potholed and crumbling roads in the UK, that includes not just tarmac, but signs, lines, traffic signals, lighting, overhanging greenery, litter and barriers.   I believe it will take a decade to do this properly, whilst also undertaking an extensive programme of targeted improvements on intersections and corridors.  Do that without raising motoring taxation (with a few new tolled routes), and there may be a chance that more can be done on pricing in due course.   

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