Australian infrastructure lobbying group and motoring clubs call for radical reform

I reported on 27 March that Infrastructure Partnerships Australia had published a discussion paper called "Road Pricing and Transport Infrastructure Funding" which has essentially recommended a move from ownership and fuel taxes to distance based charges for road use, including mass, location and time of day components.

I have since had a chance to read the report, so that I can now give a more detailed review of the paper.  It's worth reading in its own right, at least because the way it is presented and structures the key issues is both accessible and logical.

It's notable for being a report commissioned not only by contracting sector lobby groups (who would traditionally be expected to endorse more construction), but also motoring clubs (who would traditionally be expected to endorse more construction and resist user charging).  This report is not pushing construction, and openly admits that big cities are unable to "build themselves out" of congestion, although there will be an ongoing need for new road capital investment.  It does support road pricing, and it also supports using some road pricing revenue to enhance public transport.  That is fairly revolutionary in thinking from these sorts of entities, and is to be applauded.  

It is important to note that not all Australian motoring clubs are parties to this report, but many key ones are.  It indicates a level of analytical rigour and honesty to admit that the future will be improved by measures that, on the face of it, many if not most motorists will be sceptical about.  There are plenty of motoring clubs worldwide that simply oppose user charges and call for more road construction to fix major problems, hopefully this report will catalyse some to apply some more economic rigour.

 

The report has a number of key things going for it:

- The key limitations of existing forms of motoring taxation are outlined.  Taxing ownership and fuel has major issues of equity, sustainability and lack of flexibility, which are not compensated for by simplicity.

- The benefits of user charging are made clear around network efficiency and addressing congestion.

- A range of options are looked at, and assessed at a strategic level according to some clear objectives

- A pathway of small steps to go forward with is presented.

- It has the endorsement of a number of several (although not all) motoring clubs in Australia.  Getting support from this lobby is crucial and important, given how influential it is.

It is worth reading in its own right, but I thought it would worthwhile providing a brief synopsis of the main points.   I have also included some graphics from the report, which is blatant plagiarism, but help to explain some key points.

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.

News briefs - Australia, New Zealand, South Africa, UK, USA

Australia - Transport Reform Network calls for treating highways as utilities

Supply Chain Review reports that the cross-sector lobby group, Transport Reform Network (TRN), is calling for roads to be managed more like the electricity and water sectors, as a utility.  It was commenting in the context of a lack of funds to address problematic railway level crossings.  TRN suggests that any reform needs to look comprehensively at ownership and fuel taxes as well as tolls,  it is more concerned that talk of road pricing isn't about "bolting on" a solution to existing structures, but is part of a more comprehensive reform of highways across Australia.

This is quite enlightened and actually far beyond how most commentators, lobbyists and governments think of roads.

New Zealand - NZTA enforcing tolls against recidivist violators

The NZ Herald reports that the New Zealand Transport Agency (NZTA) successfully enforced a prosecution against a man who failed to pay NZ$5000 (US$4109) in tolls on the Northern Gateway toll road north of Auckland (the only state highway toll road in the country).  

Robert Masaberg was convicted in North Shore District Court of 20 charges of failing to pay a toll and was ordered to pay $1156 in fines, court and prosecution costs.He owes $5181 in unpaid tolls for the Northern Gateway Toll Road, unpaid administration fees and additional costs connected with attempts to get him repay his debt.

It was reported nearly two years ago that no one had been prosecution for non-payment, it is clear this policy has changed.  Three other prosecutions are to be pursued for evaders.   NZTA says the non-compliance rate for the toll road is 4%, which after four years of operation remains perhaps higher than would be expected.

South Africa - Times reports on allegations of poor practices by SANRAL

The Sunday Times of South Africa reports on a court case that claims the South African National Roads Agency Limited (SANRAL) has implemented the Gauteng toll system unlawfully, and in a way that is "disproportionately and unjustifiably expensive".  It undertook a three month investigation that raises questions about procurement practices that seem to favour certain suppliers, including a consultancy (TolPlan) that it claims has a vested interest in the promotion of projects as it works on the feasibility studies, tenders for development and engineering work on the projects.   It also claims that Kapsch won the tender for the toll system based on a minimum level of "black empowerment" shareholding of the firm set up for the contract, but has bought out most of that black shareholding (and will receive more revenue as a result).   Noting that the Kapsch led firm will receive around 25% of the tolling revenue (which if true, is comparatively high).   

The story is that it is a "cozy club" which implies a potential element of either corruption or sloppy mismanagement by SANRAL.  SANRAL CEO Nazir Alli admits that it "looks" like Tolplan had a conflict of interest by adjudicating on tenders and then working on the projects themselves, and another manager noted that SANRAL accepts consultancy recommendations "99%" of the time.

