News briefs - Australia, Belarus, Israel

Australia - Queensland Government to privatise motorway company

Queensland Motorways is a company owned by the Queensland Investment Corporation, the Queensland State Government's holding company for commercial state owned enterprises.  It owns three key toll roads in Queensland, but also acquired from Brisbane City Council the Go Between Bridge, which I profiled over two years ago as being an unprofitable disaster.

Queensland Motorways have paid the Council A$112 (US$98) million for the 50 year tolling rights to the bridge.

Previously it acquired the disastrous Clem 7 toll tunnel motorway, which is subject to a lawsuit over demand and revenue forecasts.  It paid A$618 million (US$538 million) for the road, not bad given it cost A$3 billion to build.

So now the Queensland Government thinks it is a good time to divest itself of this investment.  The Australian reports it is worth about A$4 billion (US$3.5 billion)

The report says:

Groups likely to be interested in Queensland Motorways include superannuation heavyweight Industry Funds Management, Abertis/Hastings and groups out of Canada including the Canadian Pension Plan Investment Board or the Ontario Teachers Pension Plan.

Of the listed groups, Transurban could purchase the asset with partners, a source said.


Belarus - tolling of existing highways to be expanded

ITS International reports that the Belarus electronic toll system has been expanded to a network of 118km of highways as of January 2014.  This expands the extent of the network to 933km, with the whole system installed and operated by well-known Austrian toll systems provider, Kapsch.   The expanded network will include eleven new gantries for charging and enforcement. The report claims that customers are registered from Belarus, Ukraine, Russia, Poland and Lithuania.

The system uses DSRC, not GNSS technology, paralleling that which has long been in place in Austria, and similar systems on networks in the Czech Republic and Poland.

I wrote about the Belarus system a couple of years ago.   It is branded BelTol  and charges cars €0.04 (US$0.06)  and up to €0.12 (US$0.17)  per km for trucks. Both rates seem rather cheap.  Germany charges between €0.14 and €0.29 per km for trucks, Slovakia €0.08-€0.24 and Austria €0.16-€0.44 per km.   No toll system in Western Europe charges cars by distance across a network electronically.


Israel - New HOT lane being studied

According to Israeli business news website, GLOBES, Ayalon Highways Ltd (a central government owned company responsible for managing Israel's Highway 20) is investigating the value of introducing a HOT Lane on the highway between Roads 1 and 5.  

However, the report is contradictory, which some claiming that a lane will be taken from the existing road, and the Ministry of Transport claiming that discussions are about a new (additional lane).  

The road will connect with the privately owned H-1 HOT lane that was opened in 2011 between Ben Gurion Airport and Highway 20, which I noted at the time,  and is driven entirely by heavy congestion on the existing lanes.  

The proposed lane would offer toll free access for buses, but the "high occupancy" requirement would be 4 car passengers, suggesting that there is a real interest in ensuring the lane maintains a good level of service, although it is far too early to consider what the potential toll levels would be.

Proposed new HOT lane in blue, existing H1 lane in yellow

Ohio Turnpike not to be privatised

As has been previously reported, there had been a lot of debate as to whether it was worthwhile to privatise the Ohio Turnpike.  

According to an article on Cleveland.Com, the revenues for the 241 mile long Ohio Turnpike for 2012 were at a record US$270 million (with an expected profit of US$15 million).

Governor John Kasich is keen to utilise the value of the toll road to support other transport infrastructure projects in the state.  The law currently restricts the net revenues to being spent on transport projects within one mile of the road.

Tolls increased by 10% in January 2012 and traffic volumes have increased, making the toll road a lucrative asset for the state.  It has been reducing staff and consequential costs.

So the decision has been made not to privatise the road, but instead have it issue bonds which will essentially mean the state is borrowing against future revenues from the Turnpike to pay for other transport projects.  US$1.5 billion in bonds will be issued.  

A website called Ohio Turnpike Analysis contains more details. With a specific report of more in-depth analysis here, supported by Big Four accountancy firm, KPMG.  Indeed that report had been commissioned to specifically restrict options to those that exclude privatisation, but could include a lease to a concessionaire for the revenues.

In announcing the decision on the Turnpike the website states:

While the state could have realized more money by leasing the Turnpike, maintaining public control of the Turnpike and keeping the Turnpike Commission independent helps keep tolls low and workers on the job. Better coordination with ODOT keeps virtually all Turnpike revenue in Northern Ohio.

The Ohio Turnpike Commission is to be expanded into the Ohio Turnpike and Infrastructure Commission, which will have new "expanded authority" over major transportation projects in Ohio.

In addition, there will be a cap on tolls as follows:

Tolls for local passenger trips that are paid with EZ Pass will be frozen at current levels for the next 10 years. For all other tolls (longer passenger trips and all truck trips) any increases will be capped at the rate of inflation, or approximately 2.7 percent annually, assuming sustained traffic growth at the historic 1 percent rate. This low, stable rate will be less than half the rate of increase that passenger tolls have seen over the past 20 years and almost a full percentage point less than past increases to truck tolls.

