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TRANSPORT COVER HDS:TRANSPORT COVER HDS 12/12/07 16:02 Page 1

After years of high taxation and underinvestment in transport we face gridlock on our roads and deadlock in transport policy. While the case for road pricing is clear and has been made for a long time, the public is wary of anything that could turn out to be yet another stealth tax. Towards better transport The solution we propose and investigate is to improve our infrastructure now and to repay the costs using road pricing revenues collected in the future. This way, the infrastructure can be built without delay and the funding gap met using private Towards better finance. Not only would our infrastructure be improved but we would have adopted the most efficient means of managing road space for the future. transport

This report explores the experience of PFI in transport. It then moves on to detail the institutional and fiscal frameworks Funding new infrastructure governing the sector. It finds that while our current systems of with future road pricing revenue governance and taxation are broadly compatible with road Richard Wellings and Briar Lipson, edited by Oliver Marc Hartwich pricing and the concomitant deployment of private finance, certain frameworks look more likely to promote efficient long- term investment in transport infrastructure than others.

Until transport policy takes a different direction, Britain’s transport network will continue to deteriorate while our roads become even more congested. This report shows that there is a way to get Britain moving again.

Richard Wellings and Briar Lipson edited by Oliver Marc Hartwich

£10.00 ISBN: 978-1-906097-12-7 Policy Exchange

Policy Exchange Clutha House 10 Storey’s Gate London SW1P 3AY www.policyexchange.org.uk TRANSPORT HDS:TRANSPORT HDS 12/12/07 13:49 Page 1

Towards better transport

Funding new infrastructure with future road pricing revenue

Richard Wellings and Briar Lipson edited by Oliver Marc Hartwich

Policy Exchange is an independent think tank whose mission is to develop and promote new policy ideas which will foster a free society based on strong communities, personal freedom, limited government, national self-confidence and an enterprise culture. Registered charity no: 1096300.

Policy Exchange is committed to an evidence-based approach to policy development. We work in partnership with aca- demics and other experts and commission major studies involving thorough empirical research of alternative policy outcomes. We believe that the policy experience of other countries offers important lessons for government in the UK. We also believe that government has much to learn from business and the voluntary sector.

Trustees Charles Moore (Chairman of the Board), Theodore Agnew, Richard Briance, Camilla Cavendish, Richard Ehrman, Robin Edwards, George Robinson, Andrew Sells, Tim Steel, Alice Thomson, Rachel Whetstone. TRANSPORT HDS:TRANSPORT HDS 12/12/07 13:49 Page 2

About the authors

Dr Richard Wellings Edinburgh, she worked as a Par liamentary Deputy Editorial Director, Institute of Researcher for Grant Shapps MP. Economic Affairs Dr Richard Wellings is the Deputy Dr Oliver Marc Hartwich Editorial Director at the Institute of Chief Economist, Policy Exchange Economic Affairs. He is a deputy editor of Dr Oliver Marc Hartwich is Policy Exch - the journal Economic Affairs and works on ange’s Chief Economist. He was born in the production of the IEA’s monograph 1975 and studied Business Administ ra tion series. After graduating from Oxford and Economics at Bochum University (Ger- University, he undertook a PhD on trans- many). After graduating with a Master’s port policy at the London School of Degree, he completed a PhD in Law at the Economics, which he completed in 2004. universities of Bochum and Sydney (Aus- Subsequently, he wor ked as a researcher for tralia) while working as a Researcher at the A & F Consulting Engineers, before join- Ins titute of Commercial Law of Bonn Uni- ing the IEA in August 2006. He con- versity (Germany). Having published his tributed two papers to The Railways, the award-winning thesis with Herbert Utz Market and the Government (IEA, 2006) Verlag (Munich) in March 2004, he moved and is co-authoring a forthcoming book to London to support Lord Matthew Oak- on road privatisation. eshott of Seagrove Bay during the process of the Pensions Bill. He is the UK Rep res en t- Briar Lipson ative for the German think tank the Institute Research Fellow, Policy Exchange for Free Enterprise. He is the co-author of Briar Lipson is a Research Fellow at Policy Unaffordable Housing: Fables and Myths, Exchange specialising in Economic Bigger Better Faster More, Better Homes, Competitiveness. After gr a d uating with an Greener Cities and The Best Laid Plans. He MA in Economics from the University of joined Policy Exchange in January 2005.

Published by Policy Exchange, Clutha House, 10 Storey’s Gate, London SW1P 3AY www.policyexchange.org.uk

ISBN: 978-1-906097-12-7

Printed by Heron, Dawson and Sawyer Designed by SoapBox, www.soapboxcommunications.co.uk

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Contents

Acknowledgements 4 Executive summary 5

1 A competitive disadvantage: Britain’s transport infrastructure 8 2 The case for road pricing 14 3 Harnessing private finance 20 4 The institutional framework 32 5 Taxation and investment 46 6 Additional policy options 57 7 Conclusions and recommendations 65

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Acknowledgements

Policy Exchange would like to thank Serco, Bevan Brittan and an anonymous charita- ble donor for their financial support. The authors would like to thank all those who met with them to discuss aspects of the research, as well as Nick Boles, David Worskett and two anonymous referees for their advice and comments. In addition we would like to thank Philippa Ingram for proof-reading and Oliver Marc Hartwich for his insight, expertise and ongoing editorial support.

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Executive summary

Transport has become one of the key restraints on Britain’s economic growth “ As a method of allocating a scarce resource, to and quality of life. Successive governments ration roads without employing road user charges is have failed to provide the standard of infra- comparable only with the Soviet system of queuing: structure necessary to keep up with an something so discredited as to be considered increasingly mobile and dynamic econo- ridiculous in almost every sphere of life but motoring my. Traffic congestion is now endemic, ” affecting not just large cities but also the core motorway network and small towns. It currently costs our economy in the tackle congestion. Inefficiency of govern- region of £20bn per year, a figure set to rise ment transport spending is a serious prob- significantly in the coming years. This will lem. Just 6 per cent of passenger travel is harm our future economic competitiveness undertaken by train, compared with 84 per and growth. cent by car, yet the railways receive annual International comparisons suggest that subsidies totalling almost £6.5 billion – the UK is close to the bottom of the table nearly as much as the government spends when it comes to transport infrastructure. on roads. The apparent misallocation of Among the world’s leading economies, the resources reflects the fact that transport UK has the most crowded and congested infrastructure investment has become roads, and the fewest motorways. Each detached from consumer demand. The year more than 1.6 million passenger kilo- absence of price signals means it is difficult metres are travelled on each kilometre of for government planners to allocate expen- Britain’s road network: more than twice diture efficiently. the European average. The UK also per- As a method of allocating a scarce forms poorly in terms of the quality of its resource, to ration roads without employ- public transport. ing road user charges is comparable only Clearly a step change is needed in the with the Soviet system of queuing: some- quality of Britain’s infrastructure. Not only thing so discredited as to be considered would this improve our global competi- ridiculous in almost every sphere of life but tiveness – it would also improve the day to motoring. The waste and inefficiency of day lives of the travelling public. such a system is painfully obvious to anyone The deficiencies of UK transport infra- who has sat in congestion and traffic jams. structure do not reflect a shortage of tax But the greatest barrier to pricing – pub- revenues from transport. In 2006 private lic opinion – has arisen not because the road users paid around £32bn in trans- public cannot appreciate the need for it. It port-related taxes. Of this £32bn, just is instead because, having endured decades £8bn was spent on the road network. And of special taxation for the benefit of gener- of this £8bn – which is enough in theory al spending, motorists do not trust govern- to construct at least 400 miles of six-lane ments to introduce pricing from which motorway – a large proportion was spent they will benefit. on repairing damage to the roads (caused One solution, as proposed in this report, primarily by good vehicles) and another is to upgrade transport infrastructure now, significant portion on anti-traffic and safe- and then, once users have began to experi- ty measures. New roads have also tended to ence substantial benefits, introduce the be built for political reasons rather than to road user charges necessary to cover the

