Thursday 8 May 2014

UK Government to convert Highways Agency into a state owned company, but no change to road taxation

Whilst it is not strictly about road pricing, reform of management of the national highway network in England is of relevance, if only because of the profound absence of any discussion about how charging might be linked to the funding and management of roads.

What has been announced is the corporatisation of the Highways Agency, the executive agency of the Department for Transport that currently manages England's strategic road network.  What this means is that the new Highways company (let's call it England Highways Ltd.)  will no longer be a government agency, but will act as an autonomous company owned by the state.

Details of the reform are in this document, which is the government response to consultation on its plans and summarised in this press release.

Key components of the reform

-  A new company is to be established, with the Secretary of State for Transport listed as sole shareholder, to vest the contracts, property and staff of the Highways Agency;

- It will be empowered to manage, operate and maintain the strategic road network;

- The framework for governance will comprise Legislation, a Licence, a Framework Agreement, a Road Investment Strategy and Articles of Association;

- A Road Investment Strategy with a "long-term funding guarantee, a performance specification and a defined funding and investment plan" will be established.   This means there will be a commitment of funding over a set number of years (approximately seven years);

- There will be environmental performance responsibilities and incentives to improve environmental performance;

- The company will be required to co-operate with local authorities, emergency services and "other stakeholders";

- The public transport users' representative quango "Passenger Focus" will include a "Road User Focus" unit, and the Office of Rail Regulation will include a "Strategic Road Network Monitor" to ensure the new company  "delivers its commitments efficiently and effectively";

-  Legislation will amend planning powers to make the new company a statutory consultee for relevant planning applications.

There will be no powers for the new company to toll, as it will be funded from central government through its Road Investment Strategy guaranteeing state funding for a set number of years.  From that the company will implement the strategy, but its role in informing the strategy will be advisory.  So whilst it has independence and accountability, the decisions on what gets funded will still be undertaken external to the company.   Indeed, no mention has been made of private finance, indicating no push for PPP based financing, but rather a more traditional Pay As You Go model.

These steps are significant and and a welcome step forward to help transform England's roads (bear in mind devolution means Wales, Scotland and Northern Ireland remain within bureaucratic models, although motoring taxes are all collected centrally).   Before I get into what is missing, it is important to recognise what is right.

What's good?

The company model will enable greater autonomy in day to day decision making, in hiring and contracting.  It would allow more flexibility in considering how to respond to the needs of users and to create new efficiencies.   The greater flexibility the better, although it will work only if efficiency savings are reallocated into new work, rather than being banked as a saving by Treasury.

What it should also mean is being distant from interference in day to day management matters from the Department for Transport and Ministers.  Its decisions should be based on delivering specific outcomes around safety, congestion/road user conditions and the environment, and making wise priority judgments around them all.   The Department's role should be one of policy and advising on funding and safety, not in directing the management of infrastructure.

The perhaps bigger benefit is having a longer-term funding settlement.  Being able to have certainty for seven years around funding will mean contractors have more certainty about capital investment in equipment and training investment in staff that requires many years of work to generate a return.  Whilst seven years is not really enough, it will make a difference and ought to allow contractors to make bids that combine this certainty with longer term savings.  There should be ample scope for the new company to be innovative in contracting to realise efficiencies from this, although it may be expensive and complex to get started with this.

England Highways Ltd. could be a centre of excellence for highway management and develop a new culture of service delivery that takes from the success of the Highways Agency and goes forward, so that the interests of road users come first, and efficiency and safety are at the core of the company's culture.  While it does not make it into a regulated utility, it does give it very much of the status of a utility.

What needs further work?

Of interest is the decision to establish accountability for the company with the Office of Rail Regulation (ORR) and Passenger Focus, although the choice of each body appears to be a compromise of funding rather than developing fit for purpose agencies.  ORR as a railway regulator is not exactly experienced in managing the capabilities and performance of a road controlling authority, and Passenger Focus is not used to considering the interests of motorists (who outnumber public transport passengers by a long margin).

The ORR should be renamed the Office of Transport Infrastructure Regulation, rather than have the highways network tacked onto it.  It might even incorporate the economic regulatory function of the CAA. After all, the roads carry more freight and people than the railways do, and so shouldn't be tacked onto it.   ORR is meant to effectively judge the performance of the company in terms of efficiency and effectiveness, but it isn't deciding on its funding so its influence will be more limited.  It isn't clear what poor performance could mean for the company or its board and management.

Given that England Highways will be responsible for a network used by autonomous individuals and a wide range of businesses, rather than one used by a predefined small set of operators (like Network Rail) it is a very different beast in terms of what it can control and be responsible for.  ORR will need to be quite different to do this effectively and fairly.

Passenger Focus's ability to look after the interest of roads users, be they car commuters, leisure and business motorists, lorry operators, coach companies, taxi companies, rental car firms and the like would seem to be quite different from that of those who ride buses and trains.  For a start, there still remains a vast divide between motorists and England Highways.  They don't buy a ticket from them, and their use of its network may in many cases be indistinguishable from other road networks.  How many motorists driving on the M40/A40 into London know when it goes from being a national highway to a TfL road?  However, bus and train passengers tend to know when and where they took a ride.   Do those consigning freight or buying coach tickets think they have a relationship with the roads they travel on?  Again, it seems a rather cheap choice to have this body look after road users.   Given it wont have a role on local roads without the express permission (and funding) from local authorities, this means it will be useless for the majority of road trips in England.  It's truly absurd to have a body set up to represent road users, only for the organisations responsible for supplying roads able to choose whether to interact with it.