Comment

It is always curious to see how reluctant authorities in the United States are to embrace private enterprise, capitalism and free markets when it comes to roads, especially when compared with countries that many Americans would consider to be more regulated and pejoratively, socialist (e.g. France, which has had little hesitation to have a large network of privately owned highways).   The rhetoric around it is remarkably parochial (with the implication that only people from Ohio could run the road "properly").  

What is almost completely absent is this analysis is any idea of the capital value of the Turnpike. The private sector has to account for its assets, but the public sector should as well.  It should make a return on that capital value, because taxpayers' money is tied up in it.  They should understand why their money is making more than a market return or less than that, otherwise it isn't clear whether the asset is being well managed or not.  Of course the only way to get a market capital value would be to talk to the market.  What would it be worth if it was sold, unencumbered (or encumbered by specific legislation)?  It would be dependent on revenue forecasts and expected costs, then the analysis can be done as to whether the surplus, after renewals and depreciation is worth more than the expected sale price.

There is a reasonable case to be made for reducing the risk of monopolistic pricing of the Turnpike, but beyond that if pricing can be efficient, and also reflect demand, there is scope for it to improve utilisation and get better value out of the asset.

In short, it appears that retaining the asset in state ownership is a political decision based on parochial and  long term financial grounds (better for the money to stay in Ohio, and better for the state to spend the revenues rather than monetise the asset, and let the private sector enjoy the revenues).  

The estimated value of a lease was a net NPV of US$1.8 billion, but I would have liked there to be some consideration of the most radical option - selling it.  Not that this is what should be done, but that it would provide a benchmark of value, to measure others against it.  The value of the sale money can then be treated on its own merits.

What I hope is that the new Ohio Turnpike and Infrastructure Commission efficiently transitions to fully electronic free flow tolling, adopts international best practice in asset management and customer management, and so replicates as much as is possible the efficiencies the private sector would bring to its operations.  It should also apply this to how it will supervise and manage other infrastructure projects financed through the forthcoming bond issue.

However, I also hope that the broader issues of sustainable revenues for Ohio are looked at more widely.  The Ohio Turnpike is not enough in itself to generate revenues to replace declining fuel tax yields.  Moreover,  Ohio should look at how it can leverage revenues from transit traffic and improve pricing overall to get better network utilisation, and better distribution of charges across users.  

The Ohio Turnpike may not be privatised now, or in the near future, but it should raise the debate for others. Why should states own roads, especially toll roads?  What are the deadweight unseen costs of maintaining that ownership?

Spain's growing network of bankrupt toll roads

Spain was once lauded for having a large network of first class privately financed toll roads.  Now it looks like many of those roads were commissioned by government, and built by the private sector based on overly optimistic forecasts of growth off of the back of Spain's property led boom, that was a bubble which has popped.

Phys.Org reports from AFP on the debacle of the roads heading for bankruptcy, and it isn't just rural highways, but big urban highways near Madrid:

Two highways, Radial 3 and Radial 5, opened in 2004 at the height of Spain's construction boom. Now the company owes 660 million euros ($850 million) to the bank, 340 million to the builders and 400 million to residents evicted to build it.

Six toll roads have entered bankruptcy proceedings since May 2012, when the Madrid-Toledo (AP-41) toll road was the first.  It was managed by  Grupo Isolux Corsan SA, Comsa SA, Azvi and Banco Espiritu Santo SA, and owed over US$646 million in debt. 

Many more more are also heading for bankruptcy.

It isn't just roads, as Spain built high speed railways and airports, with some of both of those now looking like woeful investments.  

The craze drove Spain to break records: it became the country in Europe with the most kilometres of motorways and the most commercial international airports, and was second only to China in the world for the length of its high-speed train lines.

Meanwhile, the government already upgraded existing roads as well, untolled roads.  At a time of deep recession, it is clear that Spaniards are preferring to save money over time, so are avoiding the toll roads in favour of the untolled government roads.  

Motorway traffic is now at levels not seen for over 15 years. 

The report continues:

On the Accesos de Madrid roads, "where there were supposed to be 35,000 vehicles a day, there are 10,000," said Jose Antonio Lopez Casas, director of Accesos de Madrid, the company that manages two major highways around the capital.

What is the lesson?  

That road projects should be driven not by political imperatives, but commercial ones.  The private sector assumed that perpetual growth would continue and that forecasts of growth were robust, but ignored the bubble economy (like so many others did).  Instead of project let concessions, it may have made more sense to commercialise parts of the network, letting the private sector manage existing highways and decide on the merits of upgrading them instead of building new tolled roads.  

However, there is a bright side in that the risk has been born by the private sector.  The roads are built, and the cost to maintain them is a fraction of the capital cost to build them, which in most cases will be wiped out and born by the creditors.

Spain is obviously "overbuilt" for toll roads, and bankrupt toll roads may see prices cut to encourage demand, but may also put pressure on government to change how it charges its untolled network (through fuel tax).  The bigger issue is whether the sheer scale of this bankruptcy overwhelms, and is likely to create mergers and require more fundamental reform of the highway sector, or if government feels pressured to nationalise the roads (unnecessary and unwise in my view).

News briefs - Australia, Germany, UK

Australia - Transurban CEO calls for network road pricing and hangs onto Pocahontas 895

AAP reports that Transurban CEO, Lindsay Maxsted, told the company AGM last year that 

"The time is quickly coming where we must face concepts such as distance-based tolls, peak-hour pricing or demand pricing... We must utilise our existing networks better."