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Towards better transport

costs. There is, of course, the problem of Hand in hand with reforming and how to finance the gap between the start of devolving the institutional structures construction and collection of the revenue must be consideration of both the fiscal stream. The answer to this lies in private framework around transport and the finance. The Private Finance Initiative charges to be set. At least to begin with, (PFI) has a largely successful track record the scheme we advocate will be revenue in the transport sector. The PFI was used additional, but further investigation in the Design, Build, Finance and Operate reveals two very striking facts. First, rela- (DBFO) road contracts first employed in tively small charges on congestion hot- the early 1990s. Cost savings compared to spots will soon pay for improvements. For public sector estimates were between 14 example, a six-hour peak time weekday per cent and 22 per cent for the first eight charge of 10p/km on a six-lane motorway such projects (depending on the discount priced to run close to capacity could in a rate used). The M6 Toll is another example year raise around £1.5 million per km – of PFI in transport. Despite traffic projec- sufficient to pay for widening to eight tions failing to live up to expectations, ulti- lanes or indeed, to construct a brand new mately it has provided a brand new road in six-lane motorway in parallel. Second, the a highly congested area at very minimal dynamic effects of pricing and improved cost to the taxpayer. Similarly, PFI has transport infrastructure on the economy enabled cities such as Nottingham to build will increase overall tax yields, which in and operate better public transport servic- time could facilitate cuts in fuel and vehi- es. cle taxes. One of the greatest problems for the pri- The issue of transport taxation has been vate financing of transport infrastructure is complicated in recent years by environ- political risk compounded by a lack of long mental justifications for high fuel taxes. term stability and accountability in trans- Although both are externalities of road port governance. The Treasury, transport, congestion and carbon emis- Department for Transport, Highways sions are separate problems with different Agency, Network Rail, Regional solutions. Fuel consumption is a much Assemblies, Passenger Transport Executives more accurate proxy for carbon emissions and Authorities, not to mention the EU, than distance travelled, and should remain all have some influence over policy in this the preferred tool. That said, even accord- area; and these are just the public sector ing to the high-end estimates of the cost of bodies. With so many layers of governance carbon emissions detailed in the Stern and such diverse needs in different parts of report, the carbon tax on a litre of petrol the country we advocate a significantly should be around 11 pence, which is much more devolved approach to transport, pos- less than the current petrol tax rate of sibly supported by a strategic road network around 50 pence per litre. manager, Network Road (by analogy with The British economy is suffering from Network Rail). Simplifying the system and its reliance on a centrally planned model of improving accountability would make transport governance. It has left the coun- transport investment considerably more try crying out for an injection of invest- attractive to potential investors, thereby ment which is simply not available from lowering financing costs and raising the the Treasury. In a relatively small country quality of affordable schemes. such as Britain with tightly centralised

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Executive summary

planning laws and an affluent car-loving pricing, and in that order, Britain’s sub- population, roads are – and will undoubt- standard transport infrastructure can be edly remain – a scarce resource for which upgraded, thereby improving economic rationing by queuing and congestion is competitiveness and the quality of life of inefficient. By combining investment with the British public.

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A competitive disadvantage: Britain’s transport infrastructure

Decades of insufficient and inefficient six metres of roads per inhabitant. investment in transport have damaged Even in the Netherlands, which is Britain’s international competitiveness. much more densely populated, the In their Economic Survey of the United figure was seven metres.4 Kingdom, the OECD stated that: We have fewer kilometres of motorway than other European countries of “The United Kingdom ranks poorly in comparable population. Spain, France international comparison both on survey and Germany each have a motorway 1. OECD, Economic Survey of the United Kingdom 2005: based measures regarding the quality of network that is more than twice the Public Services and transport infrastructure and on measures size of ours.5 Infrastructure: Tracking the Improvements, www.oecd.org of congestion.” 1 Only 30 per cent of railway tracks /document/27/0,2340,en_2649 _201185_35461339_1_1_1_1, were electrified in the UK, compared 00.html In March 2006 the Economist with more than 70 per cent in 2. The Independent, 28th March Intelligence Unit warned us that the UK Belgium, Sweden and the Nether - 2006, available at: 6 www.findarticles.com/p/articles/ risked slipping down the global business lands. mi_qn4158/is_20060328/ai_n161 environment rankings if its “congested 80583 and unreliable land transport infrastruc- As Figure 1.1 shows, Britain has fallen a 3. Department for Transport, The 2 Future of Transport, Stationery ture” did not improve. The Department long way behind its economic competi- Office, 2004 for Transport has itself admitted that: tors in the provision of a modern trans- 4. The Strategy Unit, Transport Strategy Review: Phase One, “The core of our railway network was port network, even though it imposes the Cabinet Office, 2001 established well over a hundred years ago. highest fuel taxes on road users.7 Already 5. A large discrepancy remains Most of our motorways were built 30 or by 2004 China had constructed a motor- even after adjustments are made for land area and population 40 years ago. Successive governments way network ten times the size of the density. In fact, densely populat- have devoted insufficient resources to UK’s and was investing around thirty ed countries such as the UK would be expected to have more upgrading and modernising the transport times the UK figure (adjusted for pur- motorway km per head of popu- system, while travel on our road and rail chasing power parity) in its road net- lation than less densely populated nations, since there would be networks has increased to levels that were work. The disparity cannot be explained greater demand for high capaci- 3 ty routes (traffic also declines as never anticipated when they were built.” by lack of space. Motorways carry 20% distances increase). The following figures from a 2001 of total traffic and 40% of road freight, 6. Ibid. report by the Prime Minister’s Strategy yet they take up less than one two-thou- 7. World Road Statistics 2006, Unit illustrate this analysis: sandth of Great Britain’s land area.8 Tables 8.1 and 8.2, International Road Federation, 2006 Sir Rod Eddington, who reviewed the

8. Calculated from Department In no other major country were the long-term links between transport and for Transport, Transport road lengths per person as short as in the UK’s productivity, growth and stabil- Statistics Great Britain, Ch. 7, 2006 the UK, where there were on average ity for the Government in 2005-06,

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A competitive disadvantage

Figure 1.1 Selected road statistics for the world’s major economies9

Motorway length (km) per billion vehicle km

0 Canada China France Germany US UK

Motorway network (km)

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0 US China Canada Germany France Japan Italy UK

Annual road expenditure ($) per thousand vehicle km

300

250

200

150 9. Sources: World Road Statistics 2006: Data 1999-2004, 100 International Road Federation, 2006; and Connecting East Asia, A New Framework for 50 Infrastructure, World Bank, 2005. Traffic volume excludes motor- 0 cycles and mopeds. Figures are China France US Canada UK the latest available, 2004 or earlier (purchasing power parity adjusted).

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Towards better transport

found that air transport performed rela- work, although some progress has been tively well (although planning delays now made in recent years in upgrading the A1 threatened this competitive advantage), in North Yorkshire. No direct motorway but that land transport was a particular link exists between Southampton, one of weakness. His study concluded that: Britain’s biggest ports, and the Channel “Continued economic success is forecast Tunnel. to lead to rising demands – if left unchecked 13 per cent of traffic will be subject to stop-start travel conditions by The misallocation of investment 2025.”10 The pattern of new roads has borne little British governments have always had a relation to congestion levels or consumer peculiar reluctance to invest in roads. In demand, with the possible exception of the 1920s and 1930s, when the first the privately built and operated M6 Toll motorway networks were being con- (Birmingham Northern Relief Road). structed in Germany, Italy and the US, The A74 through southern Scotland did the Ministry of Transport actually pre- not suffer from chronic congestion, yet vented entrepreneurs from building this road was chosen for upgrading to motorways in England.11 The UK would motorway standard, probably for politi- have to wait another 30 years, until the cal reasons as it links Scotland (almost) to 1950s, for its first motorway. If such an the English network. Similarly, the anti-road building tradition is upheld in upgrade of the A1 in North Yorkshire was the 21st century, perhaps rationalised on driven, at least in part, by regional devel- environmental grounds, the country will opment objectives. be unable to fulfil its economic potential. Expenditure on public transport has Very little extra capacity has been also been driven by political expediency added since 1995, despite rising inter- rather than economic efficiency. The urban congestion. Existing motorways level of government subsidy has risen sig- often take indirect routes that add to nificantly over the past 15 years to about journey times; the M1 heads north west £10 billion a year.12 Of this, approximate- towards Birmingham before heading ly £6.5 billion per annum is destined for north to Leeds. There are still obvious Britain’s railways; even though they gaps in the network; Manchester and account for only 9 per cent of freight Sheffield, two of the country’s largest mileage and 6 per cent of passenger cities and only 30 miles apart, have no mileage (see Table 1.1).13 Furthermore direct motorway connection – travellers operating subsidies are disproportionate- 10. The Eddington Transport Study, the Case for Action: Sir must choose between the tortuous and ly concentrated on poorly used regional Rod Eddington’s Advice to dangerous Woodhead and Snake Passes railways rather than the overcrowded Government, The Stationery 14 Office, 2006 or divert 25 miles north to the M62. London commuter routes.