Clearly allegations of this kind raise opposition to tolling in the country, if the sense is that those promoting tolls are doing so out of personal financial interest.  The more that looks like being the case, the more damage is obviously done to plans to expand tolling the country, and damage both to SANRAL and those companies which engage in such practices with full awareness of what is going on.

UK - MP suggests tolling road to pay for maintenance

Whilst government considers reform of the highway sector, the Bournemouth Echo reports that one MP has floated tolling an existing road, that needs a £26 million (US$39m) major repair which is currently unfunded.  The MP is Chris Chope, who represents Christchurch and is from the Conservative Party. The road is the A338 Bournemouth  spur road, the main road from the east and north into the city.  The idea has been scorned, no less than because it would mean motorists paying to use an existing road, and risks substantial diversions of traffic onto parallel routes or dissuading visitors altogether.

USA - Pennsylvania - fully electronic tolling open option for congestion pricing

The self-styled "liberal" news-site Keystone Politics comments approvingly about the Pennsylvania Turnpike Commission's plan to convert manual tolls to fully electronic tolling, saying the key advantage (beyond removing people from "dehumanizing" work) would be to allow for higher tolls at peak times, to reduce congestion and encourage public transport usage.  The plan is to replace all toll booths over five years, and frankly the sooner the better.  

USA - Texas - toll tag options

The Waco Tribune has a useful article on toll tag account options in Texas.  It outlines how there are three toll road authorities in the state, each offering toll road accounts that are effective on all toll roads in Texas (TxTag, provided by Texas DoT. TollTag, provided by North Texas Tollway Authority.  EZ Tag, provided by Harris County Toll Road Authority.  It describes how non-tag toll prices can be between 33-50% more than tag product prices.  

UK highway reforms split on road charging

I've written extensively about proposals from the UK Government to restructure and reform the highways sector.  

The emphasis has been on the strategic road network for England - the network of motorways and major highways managed by central government through the Highways Agency (highways in Wales, Scotland and Northern Ireland are the responsibility of the devolved administrations).  The purpose has been to find ways to get more investment in improving the network, both through greater efficiencies in potentially restructuring the Highways Agency into a more independent commercial enterprise, and to attract private investment into the network.

However, whilst it would appear that the objectives are clear, there are divisions in government about to how to progress them.  A recent Financial Times report indicated that it is explicitly about road charging, with the Chancellor of the Exchequer (no doubt backed by Treasury) advocating allowing tolls to be introduced on existing motorways, whilst the Prime Minister wants nobody to be "worse off" (i.e. nobody should pay more than they do now).  

The fundamental problem is clear - how does the Government get more capital spending on roads?  Given the tight fiscal situation, there is little appetite to expand government spending on roads beyond what has already been committed.  Similarly, the political cost of increasing existing motoring taxes (none of which have any link at all to what is spent on roads) appears to be too risky, given the Government seems unable to increase fuel tax, even though the increase recently cancelled was actually set by the previous Labour Government.

The Prime Minister's initial speech that talked about highway reform and later statements about reform gave the impression that the private sector could ride in and rescue the network, pour lots of capital into it and get a return, but the problem with that is how to pay the private sector back in the absence of tolls.

One idea that was floated was to restructure vehicle excise duty (commonly and misleadingly referred to as "road tax"), the tax on vehicle ownership, into a two-tier duty.  All motorists would pay a universal lower rate for access to the road network generally, but a top-up second tier would be voluntary for those wishing to access the motorway network.  In effect the second tier would be similar to the vignette systems in operation in several continental European countries.  The expectation would be that this could provide a revenue stream for a restructured strategic road network, with private owners having a hypothecated stream of revenue based on such charges (Austria's ASFINAG gains its revenue from light vehicles on this basis).

The obvious problem with this is that there would be a diversion from the motorway network onto local roads, which in some cases would create significant congestion as people avoid the motorways to save money.  Furthermore, the option would mean revenue would have a low relationship to network usage (except at the level of regularity of access, as regular users would probably pay for a year of access, whereas occasional users may buy access for a day or more at a time).  It also inverts the capital costs of the different parts of the network, given that the marginal infrastructure costs of using the motorways (given the sheer volume of traffic to spread costs between) are lower than that of the local road networks.   However, it is clear that the unintended consequences of such a proposal would be the sudden emergence of new bottlenecks that would mean exemptions being granted to use many parts of the motorway network to fix them, which would be a political liability.  In addition, there would be a drop in revenue as significant numbers of motorists would suddenly decide they don't need to use the motorways regularly (i.e. many in cities), plus something would have to be done for those in Wales, Northern Ireland and Scotland (as the tax is levied across the UK, but Westminster does not manage roads in the other devolved "countries").