The Sydney Morning Herald reported him saying:

the states could not ''build our way out of congestion forever'' and needed to look at different pricing models for roadways.

He said that there could also be off peak discounts, but existing concessions meant Transurban could only charge one price all day long.  He insisted Transurban was not motivated to renegotiate these, but that future concessions should include the flexibility for peak and off peak pricing.

This is a welcome step, and besides being obvious, it demonstrates that private road owners are incentivised by the market to increase yields at peak times, and utilisation off peak, which would benefit them and off peak users (and peak users if congestion is avoided).  

However, New South Wales Minister for Roads, Duncan Gay, responded saying there wouldn't be a "congestion tax" or "time of day tolling", which frankly is a missed opportunity.  Curiously an online poll on the Sydney Morning Herald website suggested 42% would support higher peak time tolls.  A figure which astonishes me, as I wouldn't expect people to support this without expecting more reliable trips or reductions in off peak tolls.

On the beleagured Pocahontas 895 toll road he said Transurban will hang onto the asset, but seek to renegotiate with its lenders:

"That's the most likely outcome: a full reconstruction with those lenders, and we may well be the ongoing owners of that asset," he said  "The fact is that because of the poor performance of the asset, there's not a lot of people out there that run the asset, and in terms of our expertise, we're still probably the logical owner of it but not at the price paid those many years ago."

Germany - attitudes to urban congestion charging

I already reported on how some German states have been considering urban congestion charging as a revenue raising proposition.  An article in The Local points out some more details of what was being considered and responses to it:

- It talks of a single charge of EURO 6.10 per day (US$7.85);
- Green Party says it is "badly needed" to pay to maintain and modernise transport infrastructure;
- Federal commissioner for tourism Ernst Hinsken, of the conservative Christian Social Union (part of the ruling Federal coalition), warned against "defrauding commuters and tourists" arguing it would unfairly punish commuters facing increasing fuel prices;
- HDE, a retail business association, claimed it would make downtown city centres less attractive, by penalising those who visit them for shopping.

Still a fair way to go in Germany before this goes further.

UK - Local transport chief calls for nationalisation of private toll road

According to the Birmingham Mail, Centro (the public body responsible for planning and contracting public transport services in the West Midlands) Chief Executive Geoff Inskip has called for the UK Government to nationalise the M6 toll road.  He said it was "madness" that the parallel untolled publicly owned M6 is "choc a bloc" with congestion, but that high prices on the toll road meant it was underutilised.  Midland Expressway (the company that owns the road) responded by saying it had a "long term view" of the investment.

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.  

Comment

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.

UK highway privatisation/reform stalled... again

The Financial Times reports that the Budget is unlikely to see any announcement around highways privatisation, for fears of a political backlash.  The intention instead is to publish a "green paper" in summer outlining options, which effectively means no substantial reform will be completed before the general election in two years' time.

Whilst privatising the strategic road network in England (motorways and major A roads) is not necessarily difficult, the problem is in guaranteeing a stream of revenue for any private investors.  Options under consideration have ranged from allowing tolls to be introduced (which the Government is prepared to accept for new roads and "new capacity" (e.g. additional lanes), to reforming Vehicle Excise Duty (the tax on owning vehicles) by splitting part of it away into an optional motorway vignette, which would then be dedicated to paying for that network.

The Prime Minister has made it clear that no option should leave anyone worse off, effectively constraining tolls to new capacity only (and given the issues of diversion, this is unlikely to mean tolls are going to be feasible except for comparatively few projects).   

Understandably, some Ministers and MPs are baulking at the Vehicle Excise Duty reform option.  The appeal to officials is that is attempts to replicate what has existed in some European countries for many years, when vignettes were introduced to pay for their motorway networks.  However, by offering the option of not paying, it is likely to cause some motorists to divert short trips on motorways onto local roads, creating localised congestion issues.

Motorists are likely to be fairly open to reforms of the Highways Agency that may commercialise it or even privatise it, but when it is about paying to use the roads, it becomes different. 

The reason to introduce a vignette was seen as a way of transparently introducing a user charge for motorway use, so that money for that network could be readily identified without the need for hypothecation of a tax that is also being used for other purposes.  Of course later it could be reformed into a more usage based charge over time.

Yet it neglects the local road network, and doesn't create a cohesive structure to reform the highway sector as a whole.  Ignoring local roads, where much congestion is and where maintenance issues (and capabilities in asset management) are the most serious, is simply absurd.

I've written before about what I think of this option and what I believe should happen - which is to commercialise the Highways Agency and incentivise local authorities to do the same (including creating multi-council joint ventures), set up a regulator to "buy highway services" on behalf of motorists, funded by hypothecating Vehicle Excise Duty and part of Fuel Duty, and then allow the commercialised entities to attract private equity, and progressively be privatised (and to set up tolls that allow motorists to choose to contract out of paying existing taxes).

Previous articles:

- UK highway reforms split on road charging

- Reforming Britain's highways, my views and CBI's views

- Radical privatisation of UK highways proposed by thinktank

- Higher road tax for UK motorways?

