Tuesday, 26 March 2013

UK government confirms road pricing and privatisation off the agenda for now

I noted last week that the latest Budget from the UK government seemed to indicate that there will be no reform of Vehicle Excise Duty (a tax on owning a vehicle), now it is confirmed by the Transport Secretary (Minister) Patrick McLoughlin in today's Financial Times (registration needed) that road privatisation is off the agenda  (Also reported in the Daily Telegraph).

He has stated a categorical "no" to national road pricing, saying "I’m not looking at ways of taking more money off the motorists. I think the motorist has been hit hard over time".

He also said that road privatisation, whilst not ruled out, simply cannot be implemented before the next General Election in 2015.   It looks like a more modest reform is envisaged, to provide a longer term funding cycle for highways that avoids spending on roads being affected by annual budgetary cycles.  

The Financial Times report indicated:

the DfT’s options paper would focus more on finding ways to give road investment greater future certainty over capital investment and upgrades.

The "options paper" in expected in the middle of the year, and may include a more independent commercial structure for the Highways Agency, as a precursor to privatisation.

There may be more flexibility to use tolls, with the A14 project, discussed before on this blog, being the most talked about future toll road project.  


It isn't surprising that this has been shelved, as it has been clear that there is some complexity to the issue and how it was being approached.  However, it is disappointing that it seems to have to some fairly clear stumbling blocks.

It should be possible to commercialise or be well on the way to commercialising the Highways Agency, which sets it up to be partially or wholly privatised, either as a single entity, regional entities or even competing entities.  It should also be possible to ringfence funding for such a body (and to do the same for similar local authority entities), whether it involves formal hypothecation of highway taxes or not.  

However, the "elephant in the room" on policy is charging.  As much as increasing fuel taxes appears politically too difficult for now, it is more difficult to talk about tolling existing roads.

I've said before that any major reforms are going to have to involve certain key principles.  I suggest some of these are:

- Choice:  Motorists must be given the option of paying directly for road use or continuing to pay as they do now.  Only by having it as an option will there be incentives to get service, pricing and costs right.

- Link between prices and costs:  This barely exists now in the rates of VED for heavy vehicles, but needs to be a rational relationship between the long run infrastructure costs of sustaining the network and developing it, and those road users who should bear those costs.   This means charge setting being rational, but also money from direct charging going into roads (and I suggest some money from existing motoring taxes going into them as well).

- Commercially driven dimension to prices:  Not only should prices be driven by costs, but also commercial incentives to attract motorists to paying directly rather than through fuel and ownership taxes.  That's why any new entities need to be given maximum freedom to incentivise direct tolls.   That can be moderated by OFT application of competition law, to avoid excessive rent seeking by highways companies, but then if there remains choice, the risks of this can be reduced.

- Decentralisation and competition in retailing of road charging:   A national road pricing scheme should never be considered, for the same reason there isn't a national air fare system or national telecommunications fee system.  People should be able to go to different retailers of access to highways, and buy packages of services.  This means having a structure that will allow this market to develop, as it has in Ireland for toll roads.

- Respect of privacy:  Initially, those concerned about privacy would simply stay on the current motoring taxes, but new options should include ways of paying for road use that also respect this.  That must be the answer to concerns about people's movements being tracked.  However, also having some protocols around use of data on movements and respecting privacy of account data will be critical.

- Quality of service:  Most discussions about road pricing involve the "how" and "how much", with little about getting value for money.  A commercialised structure should change the culture of highways management to be service oriented, and be committed to delivering high standards of service for paying customers. Indeed, you do not need tolls to introduce this, although they will help.

Finally, there needs to be some conscious thought about what motoring taxes are form, rather than the implicit "they are just general tax revenue" presumption that Treasury has taken.

Ownership taxes, after all, impose modest barriers to car ownership, but are a third best way of adjusting for the point that fuel tax poorly reflects marginal infrastructure costs imposed by HGVs above 8 tonnes or so.

Fuel taxes can be argued as being carbon taxes, and taxes on noxious emissions, and taxes to recover infrastructure costs, as well as general revenue taxes.  It would help transparency and acceptance of reform if levels for all of these were spelt out.

Road pricing inevitably means motorists buying a service from a provider of such a service, at a price that reflects the fixed and marginal costs of that provision (plus a factor for profit or the opportunity cost of capital depending on governance structures).   It is difficult to envisage it going anywhere until the management and relationship of roads with users becomes a little closer to that of other regulated utilities.

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