Having seemed to have moved away from this, the thought has turned to conventional tolls.  The initial announcement by the Prime Minister was that tolling would be allowed for new capacity, but the problem is that most projects on hold for improving the highway network are not conducive for tolling.  Tolls need a major new corridor or a substantial length of new lanes to be technically (let alone economically) feasible.  The project highlighted as being able to be toll funded - the A14 corridor upgrade - will only be able to recover a fraction of its capital costs from tolls.  The simple truth is that tolling really only works if the route to be tolled is a significant improvement to the untolled capacity so that motorists are willing to pay the extra. 

So now discussion has moved to whether something can be done to allow tolling on existing capacity.  There is one view held by some that, despite UK fuel taxes being amongst the highest in Europe, that if tolls are taken into account, some motorists in Europe pay notably more per mile than those in the UK (Italy has tax on petrol at around EURO 0.02 less than the UK, but tolls would easily be more for those using the motorways).   That may well be true, but it is obvious that any approach to introduce tolls on existing roads, without some countervailing reduction in other motoring taxes, would be politically suicidal.

This is in the context of the Government having been unable to increase fuel tax because of the political price it would pay for doing so, and the poor reputation of existing tolled roads, in part because of policy that smacks of bureaucratic short cuts rather than any attempt to treat those who are paying as customers.

I've written already about one approach that I think has merit, but there needs to be a very clear distinction between five components of any new policy.

- Institutional reform:  Commercialising the Highways Agency should proceed, as this will encourage efficiency improvements and create an incentives structure to improve performance and be more dynamic and innovative.  A similar approach should be taken to local authority roads, at least in the major conurbations.  Such new entities should be allowed to introduce tolls on any new capacity if viable and propose new relationships with the private sector.

- Funding framework:  If it is accepted that motoring taxes, in their present form, will remain for some time, then there should be some hypothecation of a portion of existing revenue, dedicated to an independent regulator/funder to buy improvements and maintenance of roads from the new highways companies.  This will also incentvise efficiency and can enc

- Regulator:  The new highways companies will need a regulatory framework to govern tolls, to seek funding from existing sources and to set standards.

- Private sector involvement: Until this new structure is established, the initial role of the private sector will be in a new generation of PFI projects, but this will evolve to include taking control and be part shareholders in parts of the highway network.  However, this cannot readily happen until the public sector governance framework is established.

- Charging:  Allowing tolling on new capacity is obvious, but there should also be a framework to allow tolling on existing capacity with a system to refund part of vehicle excise duty and part of fuel duty.  Again, this cannot readily happen until the public sector governance framework is established.

There is little doubt that to achieve all of this means a lot of work, it is akin to the "deregulation" and privatisation of the telecommunications, water and energy sectors, and should be treated as such.  My concern is that there has been the impression given that there are quick solutions, when there are not.

The slow progress is a good sign, because it shows some degree of caution and consideration being given about what to do and how to move forward.  Highways are assets worth tens of billions of pounds (hundreds if you include the local network) and generate tens of billions of pounds for the Treasury every year.  Reform will be a big job, and it should be done in stages.

There can be reform that extracts more efficiencies from the sector, changes the incentives structure and provides a long term framework to allow more tolls  in due course (and enables private investment).  However, nobody should pretend that the private sector can provide the answers without a suitable funding framework especially in the absence of either more road charging or some hypothecation of existing revenue over the longer term.

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

My presentation is here.

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

The CBI/Aggregate Industries report is here. 

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.

Conclusion

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.   

Radical privatisation of UK highways proposed by thinktank

Could the UK's entire road network be privately owned and operated?

This is what has been proposed by the Institute of Economic Affairs (IEA) in a report authored by Dr Oliver Knipping, president of the Institute for Free Enterprise (a German free-market think tank) and Dr Richard Wellings, deputy editorial director at the IEA and director of the IEA’s transport unit.

It is a radical vision of a UK road system owned and operated by private entities ranging from larger companies that may own sets of highways and regional networks, to smaller rural or urban co-operatives, all offering different pricing approaches ranging from distance to single point tolling, to access passes, to free routes (paid for by property owners).  A very decentralised network, which bears little resemblance to the current central and local government controlled system, and is even more dynamic than the energy and telecommunications utility sectors that it is often (negatively) compared with.

The full report is available here.  It is well worth a read, not only for those interested in UK transport policy, but those interested in highways reform worldwide.  Why?  Because it sweeps away many of the assumptions made about the status quo seen in almost every country, and taps a handful of examples of private sector participation in the roads sector that are useful.

It goes far far beyond public-private partnerships as well.  Unfortunately its release on Sunday was more than overshadowed by the rather pointless over-reporting of an alleged proposal to have a two-tier vehicle excise duty/vignette system for the UK, which seemed to have little real substance.

Why privatise?