- UK government announces feasibility study into highway privatisation options

Brisconnections goes into receivership - another victim of toll road optimism bias?

It has now been reported by various Australian news outlets that Brisconnections, the company behind the AirportLink toll road in Brisbane, has gone into receivership following the withdrawal of support from the company's financial backers.  

Regular readers will remember my previous articles about the AirportLink toll road, which is now the second major toll road project in Brisbane to effectively go bankrupt.  They are below in chronological order, telling a sad tale of a road that faced construction cost overruns, but has been doomed by optimism bias in demand forecasting.

New Brisbane Airport Link toll road may include loyalty programme

Brisbane's latest toll road to open under clouds of scepticism

Brisbane's Airport Link toll road demand may give cause for caution

Brisbane Airport Link looking almost as bad as Clem 7

Brisbane Airport Link debacle down to incentives and value of time

It has looked increasingly doomed (at least financially) since it was opened. It is, of course, technically superb.  

Brisbane Airport Link's complex interchange at Bowen Hills

The road cost A$4.8 billion (US$5 billion) to build and has been open for seven months.  It was meant to have an average of 135,000 vehicles a day by now, but the Sydney Morning Herald said only 47,000 a day on average used it in December (a little unfair, given the Christmas season will mean numbers are down with a lack of business traffic).  Even if you take that into account, traffic numbers are around 40% of what was forecast.  ARUP, the demand modellers in this instance, will be getting legal advice and checking its insurance for fear that it may be in front of a court as AECOM now is over the Clem 7 toll road.  You can review ARUP's report to investors on its demand modelling here, on page 110.   That is worthy of a look, as you can see some of the assumptions used look now, in hindsight, to be worthy of questioning (i.e. comparing toll prices on a per km basis with other toll roads, which is not how people value time and trips, and treating historic traffic growth as reflecting future growth).

Bear in mind that the toll on the road right now is at a discount of around 45% on the full estimated price, and it still can't get the demand levels that were forecast (it is expected that the price would increase in April 2013 to about halve that discount, and increase again in October 2013, both increases testing the elasticity of demand).

The report said "a consortium of 10 banks, including ANZ and European heavyweights Deutsche Bank and BNP Paribas, finally appointed PPB Advisory as receivers on Tuesday. The banks lent about $3.3 billion to BrisConnections, and stand to lose a sizeable chunk of their money."

Of course, the road remains open.  The asset is fixed and there is nothing else that can be done with it, beyond some incremental cost trimming and some price incentives to encourage demand.  The road's true market value will be below its construction and financing costs, suggesting that it simply wasn't an economically viable project.   It would be interesting to see if there was a recent public sector comparator cost-benefit analysis to compare with the financial business case, which now looks dire.

The Courier Mail reports that Professor John Goldberg of the University of Sydney claims the modelling was used to "work backwards" from expected returns to what figures were needed, which is an outrageous assertion to make.   He has himself undertaken his own financial modelling (pdf) of toll road PPPs in Australia and is suspicious of the entire approach. However, his call for a Royal Commission to investigate this is ludicrous, as it is not a matter for the government to be specifically concerned about private companies making malinvestments and losing money.  It would be preferable for the state, if it wishes to promote specific projects as PPPs, to commission its own demand forecasts based on determining if a project is worth proceeding with.

The Product Disclosure Statement claims that debt servicing can withstand a 40% reduction in forecast traffic each year.   What happened is 60%.

What now for AirportLink?

Not much, it will continue to operate.  The receivers will commission a review of its performance to find a way to maximise revenue and minimise costs.  It will remain a prime piece of infrastructure for Brisbane.

The question is whether any legal action will occur, and what long term owner it will have.

What now for future toll road PPPs in Australia?

Transurban half year results positive, but what are the details?

Australian toll road investor Transurban has released its results for the six months ended 31 December 2012, which report an increase in the proportional EBITDA of 3.8%, compared to the prior corresponding period, but a reduction in the statutory net profit of 16%.  The difference between these is due to the exclusion of five assets in which Transurban has a partial shareholding in the statutory net profit.  Costs are up 10.5% overall, largely attributed to the launching of the I-495 express lanes.

It is a good result with "A distribution totalling 15.5 cents per stapled security will be paid on 14 February 2013 for the six months ended 31 December 2012. This will be made up of a 12.0 cent distribution from Transurban Holding Trust and a 3.5 cent fully franked dividend from Transurban Holdings Limited".  There is also a A$5 billion pipeline of investments for the group (being the Hills M2, I-95 Express Lanes and M5 widening projects

However, it's worth having a look at Transurban's portfolio of assets to see what they are looking like, and what it teaches future investors about the profile of such investments, compare to the full year results for 2012 which I reported on here.   Transurban's presentation is the source of much of the following conclusions.

Melbourne Citylink

Proving that a major urban motorway can be a profitable investment that delivers enormous benefits to a metropolis, Citylink continues to be the "jewel in the crown" of Transurban delivering nearly half of all of its toll revenue.  Traffic growth has been 2% in the past year and toll revenue growth 4% (EBITDA 3.9%) including an adjustment for the bedding down of a new billing system, which added short term costs.