11. Plowden W, The Motor Car Motorway provision is also patchy along Money has also been lavished on large and Politics, The Bodley Head, the route of the Great North Road infrastructure projects such as the 1971 between London and Edinburgh. There 12. Department for Transport, Channel Tunnel Rail Link and the mod- 2006, op. cit. is no link between Newcastle and ernisation of the West Coast Main Line 13. Ibid. Edinburgh or Newcastle and Glasgow, (£5 billion and £7.6 billion respectively 14. Wellings R, ‘Rail in a Market and the current A1 link follows an indi- in 2004 prices). Neither scheme is likely Economy’ in The Railways, the Market and the Government, rect and time-consuming route. The large to achieve a commercial return on invest- IEA, 2006, p 225 conurbations of the North East of ment.15 Local tran s port schemes have pos- 15. See www.ctrl.co.uk and England (Teesside and Tyneside) have yet sibly been even worse investments. Of Modern Railways, June 2004, pp 52-4 to be linked to the main motorway net- the numerous light rail schemes con-

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A competitive disadvantage

Table 1.1: Travel and public expenditure by surface transport mode

Mode Proportion of surface passenger Estimated annual government miles (%) expenditure (£ bn) 16

Car/van 84 8 Rail 6 6.5 Bus 5 2.0 Underground 1 1.0

structed over the past 20 years none has of government expenditure on transport managed a commercial rate of return.17 In and roads is questionable. And there are fact many have been plagued by operat- sound theoretical reasons to expect a high ing losses for much of their history. degree of government failure in this regard.

The failure of supply and demand Lack of investment in transport infrastruc- “ The Government receives about £14 billion more ture, especially roads, has definitely not from transport users than it spends on transport been due to a lack of tax revenue from annually transport. The Government receives about ” £14 billion more from transport users than it spends on transport annually.18 Department for Transport figures show Gabriel Roth believes that governments that UK taxes on petrol and diesel have provide roads using methods similar to the always been among the highest in the command economies of Eastern Europe – European Union.19 A recent report from and with similar results: “Congestion in the Institute for Fiscal Studies found that some parts of the system, wasted capacity 16. Precise figures are unavail- able. For example, not all road Britain has the highest combined tax rate in others, and widespread deterioration expenditure provides infrastruc- on unleaded fuel of any EU member and financial losses.”22 Indeed, the trans- ture and services for motorists. 20 Wear and tear is predominantly state. But tax revenue from transport is port sector as a whole is subject to a high caused by goods vehicles.

decoupled from spending on transport level of state intervention in the UK. There 17. Babalik E, Urban Rail infrastructure. is direct political control of fuel duty rates Systems: A Planning Framework to Increase Their Success, Since rail and bus transport are heavily and road tax, while numerous centrally unpublished PhD thesis, subsidised, the burden is far higher for decided regulations determine matters University of London, 2000 www.env.leeds.ac.uk/its/private/l private road users, who pay £32 billion in such as speed limits, safety standards and evel2/instruments/instrument002 special taxes compared with government vehicle sizes. The Government chooses /l2_002a.htm#cost 18. Calculated from Department expenditure on the roads of about £8 bil- which transport modes to subsidise, which for Transport, Transport lion per annum.21 The latter is still a sig- to neglect and which to tax heavily; it is Statistics Great Britain, 2006 nificant sum, enough to construct at least not surprising that a large proportion of 19. Ibid., Chapter 10 400 miles of six-lane motorway. However, consumers are dissatisfied with the provi- 20. Leicester A, Fuel Taxation, Institute for Fiscal Studies, 2005, much of it is spent on maintenance (dam- sion of transport services or that trans- www.ifs.org.uk/bns/bn55.pdf

age to the roads is primarily caused by port prices bear very little relation to 21. Department for Transport, goods vehicles) and a significant propor- demand. 2006, op cit. 22. Roth G, Roads in a Market tion on anti-traffic and road safety meas- Market prices play some part in the Economy, Avebury Technical, ures. In general, the economic efficiency transport sector, as one would expect in a 1996, p 1

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mixed economy, but their role is subordi- have often neglected transport’s integral nated to that of political control, prima- role in productivity increases and the rily from central government depart- resulting production of wealth. Travel ments. For example, the provision of new times are not only dependent on the infrastructure is largely centrally planned. absence of congestion but also the pattern If there is a congested road then it is very of infrastructure provision. unlikely that capacity will be increased as One should remember, too, that subsi- a response (raising tolls is impossible dies for public transport are financed under the present regime). New roads are from taxation, with the associated harm- perhaps more likely to be built in rela- ful effects on the production of wealth, tively uncongested areas as part of regen- including reduced incentives and distort- eration schemes. ed decision making. Then there are the costs of tax collection (and the effort expended in avoiding taxes) to consider. Some economists have estimated that “ On every kilometre of Britain’s road network more than “deadweight losses” mean every addition- 1.6 million passenger kilometres are travelled every year – al pound collected by taxation costs the more than twice the European average ” economy a further 50p to £1.50.25 Thus public transport subsidies inflict substantial economic damage for the sake of a relatively small proportion of the market for Central planning authorities are less mobility. capable of making efficient resource allocation decisions than free markets operating within relatively unrestrictive regula- Transport and wealth creation tory framework. Because government As our economy has expanded the need to decision-makers do not personally own travel has increased, but investment in the capital they are allocating they have transport infrastructure has not kept pace weaker incentives to act responsibly or and existing transport networks have show initiative.23 They are further ham- become increasingly congested. In no pered because they may not have access other major European country are roads as

23. Mises L, ‘Economic calcula- to relevant market prices and therefore congested as in the UK. On every kilome- tion in the socialist common- cannot accurately calculate costs and out- tre of Britain’s road network more than 1.6 wealth’, in F. A. Hayek (ed.), 24 Collectivist Economic Planning: puts. Transport officials have faced this million passenger kilometres are travelled Critical Studies of the problem when planning new road every year – more than twice the European Possibilities of Socialism, 26 Routledge and Kegan Paul, schemes. In the absence of toll revenue average. It has been estimated that traffic 1935, pp 87-130 from road users, the true value of the congestion costs the UK economy as much 24. See Mises L, Human Action: facility to users cannot be known and as £21 billion per year.27 A Treatise on Economics, William Hodge,1949, p 696 therefore the rate of return on the capital Eddington estimated that by 2025, 25. See, for example, Harrison F, spent cannot be calculated. Vital infor- without action, congestion on England’s Wheels of Fortune, London: IEA, 2006, p 165 mation about the best way of allocating roads will rise by 30 per cent, increasing

26. Calculated using data from capital resources is lost. costs to businesses and freight by over £10 Panorama of Transport, Eurostat, Although it is impossible to quantify billion a year, and wasting an extra £12 2007 precisely the impact of the current misallo- billion worth of time for households.28 27. Blythe P, ‘Congestion Charging: technical options for cation of transport sector resources on the As for the opportunity costs (negative the delivery of future UK policy’, British economy, the negative effects could economic impacts of the exchanges not Transportation Research Part A, 38; pp 571-87, 2006 be of far greater magnitude than those sim- undertaken because perceived congestion 28. Eddington R, op. cit., p 30 ply relating to congestion. Commentators acts as a deterrent) associated with conges-

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A competitive disadvantage

tion, they are difficult to estimate. turing sectors. Trade is facilitated that Examples include businesses not compet- otherwise would be uneconomic, resulting for trade in congested areas, potential ing in more specialised and productive employees not applying for jobs because economic activity. Of course, for the full the travel-to-work time would be too great economic benefits of improvements in and directors not holding a meeting transport infrastructure to be realised it is because it would waste too much time to essential that businesses and individuals travel the distance to convene. are free to locate their activities at the The economic benefits of efficiently most efficient sites. Thus the biggest eco- distributed transport capacity could be nomic gains are likely to be achieved substantial. If travel costs allow, more when efficient transport networks are companies can locate in one area, increas- combined with a high degree of freedom ing competition, enabling economies of in land markets.29 scale and thus increasing productivity. The widening gap between supply and For example, new motorways could dra- demand for transport in our fast-moving matically increase the population within, economy is threatening our very economic say, two hours’ drive of a particular loca- competitiveness. Rather than risk slipping tion. The new infrastructure could make down the international league tables of the the construction of a large and efficient best places to live and do business in the distribution centre viable where previous- world, Britain must bring about a step 29. On the economic impact of planning controls, see Evans A ly only a small centre would have been improvement in transport. This report and Hartwich O, The Best Laid Plans: How Planning Prevents profitable. Reduced transport costs bring explores a long-term and politically viable Economic Growth, Policy similar gains in the retail and manufac- solution. Exchange, 2007