The case is for private ownership of the UK road network.  Knipping and Wellings make a compelling case that the status quo is sub-optimal, given that congestion costs £20 billion per annum and the network as it stands costs 2,000 deaths and 25,000 serious injuries a year.   They also argue that £9.5 billion worth of spending on roads is poorly allocated because it reflects political rather than user preferences.  Certainly, it seems odd that new capital projects can proceed when increasing proportions of the network are poorly maintained and shabby (with signage, lining and road surfaces visibly neglected).

They argue these outcomes arise from the inherent incentives around the current governance of the highways system, and believe that commercial and market oriented incentives would produce superior results. one issue cited is that UK transport policy being strongly biased towards expenditure on public transport rather than roads, as is reflected in the deferral of road projects with higher benefit/cost ratio appraisals than approved public transport projects.  Furthermore, local authorities have poor incentives to improve network maintenance, in part because they do not benefit from revenue raised from road use (although they do from parking) and the planning system has largely hindered development of the highway network, because it magnifies the views of opponents, compared to those who benefit from the positive externalities of highways.

Certainly the process of getting highways built in the UK is glacial, and due to enormous amounts of consultation and the need for hypersensitivity about environmental and social impacts.  Knipping and Wellings believe that private companies needing to respect private property rights as the first principle, would be better placed to compensate landowners and take into account community views being driven by the profit motive, rather than to fit criteria determined by government.

The report notes historic underinvestment in new capital in the roads sector, but highlights the Humber Bridge as an example of poor investment - it being a toll bridge that has had part of its debt written off because the benefits in promoting growth did not eventuate.

What about road pricing?

On the topic of this blog, road pricing, the key point the authors make is that whilst widespread road pricing would be beneficial, this "would not in itself solve the fundamental problems associated with government ownership of roads" because the two key benefits (better use of existing capacity and better direction of future investment decisions) are undermined by pricing being set by politically determined rather than market oriented criteria.

The authors don't proscribe a road pricing approach per se, but see it as being up to the privatised road owners.  They say that no single pricing mechanism would exist under a privatised road structure, it could be highly diverse and dynamic, and should be.  The full range of options could exist, from time/distance/place based charging, to tolling with manual toll booths on quieter rural routes, to access passes (like vignettes) for networks.  In all cases, it would be about comparing revenues, to yield, to asset management and the transaction costs of different charging options.  

The authors claims prices would be market set, with the key being competition from alternatives.  The obvious alternatives of mode and not travelling are part of this, but also what matters is how privatisation is implemented to encourage competition between roads.

How could privatisation promote competition and so pressure on road prices?

The authors propose that:

"a denationalisation of the road industry should aim initially at creating smaller-sized lots of road networks than  privatising the state monopoly in a single chunk, which would create a dominant position in the road market. Smaller sizes – whether area-based or route-based – would facilitate consolidation or deconsolidation moves in the road industry and shape something like an efficient market structure, save for the unavoidable inefficiencies and distortions that had been created by previous state monopoly."

In other words, the Highways Agency might be broken up into multiple regional or route based entities, and perhaps local authority networks could stand alone on their own right, or be broken up as well.  Whatever would happen ends up being dynamic, and would see a progressive transformation (probably some consolidation for economies of scale, subject to competition regulation concerns) to see a range of road companies emerging.  

The big question is how competitive they may be.  Area based road owners would be less likely to offer choices for specific routes (and of course for local trips, such choices may be unlikely to exist), whereas corridor based ones could do.  However, at present there is no competition, and the government levies 6p per mile on the average car doing an average trip, through fuel tax.  

For local roads, models are suggested such as the Swedish Road Association model which effectively creates co-operatives for rural roads, to property owners operating in their own co-operatives for urban local roads.  In addition, in many cases there are rights of way that exist over roads, based on historic property development and ownership.  Such rights of access are assumed to remain, but road owners that wanted to override them could do so with the consent of the rights' owners, who may be presumed to want compensation for the loss of the rights.

What about externalities?

A key point is that better pricing resulting from market related decisions should see lower congestion and consequential emissions, but beyond that private owners would have to negotiate with property owners and communities regarding any new construction, and would be well incentivised to manage negative externalities.   They also respond that there are positive externalities to the presence of roads that are often ignored, such as the network effects of a road providing universal access.  Fundamentally, it is thought that a property rights approach combined with more efficient pricing could result in better overall results for the environment, even though road owners will want to incentivise the greatest efficient use of their networks.

How would road taxes be reformed?

The authors have a radical proposal.  Once all roads are privatised, they would empower the new owners to price road users as they saw fit, but abolish Vehicle Excise Duty (the tax on ownership) and cut Fuel Excise Duty by three-quarters from 59p/l to 15p/l.  The new owners would be paying for the roads from road user charges, so government spending on roads would cease.  However, this cut in motoring taxes would reduce revenue by far more than what is spent on roads.  The rest would be made up by the predicted windfall of £150 billion from selling the network, which could be used to cut public debt (and resulting interest) or simply to offset the loss of revenue until the economic benefits of better pricing and a more dynamic highways sector flowed into the wider economy.  It is clear that this proposal implies government spending restraint more widely.  One of the longer term effects is seen to be that subsidies for rail can be phased out, primarily because if roads are priced efficiently, the case for subsidising rail is difficult to sustain on pure economic efficiency grounds.