The key prospects for this project are in a related proposal, the East-West Link, which would connect Melbourne's Eastern Freeway with the Western Ring Road interchanging with Citylink.  Transurban is targeting this as an obvious potential enhancement to its portfolio.  There are also plans to upgrade Citylink.  Bear in mind Melbourne Citylink is the corridor between the city and Melbourne's major airport (there is no rail link), and is the only decent east-west corridor at present.  It is strategically vital, but thrives as a privately owned toll road.  Concession ends in 2034.

Revenue of A$267.1m, costs of A$52m, depreciation/amortisation/financing costs of $A100.8m, leaving a profit before tax of A$114.3m

Sydney Hills M2

This motorway has suffered due to extensive roadworks to add new interchange capacity, which has deterred trips because of lower speed limits.  Traffic volumes are down 2%, with toll revenue down 1.7% (EBITDA 1.9%).  The works are expected to be completed mid 2013, with the hope that traffic volumes will recover.  The M2 is a core part of the Sydney orbital toll road network, connecting the northern suburbs to the west, and so has affected the results of two other Transurban assets.  It is more of a suburban motorway that needs orbital urban traffic to thrive, so will be dependent on how there is growth in suburb-suburb commuter and leisure traffic (which is not conducive to public transport usage, which is high in Sydney for trips to the downtown area).  It is expected to deliver significant growth in 2014, as temporary speed restrictions are removed.  Concession ends in 2046.

Revenue of A$73.4m, costs of A$15.9m, depreciation/amortisation/financing of A$52.9m, profit before tax of A$4.6m.

Sydney Lane Cove Tunnel

This part of the main route north from Sydney has seen static traffic with a small increase in toll revenue (0.3% - EBITDA 4%).  Bear in mind the history of this project in that Transurban bought it from the receivers for around 60% of the cost of constructing it, after traffic and revenue numbers did not meet forecast expectations.  A key project is to consolidate and reduce costs in maintaining Transurban's Sydney highway assets, which may partly reflect the better EBITDA figures.  Lane Cove Tunnel does have an untolled alternative, so is sensitive to pricing, congestion levels on the surface streets and limited competition from rail.  Concession ends in 2037.

Revenue of A$31.7m, costs of A$13.4m, depreciation/amortisation/financing of A$22.1m, meaning a loss before tax of A$3.8m

Sydney M1 Eastern Distributor

This is the highway that connects Sydney Airport to the city and the harbour crossings.  It has seen a small decrease in traffic (0.4%), but a 8.2% increase in toll revenue (EBITDA 8%) due to 9% toll increases ($A 0.50), indicating low elasticity of demand on this key corridor (which also has intensive rail competition, and parallel inferior surface streets).   Transurban has a 75.11% shareholding in this road.  Given the time sensitivity and the constraints in corridor expansion along this route, it can be expected that this investment can deliver more over the long term.  Concession ends in 2048.

Revenue of A$51.3m, costs of A$13.7m, depreciation/amortisation/financing of A$48.3m, meaning a loss before tax of A$10.7m. 

Sydney Westlink M7

The M7 runs north-south along the western end of the Sydney orbital ring road, and so is a core part of Sydney's bypass, but also connects the northwest and northern suburbs with the south, avoiding the need to use the harbour crossings.   It has seen a 2.4% increase in traffic, and 3.2% increase in toll revenue (EBITDA 3%).  A stable route, growth being dependent on growth in housing and employment at Sydney's periphery promoted by the location of growth nodes at either end of the motorway.  50% owned by Transurban.  Concession ends in 2037.

Revenue of A$106.6m, costs of A$23.8m, depreciation/amortisation/financing of A$177.2m, meaning a loss of A$94.4m before tax.

Sydney M5 SouthWest

The M5 is Sydney's main motorway south-west towards Canberra and Melbourne.  It has seen a small (0.4%) decrease in traffic, but 10.1% increase in toll revenue (EBITDA 11.4%) due to toll price increases.   This road is 50% owned by Transurban, and has its own widening project underway, which means an additional lane each way (from 2 to 3 lanes in each direction).  It also has the eccentricity of a taxpayer funded rebate scheme for regular users, which was a 1995 electoral bribe by the then Labor state government.  It means that vehicles that are owned by a New South Wales resident, registered in the state for private, pensioner or charitable use, and are equipped with an electronic tag, are eligible for toll refunds.  "Business vehicles" are not included.  As such, there is obvious long run potential if the state finances get to the point where this is to removed.  Concession ends in 2026.

Also in Sydney, Transurban is pursuing a potential project to connect its M3 to the F2 freeway (which leads to Newcastle).

Revenue of A$103.1m, costs of A$14.2m, depreciation/amortisation/financing of A$51m, meaning a profit of A$37.9m before tax.

USA I-495 express lanes

These lanes opened in November, as reported here.  However, Transurban is reporting that traffic is below expectations, but systems are working well.  Obviously two months are too early for any assessment of trends.  It will require both marketing and patience to see if motorists become more willing to pay to bypass congestion on this route, which is the key south-west quadrant of Washington DC's orbital freeway network.  Concession ends in 2087!