It's unclear whether the new company will be able to acquire land for future new highways or highway improvements and gain the benefit of renting such land until funding is obtained for the project.  This would be one way it could achieve long term efficiencies, and also plan far into the future, rather than have to spend significant sums on acquiring land at construction time or in fighting for approval with landowners that could have been bought out long ago at market prices.   It would also provide a small, but useful source of income. After all, a key asset for any highway operator will be land, it would be a missed opportunity for the Highways Company to not buy land for future widening, extensions and new corridors where such projects are likely to be needed in the longer term.

What are the big gaps?

Local roads

Local authority roads are excluded, even though their performance in terms of asset management, maintenance and being user friendly is highly variable and politics interferes extensively with the efficient management of the network. Whilst the Government has an agenda of localism, the differences between some local roads and some strategic national roads are administrative rather than substantive.  Many A roads in London carry much more traffic than half of the Highways Agency network, and it is difficult to argue that there is no national strategic interest in the A40 once it hits the boundaries of Greater London.

If there were 153 local bureaucracies looking after local telecommunications, gas, electricity and water networks, it would be considered absurd.  The duplication of management, the variations in service standards, the likely chronic lack of investment, the malinvestment, the lack of co-ordination and the scope for politically driven outcomes rather than wider professional and consumer based ones would be considerable.   The actual number of such road controlling bodies should probably be less than half that number, and perhaps be on a regional basis, at least for A and B roads.

This diversity is barely a strength, and is primarily a weakness, and it means local authorities can be captured by narrow interests that are short-term political in outlook, and of course are tied to the same short term funding cycle as the Highways Agency has been.  Few local authorities look at opportunities to purchase land to reserve for highway purposes in future, or to develop corridor strategies that plan networks.  Few use professional asset management services to prioritise maintenance.

It is purely a political decision of course, in a belief in localism, but it fails to note that local authorities don't provide most of the funds for their roads, nor do they charge road users like the government does.  There should be a single utility based framework for all roads.  At the very least, all local authorities should be required to put their road operations into arms-length companies to be subject to similar performance measurement frameworks.   It is absurd to have different regulatory regimes and funding frameworks for different parts of what is essentially the same network.

Charges and funding

Some in Treasury no doubt think that road users currently aren't charged to use the roads, considering fuel and vehicle excise duties have no relationship whatsoever to using roads, but that's an intepretation of taxes on owning and operating vehicles that suits a political perspective, rather than an economic one.  After all, taxes on fuel used on the roads are higher than for some other purposes, and taxes on energy used for electricity generation or home heating are vastly different.

There remains no relationship at all between what road users pay in fuel tax, vehicle excise duty and the HGV levy, and what is spent on roads.  There are good reasons to change this, not least because it puts a discipline on the spending on roads, but also because it starts to make it easier to consider alternatives.  It will also develop a relationship between road users and road providers that is largely absent at present.

Notwithstanding the government's complete opposition to road user charging at a national level, there should be at least an administrative acknowledgement of some link.  Australia has a similar road taxation structure, in that taxes on owning vehicles are much higher for HGVs, as a way of recovering the higher wear and tear such vehicles impose on the road network, with part of fuel tax hypothecated for transport funding to make up the difference.   It would mean the difficult decision to face up to fuel tax as not just being a whimsical tax on certain fuels, but as a tax that exists, in part to recover the infrastructure costs arising from providing a network for road users.  It need not be legally hypothecated, could be linked by calculation with approval still made by the Chancellor of the Exchequer, but ultimately efficiency will only come with funding being linked to revenue.

Until this is done, there is no hope at all of considering ways to move beyond such taxation towards direct user charging by reducing or replacing such taxes.

Relationship with road users

In the absence of direct road user charging, there needs to be a closer relationship with road users, which can be partially delivered by having a funding framework that helps create expectations from road users about what they can expect from the new company.  Instead of having a Road Investment Strategy developed bureaucratically, I would forget about the Passenger Focus and ORR roles, and merge them for highways into a new highways funding agency.  It would monitor performance, represent road users and would get a funding allocation for roads (that need not be, but could include hypothecated taxes), and would purchase maintenance and improvements on their behalf.

That would mean a direct relationship of accountability and performance based on funding, and it would mean bidding for funds and proactively considering ways to improve conditions for road users.

However, that wouldn't be worth doing without having it apply to local roads, and dare I say road funding for devolved administrations too could also be managed by this entity.  They could opt out of it by establishing their own taxes or road user charges, rather than accept those imposed by Westminster.   It has a parallel to the water industry where consumers have been incentivised to move to meters rather than paying a flat charge. 

In the long run...

This move should generate efficiencies and savings, and allow for more dynamism particularly as technology allows for more automation and communication with drivers.  However, it cannot be left to local authorities to drive innovation on local roads.  They can't.  There are too many other priorities and activities that get political attention at the local level for matters regarding roads to be anything but a second thought.  Roads get attention if they are falling apart or there is a persistent safety problem, beyond that road users don't have enough influence to make a substantial difference and local authorities are typically unable to bring together the experience and innovation necessary to make a difference. 

As for pricing? No sign of it, but you can imagine a road company being able to set up tolls on its own initiative.  So the structure may be there to move towards it, but that's it for now.  A good step forward, yes, but the UK is still stuck in political catatonia around road pricing.  That will only be broken if the issues around existing motoring taxes, the levels they are set at, what they are for and where the money gets spent get discussed.  

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