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The case for road pricing

The true costs of motoring To put it in blunt economic terms, driv- At present a significant proportion of ers at busy times do not pay the full mar- road user costs such as depreciation, ginal costs they impose on other road users insurance and vehicle excise duty (VED), through resulting congestion. Of course, are fixed. Once paid, they may actually motorists using congested roads pay a price encourage motorists – equating marginal in the sense that their time is wasted. journey costs to the price of fuel – to use However those for whom time has a lower their cars more than they otherwise would value (for example the retired or unem- in order to justify the sunk payments. ployed) are able to impose higher costs on Road pricing could help reduce this those for whom time has a greater value ‘information’ problem by, in relative (hospital consultants or couriers delivering terms, reducing the fixed element and expensive just-in-time products for exam- increasing the marginal element of road ple). Any system that fails to account for travel costs – for example, by abolishing the fact that different people value time vehicle excise duty and introducing pay- differently is intrinsically inefficient. As a as-you-go insurance and tolls for using method of allocating a scarce resource, to congested roads. ration roads without employing road Fuel tax, and to a lesser extent VED, are charges is comparable only with the Soviet the only pricing mechanisms currently system of queuing: something so discredit- available to the government to ration road ed as to be considered ridiculous in almost use. Although they undoubtedly do this, every sphere of life but motoring. they do not accurately reflect the external Road pricing would force motorists to costs of using particular roads. These exter- take the value of their time into account. nal costs vary widely by location, time of People with a high degree of flexibility day, type of vehicle and grade of road. about when they travelled could choose to Evaluated rationally, they could be incor- go at off-peak times when tolls were low. porated into road user charges. The Road operators could even offer special details of such a scheme are outlined rates, like saver fares on the railways, to below. encourage travel at the quietest periods. Such variations in price would even out Congestion costs traffic levels over time and space, poten- At certain times and locations road space is tially increasing the use of existing road clearly a scarce resource. The evidence is capacity. congestion. But such variations in the scarcity of road space are not reflected in Track costs current motoring taxes: users pay roughly It clearly makes sense for drivers using the same no matter what kinds of road extremely expensive urban motorways – they use, where or at what times. perhaps built on expensive land and

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involving the purchase of hundreds of prop- Accident costs erties and tunnelling – to pay more than a Similar benefits could be forthcoming in driver using a neglected rural A-road that road safety. More than 3,000 people are has barely been improved since the 1920s. killed on Britain’s roads every year, with a However, although this principle can huge human and economic impact.31 It easily be applied to newly built infrastruc- could be possible to pay accident-insurance ture, it is more difficult when it comes to based on usage, as Norwich Union now existing roads. Drivers may feel, with some offers, or even as a component of tolls. With justification, that they have already paid either system, insurance companies could the construction costs through their charge road users more to travel along roads motoring taxes. But it is important that the with a high casualty rate or after midnight, current capital value of roads is reflected in and less to travel along safer roads or at off- pricing regimes to ensure an efficient allo- peak times during the day. This would give cation of resources. These issues and possi- drivers an obvious financial incentive to use ble institutional solutions are discussed safer roads and could, if some form of par- further in Chapters 4 and 5. tial pricing is introduced, help deter the diversion of motorists from motorways on Environmental costs to minor roads. The environmental costs of road use – such as noise and pollution – also vary greatly over the road network and, once Variations in the scarcity of road space are not again, the current taxation regime does not “ reflect this. The introduction of road pric- reflected in current motoring taxes: users pay roughly the ing offers the possibility of more closely same no matter what kinds of road they use, where or at relating vehicle charging to differences in what times” environmental impact. For example, noise and local air pollution costs might be negligible in many sparsely populated rural areas but considerable in densely populat- At the same time, infrastructure opera- ed urban areas. Any attempt to include tors would have an incentive to ensure environmental charging within a road pric- that their roads were safe in order to ing scheme would undoubtedly be compli- attract customers – particularly if the cated by disagreements over valuation institutional framework encouraged a methodologies.30 degree of competition between infrastruc- Another subject for debate would be ture providers/ operators. Thus pricing whether revenues from environmental offers the potential to introduce strong charges should be appropriated by govern- financial incentives towards reductions in ment for general expenditure, as with cur- the accident rate. rent fuel duty revenues or whether they It is also possible that a pricing system should be used directly to reduce environ- could reduce the number of untaxed and mental costs (or perhaps compensate uninsured drivers using the road network.

affected individuals). If these problems Research suggests that such individuals are 30. See Wellings R, op. cit.

can be overcome then pricing could create more likely to be involved in accidents 31. Department for Transport, incentives for road users to reduce the than other motorists.32 Thus, depending 2006, op. cit. 32. RAC Foundation, News environmental impact of their journeys by, on the nature of the scheme(s) implement- Release, available at: for example, using quieter and less-pollut- ed, there could be an additional road safe- www.racfoundation.org/index.ph p?option=com_content&task=vie ing vehicles or driving less in urban resi- ty effect beyond the incentive structures w&id=318&Itemid=35, 7th dential areas. detailed above. November 2005

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Clearer choice space, but also as “a measure of whether or Road pricing would make it straightfor- not to add to (or, indeed, subtract from) ward to compare the total cost of travelling the existing road space: it can and should by car or public transport. Distortions be used as an investment criterion.”33 In from discriminatory taxes and subsidies the absence of pricing and given the dis- would be removed or at least minimised, tortions of the taxation system, it is diffi- externalities would be costed and account- cult to value our road infrastructure accu- ed for and, with congestion reduced, rately. Potential investors struggle to calcu- motorists would be able to estimate their late future demand and revenue risk is journey times with far more accuracy than high. at present. Britain’s transport infrastructure would be used more efficiently by all users. Facilitating competition The revenue risk problem is well illustrated by the development of the M6 Toll (known in the planning and construction phase as the Birmingham Northern Relief Road). If roads were priced to avoid congestion, the highest “ Such uncertainties meant that the cost of tolls would be raised at the biggest bottlenecks, providing the scheme was inflated by high financing a powerful incentive for infrastructure operators to costs, while traffic projections – and rev- construct additional capacity ” enue forecasts – were overly optimistic. In the absence of wider pricing the M6 Toll suffered from ‘unfair’ competition from the existing M6. In particular, except Better investment during severe congestion, speed-limited Road pricing is not just about enabling hauliers had little to gain by using the toll individuals to make rational transport route. At the same time, M6 Toll users decisions, the revenues produced would effectively paid twice when fuel duty and also provide valuable information about vehicle excise tax are included. If a nation- consumer demand for travel and point to al road pricing system had been in place those locations where new infrastructure motorists on the original M6 would also may be most profitably provided. By have had to pay a toll and, potentially, exploiting the scattered preferences of 30 motoring taxes might have been reduced million drivers, road prices would provide or abolished. The ‘unfair’ competition far more accurate and dynamic informa- currently observed would have been elim- tion about transport preferences than that inated. currently available to planners. The implications of this are potentially If roads were priced to avoid conges- groundbreaking. It would enable private tion, the highest tolls would be raised at investors to build new links to compete the biggest bottlenecks, providing a pow- with existing ones in terms of price and erful incentive for infrastructure operators quality of service – and bring about a step to construct additional capacity. This change in the quality of Britain’s infra- capacity could be for public transport structure. However, the level playing field rather than private road vehicles if it necessary to obtain the greatest economic would harvest more revenue and the insti- benefit from private investment would tutional framework were sufficiently flexi- require an appropriate institutional and fis- ble to allow such cross-modal investment. cal framework. As we examine next, the 33. Day A, ‘The Case for Road As Alan Day argues, road pricing should politics of transport could make this diffi- Pricing’, Economic Affairs, 18 (4), pp 5-8, 1998 not simply be used to ration existing road cult to achieve.

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What is the case against road wasted road space and lost economic activ- pricing? ity) and too cheap at others (causing con- Road pricing could be a remarkable tool to gestion). improve the efficiency of our transport Although road pricing schemes must be network, but honest analysis must concede sophisticated enough to ensure the effi- that it will have some inherent difficulties cient use of road space, they must also be to overcome. predictable and easy for users to understand, so that motorists are not surprised Public opposition by a sudden rise in rates leading them to About 1.8 million people signed a petition seek alternative routes. Unfortunately, it is against road pricing on the Downing Street hard to achieve both features simultane- website and surveys show that between half ously, so a careful balance has to be struck and three-quarters of the public are between fine-tuning the system and not opposed to pricing, depending on the confusing drivers. This also means dealing details of the scheme.34 with “boundary” effects that occur, for The same surveys demonstrate that example, when traffic increases just after opposition is reduced when it is made the peak rate charges finish. These are dif- clear that road pricing revenues will be ficult technical questions, but they can be used to reduce motoring taxes or improve answered. Over time and with the oppor- transport infrastructure.35 Indeed, a tunity to experiment with different charg- majority of the public might support a ing schemes, what works and what does scheme providing certain conditions are not will become clear. met. However, there is widespread and understandable distrust of government Competing transport systems motives and a fear that road pricing could Road pricing would not operate in a vacu- end up being another tax-raising exercise, um because there are other modes of trans- just as the road fund was appropriated by port with which roads have to compete. As the Treasury and fuel duty is used for gen- Eddington recommended, the Govern- eral expenditure rather than improvement needs to get prices right for all forms ments to transport infrastructure.36 The of transport, especially congestion pricing way in which the proceeds from road on roads and environmental pricing across pricing will be used would have to be all modes.38 For travellers to make efficient attractive and clear in order to build up decisions, therefore, price distortions public support. between different modes must be removed as far as possible. If congestion pricing is What rates should be charged? applied to the road system then it must If the primary goal is to reduce congestion also be applied to public transport, includ- and speed up traffic, then prices should ing the busy commuter trains running into reflect the scarcity value of sections of road central London. This has, of course,

at various times. Prices would need to be already begun with peak and off-peak pric- 34. See Road User Charging, set by trial and error until congestion dis- ing on the rail and London Underground RAC Foundation 2006, 37 www.racfoundation.org/index.ph appeared and traffic flowed freely. But network. Levels of overcrowding on these p?option=com_content&task=vie given the likely opposition to the introduc- trains suggest that peak fares should be w&id=350&Itemid=35 tion of pricing mechanisms, political expe- increased further, although some passen- 35. Ibid. diency and not scarcity value may deter- gers may wish to trade discomfort for 36. Plowden W, op cit. mine the charge set. Economic benefits affordability. But on the rail network, sea- 37. See Hibbs J, ‘A Radical Approach’, Economic Affairs, 18 would then be lost since prices could be son tickets and fares for all journeys within (4), pp 2-4, 1998 too expensive at certain times (leading to 50 miles of London are regulated so fran- 38. Eddington R, op. cit., p 50