Conclusion

This is a radical set of proposals to shift the UK highway sector into the private sector, well beyond the commonly referred to "public-private partnerships" and beyond what the Government has proposed (which appears to be encouraging more private participation, not abandoning public provision).

The most interesting and useful dimensions to the report are the economics, and considering that to release the full potential of road pricing, it needs to be dynamic and to be supplying market signals not only to users, but to providers of roads.  The report also intelligently responds to many of the concerns raised by those who would instinctively oppose privatising roads.  I find it refreshing, and a very helpful contribution to the debate, although perhaps what was needed a little more of was the right transition path to take to generate some of the benefits and build confidence in a private model.   The other issue is that there is discussion of options for privatisation that effectively mean granting ownership to new user or property ownership co-operatives, which of course would not generate any money for the state or local authorities.  It is highly unlikely politicians will swallow an end to so much revenue so quickly unless they could sell the roads.   In the current climate, it is also highly unlikely that sufficient investors would be found to buy the whole network.

Yet, the potential is there for the Highways Agency's network, which could be privatised, but would need to be accompanied by a cut in some motoring taxation (e.g. cutting Vehicle Excise Duty to an administrative fee, or reducing fuel excise across the board) to enable the new owners to toll with less public opposition.   

For those interested in road pricing, it does help to change the terms of the debate.  For over a decade, transport economists and public officials have been trying to convince the public, the media and politicians of the merits of introducing road pricing in the UK.  Perhaps the key is to remove such decisions from political/bureaucratic structures and shift them to the private sector.  Then the debate will be only slightly less about what people pay, but will also be a little more about what they get for their money.

Footnote

The Institute of Economic Affairs (IEA) describes itself as:

the UK's original free-market think-tank, founded in 1955. Our mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

Toll prices cut on San Diego toll road

I’ve written extensively about the “renationalisation” of a private toll road in San Diego, the South Bay Expressway as follows, which gives you background about this poorly performing investment:

- Why does San Diego want to buy a bankrupt toll road?

- San Diego "nationalises" a private toll road

- San Diego debates how to pay for the South Bay Expressway

The new owner, the San Diego Association of Governments decided to cut tolls in order to spread demand between the toll road and the existing parallel untolled I-805.

CBS8 reports that tolls have dropped by between 21% and 41% from a range of US$0.85 to US$3.50 to US$0.50 to US$2.75 per trip for account holders with tags. Cash or credit card payment at toll booths will drop US$0.50 (a new range of US$2-US$3.50 compared with US$2.50 to US$4).

What will be of interest to some in the industry will be the extent to which the lowered tolls induce a shift in demand patterns, and whether this will more than offset the reduced yield per trip.  There being two relevant goals.

The primary goal is likely to still be to maximise revenue, with the hope that lower prices are more than offset by increased demand.   

Yet the secondary goal will be to enable enough shift in demand from the congested parallel highways to mean overall time savings for traffic on those highways are valued sufficiently highly enough to offset any reduction in toll revenue.

I doubt that the revenue maximising toll is the utility maximising toll (or indeed that cutting rates will be more than offset by increased demand, as the elasticities of demand on single roads are not that great).

SANDAG will be hoping for both of course, because even though there can be a net benefit of reduced congestion which, in overall economic good terms, could be much higher in theory than the loss of revenue, it will be embarrassing for SANDAG to have turned a toll road that was not a financial success into being even less financially successful.

More details on tolls on the road's recently updated website here.

Does the New York State Thruway Authority need reform?

A curious difference in public policy between the United States and other developed countries is the preponderance of elected quangoes in the US and almost complete absence of autonomous commercial government companies.   I raised this issue with some American friends in the past and it came down to the core point that if government is ever to be involved in anything in the US, then people want their politicians to be able to interfere in the operations, planning and funding of government owned entities.  As a result, the model of government owned company "as if it were privately owned" which has been seen in countries in Europe, Australia and New Zealand is rare.  In the field of highways, ASFINAG, the company responsible for Austria's motorway network, is one of the better known examples.  All of its shares are owned by the Federal Government, but it acts effectively as a private company.