So far revenue of A$1m, costs of A$3.2m, depreciation/amortisation/financing of A$9.1m, so a loss of A$11.3m before tax.

USA Pocahontas 895

If Citylink is the Jewel, Pocahontas is the fools gold.  It is 100% owned by Transurban and has been 65% below traffic forecasts.  The results have seen a 5.1% increase in traffic and similar (5.3%) increase in toll revenue (6% EBITDA), but it remains a seriously underperforming asset (which Transurban wrote down last year by A$138 million).  Problems with this asset have included the cancellation of a major property development that would have been served by the road, which was expected to generate up to 35,000 additional trips a day (the timing of the project coincided with the financial crisis and the US property market crash).  It has been suggested that the loss of Interstate status didn't help, but this point is insignificant.  The likelihood is that Transurban will hope that property development will be reignited so that the road will come into its own in due course.  Concession ends in 2105.

Revenue of A$7.4m, costs of A$3.1m, depreciation/amortisation/financing of A$16.7m, so a loss of A$12.4m before tax.

USA I-95 Express lanes to come

As Transurban's US investments are all in Virginia, it is logical that it has also put money into this HOT lane project.  It is under construction and will be completed in late 2014, and involves a 49km of new reversible 2-3 lane set of lanes south of Washington DC within the existing corridor.

Toll rate variations

The full report (PDF) includes some interesting data on the caps (if any) on toll rates for Transurban assets, as follows:

M5 South West Motorway - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

Hills M2 - Escalated quarterly by the greater of quarterly CPI or 1%. 

M1 Eastern Distributor - Escalated quarterly by the greater of a weighted sum of quarterly Average Weekly Earnings and quarterly CPI or 1%. 

Westlink M7 - Escalated or deescalated quarterly by quarterly CPI. 

Lane Cove Tunnel - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

CityLink - Escalated quarterly by the greater of quarterly CPI or 1.1065% (being 4.5% p.a. as a quarterly compound rate) for the first 15 years, then quarterly by CPI. This is subject to a cap of annual CPI plus 2.5%, which cannot be exceeded. 

Pocahontas 895 -  Fixed rates until 2017 and then escalated by the greater of CPI, real GDP or 2.8% p.a.

495 Express Lanes - Dynamic, no cap. 

Finally, an interesting interview with Transurban CEO Scott Charlton, reported in Business Spectator has him talking about the extension of concessions, and the payment of cashflow in dividends before reducing debts.   He talks of combining into one back office for all Australian operations.   He mentions the interest in applying dynamic (demand) driven pricing into Australia (which isn't possible under current concession conditions).  Transurban seems supportive of a shift towards more distance based tolling and shifting from fuel tax towards tolls more generally.   He confirms that Transurban isn't enthusiastic on the AirportLink or Clem7 tollways in Brisbane, but more interested in the Queensland Motorways assets.

Conclusion

Looking beyond Transurban, which has a range of assets from the remarkable to the unfortunate, one can see statistics which demonstrate some of the real opportunity costs of building major new motorways.  These being costs not conventionally seen in government procured projects.  That is seen in the financing costs, as these (and the capital asset value of the road) are largely hidden or written off, as they are seen in budgetary deficits as roads may be financed either by specific or non-specific public debt, or through "pay as you go" annual budgeting.

Large highways are expensive, they involve a lot of capital.  They depreciate, and it is through the accounts of companies like Transurban that we can see, transparently, what they cost.  The revenue they generate is clear (and it would be interesting to consider fuel taxes on top of that), and the operating costs (including maintenance) is also clear, but the big portion of costs is servicing that capital over the depreciated life of these assets.  A road isn't "paid for" until those costs are paid for, and then the long run capital cost of the road is the capital renewal cycle for it, which is a very long time.

Intelligent debate about the costs of highways, relative to other modes, cannot be had until there is more data on the relative costs of highways, compared to other private investments, and other parts of the economy.   Of the seven highway assets owned or part owned by Transurban in full operation, three make a profit and four have been making a loss (before tax), the losses are due to financing costs not been recovered from revenue from users.  One of those had a major refinancing in the past year, others have localised issues, but Pocahontas is a road that shouldn't have been built when it was, and I suspect had the project been entirely led by investors - not a government promoting the road on its own, it would have been quite different.

Some projects would thrive, Melbourne Citylink saves a fortune in time and fuel for those who use it, and has unlocked significant benefits for Melbourne in relieving congestion to and from the airport and across town.  Others would not be built.  That is how it should be.  Tolling, of course, provides a good proxy for whether a road should be built, notwithstanding the two distortions not reflected in this - the presence of fuel tax (which doesn't pay for the road) and the existence of parallel untolled routes (which get more demand than they should).  

News briefs - Indonesia, North Carolina, Washington DC

Indonesia - Jakarta to get six new urban toll roads

Jakarta has serious congestion, which is estimated to cost RP46 trillion (US$4.7 billion) a year in delays, wasted fuel and vehicle wear and tear, with fuel being the biggest cost (no doubt because the value of time in the city is relatively low on a per person basis).  The city is developing bus rapid transit, has plans for a metro and is widening existing corridors, but its most ambitious plan is to build six new urban toll roads.  The intention is for them to be tolled, not just to pay for the high capital costs, but to manage demand, so that the inexorable demand for road space is tempered by having to pay for it.