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chisees are not at liberty to raise fares in alone. These issues are discussed further in order to reduce demand on peak-time Chapter 5. commuter trains. The resulting congestion has led to demands for expensive capacity Operating costs increases on the worst affected routes. If Opponents of road pricing argue that most the logic of road pricing were applied to of the revenue generated would be spent on public transport it would be difficult to administration. High estimates of the costs justify the continued regulation of such of introducing and administering a national fares. scheme have been published recently.39 If, The same reasoning should apply to for example, the system cost £10 billion a environmental charges. If an environmen- year to run (about £300 per vehicle), this tal charge is included within road prices, amount would constitute around half the public transport users should also pay such annual current cost to the UK economy of a levy. Under-pricing the environmental congestion and, to put the figure in further impact of public transport will encourage perspective, would be sufficient to construct inefficient use. at least 500 miles of six-lane motorway. A complex IT driven road-pricing scheme Taxation and subsidies could suffer from severe cost over-runs and While road users pay taxes such as vehicle delays in implementation, as seen with the excise duty and fuel tax, buses and trains German lorry charging system, and the £6 receive substantial government subsidies billion National Health Service “choose and and a VAT exemption on their fuel. This book” computer system, which may end up imbalance should ideally be corrected. costing £50 billion.40 From an environmental perspective and Opinion differs on whether such a sce- in certain locations the continued govern- nario is probable for road pricing; it has ment subsidy of carbon emissions through been suggested that the costs of implemen- special support for public transport is diffi- tation are likely to be concentrated in the cult to justify. The introduction of road technology installed in vehicles rather than pricing – alongside an economy wide car- complex computer systems.41 Without bon tax (see Chapter 5) – would demon- question, though, any proposal will strate whether existing public transport inevitably have to balance the potential services are commercially and environmen- benefits with the costs and risks associated tally viable. This is a further argument in with administration. favour of increasing the pricing flexibility of public transport operators and reducing Wider economic effects subsidy levels. Thus the economic benefits of road pricing The introduction of a (non-carbon) could be lost through a combination of environmental component to road pricing political interference, modal bias, failure to 39. For example ‘Drivers face – it would probably vary according to the reform taxation and inflated administrative £600 bill for an in-car road pricing black box’, Daily Telegraph, estimated (non-carbon) environmental costs. It would be foolish to deny that these 21 February 2007. impact of a journey – would, alongside an dangers exist or to ignore them when www.telegraph.co.uk/news/main.j html?xml=/news/2007/02/19/nroa economy wide carbon tax, provide a pow- introducing a road pricing scheme. ds19.xml erful rationale for phasing out existing If expensive peak-time pricing were 40. See Sunday Times, 2 April motoring taxes. This would also increase introduced in major cities to eliminate 2006 www.timesonline.co.uk/tol/ com- the political acceptability of road pricing congestion, strict government planning ment/columnists/simon_jenkins/a and have economic benefits, since distor- controls could prevent businesses and rticle701108.ece tions are likely to occur when taxes are households from moving out of cities to 41. Private communication, 19 April 2007 focused on one sector of the economy avoid the high charges (a market reaction

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that makes more efficient use of the avail- dies could then rise, dissipating yet more of able road space and cheaper land). the benefits of road pricing. Companies could face demands for Finally, there is the possibility that, driv- increased pay from workers charged to en by bureaucratic and industry interests, drive into town at peak times. the road pricing system would suffer from At the same time, modal bias is likely to high set up and administration costs, fur- mean that public transport users would ther undermining its economic case. not be paying the full costs of commuting into city centres, since services are subsidised and environmental costs ignored. A new case for road pricing Thus significant numbers of commuters All of this leaves transport policy on the would be displaced on to public transport, horns of a political dilemma. To realise the which is often already full at peak times. advantages of a market-based solution, road The Government might then think it pricing has to be introduced. Yet on its own expedient to spend significant capital such a proposal would be guaranteed to sums on increasing capacity on public meet with fierce political resistance, which transport. However, because market prices in turn could lead to excessive intervention are so distorted by the simultaneous use of and over-regulation – as happened with rail fuel tax, VED, road user charges and pub- privatisation. Given budget constraints and lic transport subsidies, and because gov- the high level of fuel taxation, it would be ernments are notoriously poor at invest- difficult to finance new infrastructure ment, this may well represent a misalloca- through either the general budget or by tion of resources. A significant proportion levying higher petrol and diesel duties. One of the economic gain from road pricing way to surmount these difficulties would be could be dissipated on wasteful public to combine the introduction of road pric- transport schemes. Although in some areas ing with the provision of new infrastruc- public transport schemes will be commer- ture. Motorists would not then be paying cially viable, in others journeys cannot eas- again for existing infrastructure, but for ily be transferred to public transport and vital upgrades to the network. so businesses and individuals could face But unfortunately this would involve a substantial economic losses, both from time lag, because new infrastructure can direct charging costs and opportunity take years to plan and build. The M6 Toll, costs. for example, was first considered in the This is only one example, but it could early 1980s but opened only in 2003. have wider implications. Public transport Paying the tolls would only be followed by receives around £10 billion in subsidies better infrastructure at a much later date. If every year.42 If the number of commuters transport users were charged throughout using public transport doubled as a result this time without any visible improvement of road pricing, the need for increased sub- in the infrastructure, road pricing could sidy would be very significant indeed. well fail. That is why this report suggests The redistributive effects of road pricing taking a different route: introducing road are also far from clear. A negative effect on pricing after the necessary upgrades to our some less affluent inner city areas is possi- transport infrastructure have been made. ble. Pricing could deter middle-income The obvious question, which the next motorists from living in such locations, chapter explores, is how to finance the leaving inner cities to low-income public investment in new infrastructure before transport users and increasing social polar- the revenue stream from user charging has 42. Department for Transport, isation. Demands for regeneration subsi- even begun. 2006, op cit.

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Historical context The Private Finance Initiative In the 18th century a mixture of public The Government officially introduced and private capital funded the develop- the PFI in 1992. It allows the private sec- ment of an extensive and integrated net- tor to finance large projects, such as the work of toll roads or turnpikes.43 In the construction of new hospitals, prisons 19th century, following the commercial and roads. The Government lays down development of the canals, private compa- specifications for each project, and the nies built a vast railway network, support- private sector – usually a consortium of ed by Acts of Parliament that enabled the companies each specialising in a particu- compulsory purchase of land. During the lar aspect of the scheme – is responsible 1920s private consortiums proposed a for the construction and operation of the series of profit-making toll motorways infrastructure. A defining feature of PFI linking London with other big cities, usu- projects is the transfer of at least some ally with the support of the local authori- operational risk from the public to the ties along the route. By this time, however, private sector.45 As Roe and Craig the political climate had changed and Sir explain, this distinguishes PFI from the Henry Maybury, the Minister of Tran - more nebulous public private partner- sport, objected to “the placing of very imp- ships (PPP), such as London ortant road traffic arteries in the hands of Underground, that are effectively backed private capitalist enterprise, to be operated by government guarantees and can for profit”.44 Britain never did get a private- involve less transfer of risk to the private ly built motorway network but, in the sector. They add: “PPPs also tend to be right conditions, private investors were so complex as to obscure any hope of prepared to fund the development of large- transparency, are difficult to monitor scale infrastructure networks. and have confused lines of accountabili- As the role of the State grew, in trans- ty.”46

43. Albert W, ‘The Turnpike port as in other economic sectors, opportu- Trusts’, in Aldcroft D and nities for private investment became more The advantages of PFI projects47 Freeman M (eds), Transport in the Industrial Revolution, limited. The Conservative Government of They provide an alternative funding Manchester University Press, 1983 the 1980s tried to increase the role of the source for infrastructure schemes. In

44. Plowden W, op cit., p 193 private sector, albeit within a tightly regu- the short term, more capital projects

45. Roe R and Craig A, lated framework. The Queen Elizabeth II can be undertaken for a given level of Reforming the Private Finance Bridge at Dartford, opened in 1991, was public expenditure and therefore they Initiative, Centre for Policy Studies, 2004 the first notable modern road scheme to be can be brought on stream earlier.