I raise this because many of the concerns raised in this article by Alan Bedenko in ArtVoice about the New York State Thruway Authority (NYSTA) would be better able to be addressed if the "state owned enterprise" model could be applied in the United States.   Such an approach would see the State appoint board members, but as it would be a limited liability company, the board members would have to act in the fiduciary duty of the interests of the shareholder - the state, which would mean operating efficiently, focusing on customers and being as profitable as it could be.  Concerns about excessive profits could then be addressed independently by regulation, which would have to be applied consistently across similar bodies - or it could be privatised and regulated.  However, I've noticed regularly that it takes a bit of effort for politicians and officials in the US to notice governance models applied in other countries, I suspect because when you live and work in the world's biggest economy, which itself consists of 50 different states, it is less of a priority to know what other models might work and how to address concerns about them.

What's wrong with the New York State Thruway Authority?

Well first, let's establish what it is and what it does.

New York State Thruways are a network of 917km of highways that connect the state with Connecticut, Massachusetts, Pennysylvania and New Jersey, primarily a backbone connecting New York City with Buffalo.  98.4% of the network is part of the Interstate network.  It comprises six main highways with a number of smaller links.  Tolls are charged on the network including both open barrier based tolls (with both manual and EZPass options) and closed ticket based tolls (you pick up a ticket when you enter and give it over when you reach a barrier at the end to determine the price).   Tolls were originally intended to be removed once bonds used to finance construction were repaid, but this did not occur.   Tolls are complex because of the multiple entry and exit points, but the Authority has a toll calculator on its website here.

So it is a state agency responsible for a state highway backbone, which is tolled and carries 8 billion vehicle miles of traffic a year.   Its board is chaired by the Governor of the State, so it is politically controlled.  Its annual budget is around US$1 billion, but it gets half its revenue from tolls. 

It has been criticised because its revenue, according to the 2011 annual report, declined by 1.1% but costs increased by 3.9%.  The big underlying question is whether it manages its costs well and whether the tolls it sets are reflective of costs imposed and the relative values different vehicles extract from the network.

Bedenko says that Moodys and Standard & Poors changed their rating of the Authority to "negative", because it said tolls needed to increase by 45% to adequately service debt, without taking into account the need for new capital.  That looks bleak and the Authority would appear to be crying out for a detailed assessment, not just of its asset inventory (highway engineers are usually quite good at that), but its overall business, the allocation of costs among road users including demand elasticities and the long term outlook for capital investment.

If the concerns are true it will show what goes wrong when a network of high volume highways, with the direct means to recover costs through tolls, gets mismanaged by a public agency that cannot bring together the political will to charge market efficient pricing. 

Bedenko points out that if tolls suddenly increased 45% there would be some considerable diversion of traffic onto parallel roads, which makes sense.  However, what that means is a proper demand study to determine the extent to which toll revenue can be optimised without causing such a heavy distortion.  Yet the bottom line should be:

- What are the long run capital costs of the network;

-  How should these be allocated across road users efficiently;

-  What programme should be in place to increase the efficiency of the operation.

He suggests two ideas.  One being a shift to fully electronic free flow tolls, which I support.  This is moving beyond the EZPass into full highway speed free flow tolls that are seen with SR91 Orange County, 407 ETR Toronto and the like, without barriers.   In this context, it should save considerable expenses and reduce congestion.  I don't believe it is so costly as to not be worthwhile, and the Authority ought to be pursuing it.

The second is the European style vignette stickers, where access is bought in advance on a per day basis.  He doesn't know that the newest of these, in Hungary and Romania, are electronic too, with number plate recognition used to enforce (with cameras checking vehicles against databases of those who have paid).  I don't believe this would help with revenue, as it wont respond so effectively to increases in demand.

A tollway agency in a heavily populated state with substantial transit traffic shouldn't be in financial difficulty.  That is plain.  One option would be to privatise the lot, but it would be an expensive set of assets to sale (and the new owner would have to raise tolls, but would also extract a lot of efficiencies from the operation), but another is to commercialise it.   

The NYSTA should be restructured, with an independent board, clear financial goals and a target for efficiency savings, operational performance and profitability.  Its core functions should be clearly defined and one should not be to soak up unemployment.

Frankly if the State cannot adequately address this, then there is little hope of it confronting the need for reform of tolling around New York City, considering how to address the declining yields of fuel tax or reforming its dated but still relevant heavy vehicle weight-distance tax.

UK government announces feasibility study into highway privatisation options

In March 2012, British Prime Minister David Cameron announced that the Government is interested in greater private investment in England's national highway network.  Arising from that more recently has been an announcement by the Secretary of State for Transport, Justine Greening on both the Government's response to an earlier review it commissioned about the Highways Agency and the commissioning of a feasibility study into options for attracting greater private sector participation in the highways sector.

Bear in mind all of this is for England, not the United Kingdom as a whole, as responsibility for highways in Wales, Scotland and Northern Ireland was transferred to the devolved governments in those "countries" (as they are called, although there are not sovereign states).

So what bearing does this have on road pricing?

For now, not much.