However, it is controversial as the Jakarta Transportation Council, an advisory body, says it will have "no positive effect" on traffic, according to the Jakarta Post.   The projects will cost RP42 trillion (US$4.1 billion).  Objectors say it will encourage sprawl and pollution, harming the environment and public health, although it is entirely plausible that the roads could be priced and managed to minimise this.  Some argue that as the new roads are being built above existing railways or roads, that the railways should be expanded instead.   The project was advanced by the previous Governor, with one argument made that the city has a small proportion of land dedicated to roads at 6.2%, when the target is 12%.

I'm hardly in a position to judge on this, particularly as it is easy for middle income people in wealthy countries to pontificate about what is good for developing countries, and also because I am technologically neutral.  Roads are simply transport corridors, and as long as they are priced correctly, and the corridor managed well, there is no reason for them not to be positive for public transport, and to allow road space on the routes bypassed to be given over to pedestrians, cyclists, carts, and to properly regulate parking.

The six roads are shown on this Jakarta Post map:

The first phase of construction will include the 17.8-kilometer route from Semanan, West Jakarta, to Sunter, North Jakarta, and the 11-kilometer route from Sunter to Bekasi.

The second phase includes roads from Duri Pulo, Central Jakarta, to Kampung Melayu, East Jakarta, and from Kampung Melayu to Kemayoran, East Jakarta.

The third construction phase will link Ulujami, South Jakarta, to Tanah Abang, Central Jakarta and the fourth will connect Pasar Minggu, South Jakarta, to the Casablanca area in South Jakarta.

The state company PT Jakarta Tollroad Development is owned by multiple local companies, "city-owned enterprises collectively hold the majority of shares in JTD, namely, PT Jaya Real Property (22,5 percent), PT Pembangunan Jaya Ancol (20 percent), PT Jaya Konstruksi (16 percent), PT Pembangunan Jaya (9 percent), PT Jakarta Propertindo (7 percent) and PT Jaya Land (3.5 percent)."

Jakarta is also planning an electronic road pricing system to manage congestion, with legal approval for introduction reached in October 2012.   I will write more on that later.  However, I would hope that before that happens, that all toll roads in the city get converted to electronic free flow systems, which will be necessary for any form of congestion pricing in any case.

In any case, the Jakarta Post reports that it is now up to current Governor, Joko “Jokowi” Widodo, to decide on starting any of the new toll road projects.   

North Carolina toll road faces double billing controversy

According to the Charlotte Observer:

At least 800 drivers on the Triangle Expressway have been double-billed this month, paying electronic tolls twice for every trip, the N.C. Turnpike Authority says.

The problem is fairly obvious, motorists travelling with two tags both of which are getting recognised and generating a bill.  The NCTA has its own "Quickpass" as its product, but some motorists also have the EZ Pass tag, used across 14 states.

You see the Expressway is fully electronic free flow, but as of the start of 2013, it has been interoperable with EZ Pass, so there are customers with both units, and so are being billed twice.

The NCTA blames motorists for this, because the terms and conditions for its contract with customers using Quickpass is for only one tag/sticker to be in a vehicle at any one time.   However, as true as this may be, the system should have avoided this problem in its architecture.

For the system architecture should not allow two chargeable events to be attributed to the same number plate.  This isn't hard to manage, as the system ought to reconcile these sorts of events (and indeed this will become more common over time), so that while motorists should only use one device at a time, the system should not charge an identifed vehicle more than once in a specific interval.

Washington DC sceptical about congestion pricing but it's hardly surprising

There have been various reports of what is essentially a public opinion survey about transport policy, that came to the conclusion that people in Washington DC are most accepting of tolled lanes, and least accepting of distance based road pricing.  Really? It took money to figure that out?  The Brookings Institute research is interesting in as far as it shows considerable support (60%) for toll lanes - but beyond that it isn't anything that any expert in this area could not have expected.

There have been surveys about road pricing for many years in many countries, and the conclusion is pretty much always the same. The majority oppose paying more to use existing roads, and the more complicated the proposal they more resistant they are.   They like it better if more money (whose?) is spent on more public transport and other alternative modes.  

The acceptance of toll lanes is obvious, as they are optional.  The lesser support for some sort of cordon based pricing is because it would not be, and distance based pricing is always clumsily sold as some sort of tracking system, and there are no explanations made of how much people pay now with fuel taxes.

The errors in this work look like (from the reports) to be:

1.     It provided details with little rationale as to what the merits of them are;

2.     It gave people little confidence in what any of the options would deliver (why would anyone support paying more without understanding or believing that conditions could improve);

3.     It provided options without reference to replacing the gas tax;

4.     Those undertaking the survey appeared to be unable to answer core criticisms of the public, such as thinking that a cordon creates congestion just outside it.

It was undertaken using public forums.  Maybe the 20th century would like to get it survey technique back.  The busiest people or those with the least flexibility are unable to participate in such a manner.

Now I am pleased these issues are being discussed in the United States, it has taken long enough, as only eight years nobody talked about pricing existing roads.  However, it would be good for the debate for surveys like this to not occur.  