46. Ibid. privately financed; investors were paid back Private organisations may also have 47. See for example, Poole F, using toll revenues. It served as a model for greater scope to make use of innovative Roads and Private Finance, Research Paper 97/85, House of several projects launched under the Private financial instruments and financing Commons Library, 1997 Finance Initiative (PFI) during the 1990s. techniques.

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Private sector skills and expertise are Moreover, the increases in PFI price after brought into the planning and execu- contract generally resulted from late tion of projects. changes being made to the project specifica- The involvement of private business tions, such as the re-categorisation of pris- and a competitive tendering process ons to take more dangerous offenders. Such should lead to better value for money changes would undoubtedly have led to and greater economies of scale. price increases under the traditional pro- Risk can be transferred from the public curement process too. to the private sector, so that taxpayers do not have to contribute when cost over-runs occur. The level of payments for the specified service is set out in the “ Risk can be transferred from the public to the private contract and cannot be increased as a sector, so that taxpayers do not have to contribute when result of unforeseen costs. The PFI can cost over-runs occur ” therefore deliver improved price cer- tainty for government departments. Incentive structures can ensure the close integration of service needs with According to the NAO, only 24 per cent design and construction. The design, of PFI projects were delivered late, compared construction and maintenance compa- to 70 per cent within conventional public nies that comprise PFI consortiums sector procurement. The delay was more have an incentive to work closely than two months in only 8 per cent of the together to protect their long term PFI projects surveyed. These figures show financial interests. that the PFI has delivered substantial The company responsible for building improvements in reliability. It would also infrastructure is generally responsible appear that most public sector project man- for its continued long-term operation, agers have been satisfied with the perform- increasing the incentive for consor- ance of their PFI-built infrastructure.50 tiums to take a longer term approach to design and construction, and therefore Criticisms of PFI to deliver high standards. There are also Despite empirical evidence that the PFI strong financial incentives to complete offers significant advantages over conven- projects on time. tional procurement, several difficulties have been identified. Private finance has been mobilised in many sectors, with varied success. A paper pub- Critics suggest that PFI investment has lished by the Institute for Public Policy not in fact brought about a significant Research suggests that although significant increase in the level of investment in value-for-money gains are made in road and capital projects and that the real moti- 48. Maltby P, ‘Public service reform in the UK: the PFI experi- prison PFIs, the improvements in school vation for employing private finance is ence’, Institute of Public Policy 48 Research, 2003 www.ippr.org/ and hospital PFIs are more questionable. to remove investment from the articles/index.asp?id=335

The National Audit Office (NAO) found Government’s balance sheet in the 49. PFI: Construction that the price ultimately paid by the public short term, in effect creating a mort- Performance, Report by the Comptroller and Auditor sector exceeded the one agreed at contract in gage on the public sector. Roe and General, National Audit Office, 22 per cent of PFI construction projects.49 Craig estimated in 2004 that the HC 371 Session 2002-2003, 5th February 2003 Although this may sound like a high pro- Government was already committed to 50. Ibid. portion, the figure for projects implement- pay over £110 billion for PFI projects 51. Roe R and Craig A, 51 ed within the public sector was 73 per cent. between 2003-04 and 2028-29. op. cit., p iii

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The case that the PFI offers better value for innovation. In defence of detailed for money has also been questioned.52 contracts, without them the main ben- The transfer of risk to the private sector efits of the PFI could be lost; uncer- means that projects have faced higher tainty could lead to an increased risk borrowing costs, as financiers have premium on borrowing and reduce the demanded a risk premium. In contrast, long-term incentives for high construc- the Government can borrow at very low tion standards. rates since repayment – backed by powers to tax and print money – is all but Arguably, the real trouble has been a mis- guaranteed. Yet arguably these low rates match between the long-term planning can be achieved only by transferring and investment culture of PFI consortiums projects’ financial risks to taxpayers. and the often short-term politicised nature Cost over-runs on publicly financed of the public sector. In the Second Review projects involve either higher tax rates of the Private Finance Initiative, commis- or extra government borrowing. The sioned by the Treasury, Sir Malcolm Bates negative economic impact of such uncovered systemic deficiencies in the measures, as well as the gains in efficien- management of the PFI process including: cy brought about by the PFI, must a failure to prioritise projects on the therefore be balanced against higher grounds of affordability, service need and financing costs when assessing the value commercial viability; poor preparation of for money offered by PFI schemes. bids; unrealistic risk allocation in contracts; late cancellations due to policy changes; and the appointment of preferred bidders either too early or too late – all Arguably, the real trouble has been a mismatch “ leading to excessive bid costs, lengthy between the long-term planning and investment culture of negotiations and weak competition.55 PFI consortiums and the often short-term politicised According to the review, suppliers were nature of the public sector” not impressed with public sector procurement in general and felt that “departments were still overly risk averse and naïve in dealing with them”. There was also “dupli- The tendering process for PFI contracts cated activity, poor use of (and wasted) is said to be far more protracted than resources, poor value for money together traditional procurement, inflicting risk with uncoordinated and unprofessional and cost on the businesses involved.53 dealing with suppliers”. This can deter businesses considering The review suggested that there were entering the PFI market and under- particular skill shortages among local mine competition and innovation. authority officials, few of whom had solid

52. Ibid., p 7 There is a danger that a handful of experience of leading complex PFI negoti-

53. The Future of the Private large operators, with the resources to ations with the private sector or in struc- Finance Initiative, Social Market enter the expensive bidding process, turing the contractual package underlying Foundation, 2004, pp 24-25 will come to dominate the market. PFI deals and resolving issues of risk allo- 54. For example, Unison ‘A Briefing on the Private Finance PFI projects have been attacked for cation. “To get real value for money, the Initiative’, 2004 www.unison- their lack of flexibility.54 Contracts typ- public sector must acquire and retain scotland.org.uk/briefings/pfijnov02.ht ically set out detailed specifications for familiarity with the financial products used ml a 20 or 30-year period, thereby limiting to create PFI funding practices.” 55. Bates M, Second Review of the Private Finance Initiative, the ability of the public sector to make Possible solutions to this skills deficit HM Treasury, 1999, p 18 future changes and reducing its scope include setting up more specialist PFI

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units, perhaps based within the main gov- Road projects ernment spending departments rather than DBFO road building schemes the Treasury, and making greater use of The roads constructed as design, build, independent private sector consultants. finance and operate (DBFO) schemes Quoting a Treasury and Cabinet Office appear to be among the most successful review, Bates wrote that the political applications of the private finance initia- importance of many PFI projects has tive. In the basic model, the consortium meant that officials in both central and constructs the new road and then receives local government view the procurement revenues from the Highways Agency, in process as high risk and potentially career the form of shadow tolls for vehicles that threatening. The result is responsibility use it, for the duration of the concession sharing and decision-making by commit- (generally around 30 years). However, in tee, leading to delays. The institutional contrast to the situation with a private toll deficiencies of the public sector, therefore, road, there is a cap on revenues – beyond have contributed to the high costs of the certain traffic levels no more shadow tolls tendering process, which in turn have lim- are paid. The Highways Agency therefore ited the number of businesses willing to avoids the risk that traffic levels will exceed invest in PFI projects. expectations, while the risk associated with lower than expected traffic levels is borne entirely by the private consortium. During Transport and private finance the bidding process and subject to them There is considerable experience of private meeting certain quality requirements, con- finance within transport. It has been used sortiums compete according to the lowest in both the construction of roads and of shadow toll rate they will accept from the public transport infrastructure.56 The list of Highways Agency. projects suggests that both PFI and PPPs in general are flexible tools when it comes to the transport sector. PPPs have helped to fund very large schemes such as the “ PPPs have helped to fund very large schemes such modernisation of London Underground as the modernisation of London Underground lines and lines and small ones such as the provision small ones such as the provision of street lighting in local of street lighting in local boroughs. boroughs ” Interestingly, they have involved a variety of public sector partners including the Highways Agency, London Underground, passenger transport executives and local Shadow tolls are used instead of direct authorities. ones because they have negligible adminis- Some projects have been perceived as tration costs, do not divert traffic on to more successful than others, both by spe- parallel minor roads and can easily be cialists and the public at large. It is there- applied to discrete stretches of road, with- fore essential to identify those scheme out the need for expensive and disruptive characteristics that appear to best facilitate toll booths or the development of alterna- successful private investment. The next tive charging technology.57 section examines recent road and public A penalty points system has been used 56. See HM Treasury ‘PFI transport projects that have included a sig- to encourage DBFO consortiums to pro- Signed Projects List’, www.hm- nificant role for private finance, both vide a good quality service for drivers. treasury.gov.uk/media/3/6/pfi_signedd through PFI and more broadly defined Penalties are applied, for example, when eals_110707.xls PPPs. the road is taken out of service for repairs. 57. See Poole F, op. cit.