The Cook Review of the Highways Agency, commissioned in late 2010 as part of the drive for greater cost efficiency by the Government, recommended a series of measures to improve the performance, efficiency, strategic direction and accountability of the organisation, including steps to commercialise its operations.

The Government response to the Cook Review of the Highways Agency is here and largely embraces measures that can be implemented in the shorter term, including having a strategic view of the future of the network, such as considering how tolling may be a viable option to help fund some improvements.

However, the more significant governance reform options proposed by Cook have been deferred in favour of the wider scoped review that is now underway.  This feasibility study on road reform is focused on how the highway network should be governed, the role of the private sector and new sources of finance, and whether it can more resemble a regulated utility, such as water, electricity or gas (not the railways!).  The terms of reference are here.

Of interest to those in the road pricing field, it makes it clear that government policy is not to allow tolls to be introduced on existing roads that are part of the strategic network (the Highways Agency network).   However, tolls can be introduced on new capacity.  New capacity can mean both new roads, and new lanes (which can mean a new crossing parallel to an existing bridge or tunnel, or new lanes on a highway).  

This would appear to limit scope somewhat, but the Government is interested in options for how it treats existing motoring taxation and how that can be leveraged to encourage private investment.  In short, if the private sector is to buy, lease or otherwise invest in England's highways, and cannot toll existing capacity, it would need to be assured of payments from the state in the form of shadow tolls, availability payments and the like.

It is thought that instead of relying on government budgeting processes and conventional contracts, that perhaps some ringfencing or hypothecation of a proportion of existing motoring taxes would provide a more direct link between use of the road network and payment for the capital consumed in using the road network.  In the UK, motor vehicles currently pay two main taxes - Vehicle Excise Duty (effectively an ownership tax, levied according to both vehicle size and emission class) and fuel excise duty.   Taxation receipts from both are several times in excess of the total expenditure on roads, so to apportion a set proportion of revenue from either or both sources to such payments would largely be an accounting exercise.  The proposed future heavy vehicle vignette could be included in the mix. 

The UK Treasury vehemently opposes any form of hypothecation of any taxes, in part because it restricts the flexibility of government to do as it wishes with future revenues, in part because of fear it will generate an avalanche of claims for new hypothecated taxes, but also because of experience in the 1930s when a motor tax fund became awash with revenues the government was unwilling to spend on roads (suggesting that either the money should have been spent on roads, or the tax was too high).   Overseas examples of hypothecation range from the highly successful (New Zealand) to the questionable (Japan).

The debate on this needs to be had, because the primary reason there are motoring taxes is to serve as a proxy for direct charging of road users.  If highways were privately owned or even publicly owned utilities operating like electricity, telecommunications or water companies, they would charge their customers directly.   Taxing ownership of vehicles and fuel could then only be justified to account for environmental externalities, which would increase transparency around justification for the levels of such taxes.

I see this as being a precursor to the inevitable debate in the medium term about the sustainability of fuel tax when up against ever increasing fuel efficiency of vehicles and those vehicles not powered by petrol or diesel.  Ultimately, revenue levels and equity issues will dictate the need to consider a shift to road pricing in some form.

What does this all mean?

1.   In the short term, not much.  The Highways Agency will be undertaking some minor reforms and scoping out where it thinks tolls could be used to fund new capacity.  Forthcoming route strategies should help inform where the Government sees the need for new roads, new lanes and other improvements.

2.   The feasibility study into road reform is being undertaken by the Treasury and Department for Transport.  Hopefully it will look into models introduced in other countries, such as Austria, South Africa and advanced in New Zealand (but thwarted by politics).  I expect it to support a commercialised Highways Agency with more autonomy, but it would take considerable bureaucratic altruism to wish to relinquish Departmental oversight of the Highways Agency or Treasury's rock solid opposition to hypothecated motoring taxes.

3.   Some major new highway projects are likely to be offered to the private sector as finance-build-own-operate schemes, a few with a toll component to it (obvious examples are the A14 upgrades and the next crossing parallel to the Dartford Crossings). 

4.   Some existing stretches of motorway may be leased to the private sector to have long term responsibility for, primarily focusing on maintenance and relatively minor upgrades.

5.    Vehicle Excise Duty may be partly hypothecated, but only if the Prime Minister and Chancellor of the Exchequer have the courage to reject Treasury's opposition and take advice on how to make it work.

6.    There may be one or two new toll roads on the English highway network in the next few years, but pressure will come from private investors to consider ways to swap existing motoring taxes for tolls.

This also leaves open the theoretical possibility of toll lanes/HOT lanes that are for new capacity, although my view is that the scope for this is almost zero, because for toll lanes to be viable, existing capacity has to be regularly and heavily congested.