Are surveys undertaken about taxation policy, health policy, how to manage the electricity or telecommunications networks?  No.  Why would anyone presume that the general public - who can attend such meetings - are sufficiently well informed to react intelligently to what is presented to them?  More importantly, why aren't the lessons learnt from those who have tried to do this actually being applied in describing options and managing such processes?

Washington Examiner damns plan to "nationalise" Dulles Greenway

In a local editorial, the Washington Examiner describes plans to socialise/nationalise the Dulles Greenway as one that will "saddle Virginia taxpayers with this white elephant".  The plan comes from Virginia House Transportation Committee Chairman Joe May, (R-Leesburg).  So yes it is a Republican wanting the government to take over a private business, ostensibly to subsidise the users of that business. The report states the road loses US$25 million a year, which would effectively be transferred to taxpayers.  

The private owner, Macquarie Atlas Roads, would of course seek to maximise the price that it would extract from a willing buyer, and the continuing unprofitable nature of the road would be hidden in the state's public debt and general taxation.

It all seems absurd.  The whole point of private road concessions is to transfer risk, which is what has been done in this case.  The road has been built, the tolls are relatively high, but increases are capped by the concession, and the continued losses are born by the investors.   Far better for the motorists on the road to be effectively subsidised by the private owners (which is a transfer into the state from foreign investors) than from taxpayers.

ead more here: http://www.charlotteobserver.com/2013/01/31/3823197/nc-turnpike-authority-double-bills.html#storylink=cpy

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.

Disincentivising overbidding for toll road concessions

That's the title of a report for the Australian Federal Department for Infrastructure and Transport carried out by RBConsult and Oxera.

It was driven by the concerns over the list of Australian toll road concessions that appear to have been overbid with overly optimistic forecasts for traffic.  The latest being the Brisbane AirportLink, closely followed by Clem 7, the Lane Cove Tunnel and Cross City Tunnel.

I've finally had a chance to read the report, so here are some of the main points I found of interest (although it is recommended to read it thoroughly).

Six explanations were found from a literature review for possible overbidding:

- Strategic misrepresentation by the public sector:  Public sector comparators used to determine the expected costs and demand for the project get biased by political considerations demanding that the project proceed.  Bidders get caught along with this optimism.

- Strategic misrepresentation by the private sector:  Determination to because of prestige or strategic belief that winning is important in leading up to new contracts.

- Optimism Bias: A recognised flaw in forecasting of costs and benefits to take a more optimistic view of outcomes that dismisses negative influences.

- Renegotiation:  Providing an optimistic forecast to win on the basis that the contract can be renegotiated onto more favourable terms and conditions post award.

- "Winner's curse": The winner by definition will have lowered costs and have heightened expectations of demand and success, so the process self selects the one with the greatest bias from the market average.

- Technical error:  Inexperience in bidding results in bidders making a mistake that enables them to win/

It suggested various measures to minimise the risk of overbidding in future:

- In pre-procurement, subject proposed projects to economic efficiency appraisal so that only projects where there is commercial and economic viability proceed, rather than those driven by political expectations.

- Exposure to traffic risk should not be removed completely from concessions, partly to incentivise provision of higher quality service.  It is suggested that risk sharing mechanisms with the state for factors outside the control of concessionaires could be adopted, to cover factors such as GDP or population growth.   The concession should not incentivise excessive risk-taking.

- The downside risk of overbidding needs to be increased.  Options include bidding deposits that are used to cover costs if retendering is required, or to evaluate bids based on the guarantees and equity provided for the bid.

- Bid appraisal should avoid rewarding upfront premiums offered by bidders, it could also include assessment of assumptions on which demand and revenue forecasts are based.  This could also reassure investors by giving confidence that concessions are awarded to the most qualified group for appropriate reasons.

For me, the big issues are around the original viability of projects.  Governments should undertake robust commercial and economic appraisals that are allowed to say a project is not worth pursuing with.   This, at the very beginning, will mean those that proceed will be those with a reasonable chance of financial success.  An alternative would be to simply let the private sector approach government with propositions that do not involve taxpayers' money.

Beyond that is the concessioning policy framework that is set up in the first place.  It is important to note that the Queensland government has very little exposure in the Clem 7 and AirportLink toll road cases, so in that sense it hasn't been a failure.  However, if there is interest in having more of these, there needs to be a framework that allows for that.

Some ideas:

- When releasing a concession, incentivise the private sector to say if the project is not viable.  Don't make it a forgone conclusion that it will proceed.  If it is politically important then taxpayers can subsidise it, but it should be clear that bidders that are overly optimistic in forecasts wont be rescued.

- Private bidders should be required to get independent peer reviews undertaken of demand/revenue forecasts, the mere fact of this should incentivise more conservative behaviour by the primary modellers.

Beyond that, this should be more of a wake up to investors and banks that demand forecasting in this field is not something that can be done based mostly on assumptions used both on projects in other geographies and on untolled projects.  Motorists value the money they spend on tolls more than the value of time typically imputed by the public sector for transport capital projects.  It is time for investors to demand more scrutiny, and perhaps to treat the transport economics behind such forecasts as rather a bit more refined than has been undertaken by some consultants who spend most of their work dealing with untolled highway projects.

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.