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Variability charges, which make deduc- tion and maintenance of the road at its tions to payments when congestion occurs, own cost and risk, without recourse to gov- may also be used instead of conventional ernment funds or guarantees. A consor- shadow tolls. tium of big contractors (Carillion, DBFO schemes are said to have resulted McAlpine, Balfour Beatty and AMEC) in significant cost savings – between 14 began work in mid-2002 and the road was and 22 per cent for the first eight such opened one month ahead of schedule, in projects (depending on the discount rate December 2003. used).58 However, critics have pointed to MEL was to recoup its costs by collect- the lengthy, bureaucratic and expensive ing tolls, which it was entirely free to set. bidding process. Also, DBFO consortiums The only cost to government of the M6 have a vested interest in ensuring a high Toll road was an £18 million contribution level of road use in order to extract their towards rebuilding part of the connecting maximum revenue from the shadow tolls M42. The motorway cost £485 million to (these incentives have been modified to a build, although Macquarie Infrastructure degree in contracts) and thus cannot, it is Group, the Australian company that argued, be involved fully in a wider trans- acquired MEL in 2005, put the total proj- port strategy. Contractual arrangements ect cost at £900 million. The discrepancy largely insulate DBFO schemes from in part reflected high financing costs at the direct political interference, though those start of the project related to the political committed to a more top-down model of risk that final permission to build the road transport policy consider this a disadvan- would not be granted, as well as risk asso- tage. Consortiums still face a degree of ciated with the untested nature of such a political risk, however. For example, the project in the UK.59 introduction of a national road pricing MEL reported an operating profit of scheme could significantly affect their rev- around £16 million in 2005.60 Total revenues, as could a variety of local transport enue was £45 million, with staff and other measures. operating costs amounting to £11.4 million and depreciation of £17.4 million. The M6 Toll Taking into account net interest costs of With the exception of a small number of around £43 million, this left an overall loss toll bridges, the M6 Toll was the UK’s first of £26.5 million in 2005 – its first full section of tolled motorway. Designed to financial year. At this stage long term debt

58. Haynes L and Roden N, alleviate the increasing congestion on the was £819 million. Since then tolls have ‘Commercialising the M6 through Birmingham, it connects M6 been raised, interest repayments have been Management and Maintenance of Trunk Roads in the United Junction 4, near the National Exhibition reduced through refinancing and a number Kingdom’, Transportation, 26, Centre, to M6 Junction 11A north of of large developments, including distribu- pp 31-54, 1999 Wolverhampton with 43km of three-lane tion centres, have been attracted to the 59. Private communication motorway. This, the busiest section of the vicinity of the route. It is plausible, there- 60. Midland Expressway Ltd, interim financial statements M6, was previously carrying up to two- fore, that the motorway will return a prof- (unaudited) for the six months ended 31st December 2005, and-a-half times as many vehicles per day it in the medium term. www.macquarie.com.au/au/mig/ as it was designed for. Although the M6 Toll, in Macquarie’s acro- bat/m6toll_financials_enddec05. A private sector company, Midland own description, remains a “premium pdf Expressway Ltd (MEL), won the 53-year quality road that was delivered on budget, 61. Evidence given by concession to build and operate the M6 ahead of schedule and with minimum use Macquarie to the Parliamentary 61 Select Committee on Transport Toll (allowing three years for construction of taxpayer’s funds”, it is still too early to Road Pricing: The Next Steps, and fifty for operation). It was to carry out judge its commercial success. A number of Seventh Report of Session 2004-5, Volume 1 the design, construction, financing, opera- factors have contributed to this outcome.

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First there are competing toll-free route. Providing certain standards are met, routes, above all the existing M6. Secondly, MEL is able to operate the M6 Toll as an goods vehicles were originally envisaged to entirely independent stretch of road. The be a major source of revenue but many Parliamentary Select Committee on haulage companies have boycotted the toll Transport has pointed out that, until 2054, road. Hauliers often charge a fixed rate for the Government’s policies, such as nation- a delivery and, given their competitive, al road pricing, high occupancy vehicle low-margin industry, the tolls dent their lanes and active traffic management can profits – especially where the speed of only be applied to the M6 Toll road with delivery is of low importance. the co-operation of the operators. (These Thirdly, traffic predictions were over- issues could be resolved by legislation, optimistic: MEL never published its fore- renegotiation or compensation, or a com- cast traffic volumes, but estimates made by bination of all three.) transport consultants Steer Davies Gleave group suggested that about 70,000 vehicles per day would be using the road within a year of opening, and 80,000 after three “ DBFO schemes are said to have resulted in years.62 In fact just over three months after significant cost savings – between 14 and 22 per cent opening, average traffic flows were about for the first eight such projects (depending on the 47,000 vehicles on a weekday (invariably discount rate used)” busier than weekends), and after a year they were still below 50,000 vehicles per weekday.63 Time savings were also over- optimistic. A survey conducted before Some have suggested that because MEL completion of the road estimated that currently has an incentive to maximise rev- using the new M6 Toll could reduce jour- enue rather than minimise overall conges- ney times by up to 45 minutes, however tion, a toll-free route – a shadow toll the maximum time saved has been around scheme or even a conventionally procured 30 minutes.64 Comparing journey times on motorway – would have made a far greater the M6 Toll and on the M6 before the contribution to reducing congestion in the project opened, average weekday journey M6 corridor and have produced greater times are seven minutes shorter south- overall benefits for the economy. bound and twelve minutes shorter north- bound. Time savings are not nearly as big as expected, which may also help to explain Public transport schemes why traffic has been below the levels fore- Private finance in public transport schemes cast during the planning stage. has been more controversial than in road Finally, financing costs were high, both projects. It has often been characterised by because of the unique nature of the project severe financial problems and persistent and because the consortium had to bear contractual disputes with the commission- the planning risk: a significant proportion ing bodies. Such projects tend to remain 62. ‘M6 Toll Birmingham opens end-2005’, Toll Roads News, of the total cost was spent before the con- dependent on government subsidies and 15th July 2003

sortium knew that the project would be are therefore vulnerable to political risks; 63. Post Opening Project granted permission to proceed. they also have to contend with ideological Evaluation: M6 Toll One Year After Study, Highways Agency, Notwithstanding the project’s disap- opposition to private sector involvement 2005

pointing financial performance so far, fur- from traditionalist public transport admin- 64. Road Pricing: The Next ther criticisms have focused on the Gover - istrations. Important lessons can however Steps, Seventh Report of the Transport Select Committee, nment’s lack of regulatory power over the still be drawn from recent public transport Session 2004-2005

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projects in terms of funding, contractual 12 per cent increase in passengers using the arrangements and the limitation of politi- trams. cal risk. TCL made an operating profit of around £2.5 million in the year to March 2005 but Croydon Tramlink its interest payments amounted to £8.3 mil- In 1996 Tramtrack Croydon Ltd (TCL) lion.68 Tramlink now relies heavily on pay- won a 99-year contract to build and run ments from TfL (£5.8 million in 2004-05) Tramlink (99 years was considered suffi- to compensate for the introduction of lower cient time to enable the private sector to bus fares, competing bus services and view it as a long-term business rather than Oyster cards, as well as to cover conces- a limited period concession). The project sionary fares. The scheme is considered to cost £205 million to construct and have been a far greater financial failure opened in May 2000. More than half the than the M6 Toll because taxpayers have capital cost (£125m) was provided as a effectively had to subsidise both the con- grant by central government.65 The construction and operation of the route. More tract was signed by London Transport but positively, the use of private finance in July 2000 its successor body, Transport ensured that construction cost over-runs for London (TfL) was given responsibili- did not burden the taxpayer. Moreover, ty for setting tram and bus fares across the contract was also robust enough to London. deal with much of the associated political The predicted passenger numbers were risk and to ensure that insolvency was 20 million a year after 18 months of opera- avoided. tion and 25 million a year when the system reached maturity after five years, but in Nottingham Tram PFI reality passenger numbers fell about 2 mil- The Nottingham Express Transit (NET) lion short of these figures.66 Having taken is a relatively successful light rail tram sys- on revenue risk the consortium initially tem built and operated under the private struggled to cover operating costs, let alone finance initiative. Its promoters, Notting - capital repayments, despite the Govern- ham City Council and Notting hamshire ment subsidy for construction costs. County Council, awarded the 30.5 year According to TCL one of the main rea- concession to a consortium, Arrow Light sons for the shortfall in patronage was Rail. It took three-and-a-half years to Transport for London’s policy of expand- construct, and Line 1 opened to passen- ing bus services in direct competition to gers in March 2004. The service has tram routes.67 The level of bus mileage proved very popular with both com- operated in Croydon is currently 32 per muters and shoppers. 65. cent higher than at the time when the con- Behind the scheme’s relative success is a www.publications.parliament.uk/ pa/cm199900/cmselect/cmenvtr cession was granted, with some routes run- payment structure that gives NET incen- a/153/15306.htm ning directly parallel to trams. Secondly, tives without having to take on a large rev- 66. National Audit Office, Public bus fares on competing routes were origi- enue risk that it would be ill-equipped to Transport Review 2004, www.nao.org.uk/publications/na nally set at a rate 20-30 per cent lower than manage. The councils pay an ‘availability’ o_reports/03-04/0304518.pdf tram fares. The company took TfL to court fee to the operator for running the service 67. Memorandum by Tramtrack Croydon Ltd to the claiming that the lower bus fares and com- against performance targets of reliability, Parliamentary Select Committee peting services had lost TCL up to 8 mil- punctuality, cleanliness, and good mainte- on Transport, 2005, www.publications.parliament.uk/ lion passengers and therefore substantial nance, etc. In addition, thanks to a ceiling pa/cm200405/cmselect/cmtran/3 revenue. The court decided that TCL was on the possible size of the fee, if patronage 78/378we06.htm owed compensation. When fares were har- is much higher than expected the councils 68. www.bromleytransport.org. uk/croydon_Tramlink.htm monised in 2004 there was an immediate will receive some of the resulting profit.