Of course, none of this affects the rights of local authorities to introduce congestion charging schemes on their own networks, as they are permitted to do so by legislation that was enabled a decade or so ago by the previous government.   I see there being a similar scope to get local authorities to commercialise their highway networks and do very much the same thing, particularly in major urban conurbations such as London and Manchester.

Why does San Diego want to buy a bankrupt toll road?

The South Bay Expressway has been a financial disaster in the world of private concession toll roads. It opened in 2007 as a new 10 mile stretch of tolled highway, but has never generated enough demand to be profitable enough to service its debts.  TollRoadsNews has a long list of reports on the project.

Where is it?

Its website says:

Beginning at SR-905 in Otay Mesa, the Expressway provides fast and convenient access to and from Mexico and communities across San Diego County.

It filed for bankruptcy in March 2010 and since then has been owned by the banks and federal government, which supplied the debt for the road. However, the San Diego Association of Governments is seeking to buy it. This is rather strange.

Why? Because the road is there now, working and providing service to users. It isn’t going to close down. The concession agreement hands it back to state ownership in 2042 regardless. In addition, SANDAG would presumably have to borrow money or raise taxes to buy it back. Unless it believes reducing or eliminating tolls on the road would create net economic benefits that outweigh the purchase, it seems like a very strange move indeed for a public body.

Another report quotes Gary Gallegos, Executive Director, saying the road is strategic and demand will be increasing – implying that it would be money making. He also said money to buy it back could come from an existing sales tax.

Bankruptcy court apparently valued the road at US$287 million, but it is apparently now generating an operating surplus. SANDAG thinks that as a result it wont be a bad investment, although I’d have thought it would not be a good investment if the return on capital is less than the cost of debt to buy it (or the interest gained from a bank deposit).  However, it is likely that the consortia of 10 banks that own 68% of the road will want out of it quickly, as will the US Department of Transportation which holds the other 32% because of loans it made to the previous owners.

Note: This was one dud investment for the Macquarie Group, which was at one time a 50% shareholder in the road.  It wrote off the entire value of the investment in 2009 according to the Bond Buyer.

Commentary - Urban congestion charging needs governance reform

One of the biggest problems facing any policy makers seeking to introduce any form of congestion pricing in a city is not a matter of technology, or designing an appropriate geographically based charge, or even the political difficulties in gaining support, but rather something more mundane, but arguably more important - governance.

No city that has introduced a substantive form of congestion charging has done so without addressing this issue, and it comes down to having one entity responsible for all of the charged roads.   London has 33 local authorities, which almost certainly could not have come together to set up the congestion charge unless there had been an overarching authority responsible for arterial roads (Transport for London).  Singapore similarly has one agency responsible for its charged roads.  Stockholm's congestion charge is the responsibility of two agencies.  Cities with many local authorities face limitations as to what can be done with road charging.   This was alluded to this week in Australia where it was reported in the Brisbane Times that Brisbane has an advantage in having a single local authority, compared to cities such as Sydney which have 43.

The solutions to this depend very much on what the policy objectives are.

Governance reform that merges local authorities or at least merges control of arterial roads is one option, as has been seen in London.   This is what is likely to be necessary if the intention is to introduce area or cordon charging.   The key reason being to have only one entity responsible for procurement, but also one entity responsible for all of the work related to congestion charging around signage, redesigning intersections, rephasing traffic signals and the like.   These are all activities often ignored in the discussion of congestion charging.   It is very important that one entity is responsible for ensuring good standards of service are offered to motorists with the congestion charge, but also ensuring smooth traffic flows (and good use is made of revenues).

Many investigations into congestion pricing consider the important financials and economics, with assessment of costs, revenues, demand impacts, impacts on congestion and emissions.  However, far fewer consider whether the existing governance of roads in the city concerned is appropriate.

The unspoken truth is that most cities run roads like bureaucratic centrally planned services, with very much an engineering focused approach.   These transport departments or streets units or whatever are not focused on delivering front office customer service to motorists.  The closest they get to this is parking fines, which are typically treated as offences.   Roads are not delivered as utilities to paying customers, and this is the problem.   Road pricing means motorists are customers, they have queries, they will hold accounts, they will change account details, have disputes and need to be told when prices, terms, conditions and offers change.   That level of communication, handling of money, need for service and need to be responsive is not built into government monopolies typically.

The model I advocate for getting motorists on side with congestion charging is to develop a more retail, more service oriented approach with a dedicated organisation that is about delivering roads as a service to those paying for them.  That means delivering what users want, not what engineers think they should have nor what politicians think.  However, that is another story.

Those interested in progressing road pricing should never assume that existing agencies or organisations are well placed to manage a road pricing programme or be sufficiently dynamic to unlock the full range of benefits available.   It is a critical area of work that is often neglected as most of those interested in road pricing have engineering or economics backgrounds, not backgrounds in public and private sector governance and institutional reform.