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Also, one of the Nottingham consortium below the benchmark and the deductions members is Nottingham City Transport, for poor performance are usually twice the which operates the city’s buses. As a result size of the increases for above-benchmark the temptation to run bus services in com- performance. The measurement of per- petition with the tram, as happened in formance is complex and involves not only Croydon, has been eliminated. Instead the the reliability of Tube train services, but services complement each other, which fits also the condition of rolling stock and sta- well with a clear vision of integrated trans- tions. port. Similarly, since the scheme’s promoters are also the planning authorities they have been able to build complementary The PPP was implemented in the face of strong park-and-ride facilities. “ There are plans to extend the opposition from the Greater London Authority and the Nottingham Tram Line. The Government rail unions . . . work fell behind schedule and costs has agreed to allocate £437 million in PFI greatly over-ran ” credits towards the £578m scheme, and construction work is expected to start in 2010. It is intended that the remainder of the funding will be met locally and a pro- The PPP was implemented in the face of posal for a workplace parking levy to help strong opposition from the Greater raise the funds is being explored.69 London Authority and the rail unions. The two Metronet contracts ran into serious dif- The Tube PPP ficulties: work fell behind schedule and In 2003 three companies, Metronet Rail costs greatly over-ran. The Metronet con- BCV, Metronet Rail SSL and Tube Lines sortium, whose shareholders are Balfour entered into a 30-year infrastructures serv- Beatty, Atkins, EDF Energy, Thames Water ices contract with London Underground and Bombardier, sought a review of its PPP to upgrade the Tube.70 Banks, including contract in an attempt to increase the pay- Deutsche Bank, UBS, Abbey National ments from London Underground. But, in and the Royal Bank of Scotland, provided July 2007, the independent PPP arbiter debt financing for the project, which Chris Bolt decided that LU should pay amounted to £2.6 billion in the case of the only a fraction of the sum demanded, and Metronet contracts.71 This level of private Metronet went into administration.73 financing far exceeds that for the DBFO London Underground management may

road schemes or the M6 Toll. Under this intervene to take over maintenance and 69. www.nottinghamwpl.com/

public private partnership, London renewal work although, given their long his- 70. ‘The Public Private Underground (LU) retains responsibility tory of substantial cost over-runs on projects Partnership’, www.metronetrail. com/default.asp?sID=10787534 for overall safety and for operating trains managed in-house (for example, the Jubilee 14926

and stations. Every four weeks LU pays Line Extension), it is not clear that this will 71. See www.ashurst. the infrastructure companies a charge, prove more efficient. The fact that the pub- com/media-item.aspx?id_ Content=626&expandOfficeList= which is increased or decreased to reflect lic sector appears to be duty bound to com- true&id_queryContent=&showDe actual performance and is subject to annu- plete the work also raises questions about als=true 72 72. For the two Metronet con- al indexation. The consortiums can the extent to which risk was transferred to tracts these payment totalled improve their revenues through bonus the private sector in this PPP. £660 million in 2005. See ‘Metronet under strain as costs payments if performance is better than the over-run’, Milmo D, The PPP benchmark, which tightens progres- The Channel Tunnel Guardian, 18th April 2007 sively over the life of the contract. In 1985 the British and French govern- 73. ‘Tube company Metronet goes into administration’, The Revenue is reduced if performance falls ments invited bids from the private sector Times, 18th July 2007

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to design, build, finance and operate a link Political risk also played a role, since the across the English Channel. Eurotunnel, a construction of a state subsidised high- consortium of banks and construction speed rail connection to London was con- firms, was selected out of nine bidders. siderably delayed – it having finally opened The plan involved building a rail tunnel on 14th November 2007 alongside the re- with a shuttle service for road vehicles.74 opening of St Pancras Station as St Pancras The Tunnel was financed privately, most- International. Rail traffic was so low that a ly through bank loans, but also with equity minimum usage charge agreed by British capital from a series of share offers. Rail and SNCF in 1987 became a vital Unfortunately the project was not a success component of Eurotunnel’s revenues.75 In for investors. Unforeseen geological difficul- 1997, the two governments provided sup- ties delayed completion by a year, leading to port by extending the length of the conces- additional interest payments and lost rev- sion from 55 years to 99 years. enue. Because the project was technological- While the Channel Tunnel project faced ly challenging, it was difficult to draft a suit- unique challenges, some of its lessons are able construction contract in advance. This more widely applicable. The existence of a led to cumbersome and costly negotiations, minimum revenue guarantee and the as well as conflict, between Eurotunnel and extension of the concession facilitated pri- the contractors TransManche Link. Costs vate funding at different times, yet were were also inflated by government interfer- not enough to compensate investors for ence on health and safety issues. political and revenue risks, or contractual After completion in 1994, revenues difficulties between Eurotunnel and TML. failed to live up to forecasts. Passenger Although the size of the scheme (around numbers were less than half those expected £10 billion) demonstrates the potential for and freight figures also disappointed. The large-scale private sector funding of major cross-Channel ferry companies cut their infrastructure projects, its difficulties have prices and competition from budget air- undoubtedly left the market more cautious lines began to appear in the late 1990s. of taking on large revenue risks.

The Cardiff proposals

Although yet to be implemented, a proposed scheme in Cardiff to tackle growing traffic and congestion is particularly relevant to this report. Cardiff City Council has established a transport partnership comprising the local authority, Capita Symonds and Carillion with a remit to improve local transport infrastructure. It plans to introduce road pricing in the form of a congestion charge during the morning peak, possibly from 7am to 10am. Surplus revenues (after operating costs) will finance the planned investment. However, the charge will not begin until the infrastructure improvements are in place or at least at an advanced stage of development. Private finance will therefore be deployed to fund the up-front expenditure, amounting perhaps to £425 million, and future toll rev- 74. Gourvish T, The Official enues will repay the debt.76 History of Britain and the Channel Tunnel, Routledge, Capita Symonds will operate the system, while Carillion will manage the construction contracts. It 2006 is therefore likely that the revenue risk will be borne by the banks involved and the local authority. 75. See Myddelton D, They The Cardiff proposal demonstrates the potential for using future road pricing revenues for imme- Meant Well, Government Project Disasters, IEA, 2007 diate investment. The involvement of a city authority, banks and leading firms suggests that such

76. See ‘Trying to squeeze us projects are perceived as a practical and viable option. If the amounts involved were rolled out pro out of rush-hour car seats’, rata across the country then the impact would be very significant. Western Mail, 11th October 2006

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Building on success Political risks Experience of private finance in transport The introduction of a road pricing scheme has undoubtedly been variable. A number could be abandoned due to public opposi- of highly successful schemes, particularly tion; a fiscal crisis could lead to increases in new roads, can be contrasted with more fuel duty that reduced traffic flows and mixed outcomes concentrated in the pub- therefore toll revenues; a hostile local lic transport sector. The latter are charac- authority could decide to subsidise compet- terised by poor financial returns, commer- ing bus services alongside a privately cial failure and the need for additional tax- financed tram route – these are just three of payer subsidies. While the specific natures the many possibilities that must be of individual projects make it problematic addressed when contracts are being drawn to reach general conclusions about the cri- up and investment planned. At the same teria for success, the following factors time, the public sector (the Department for should be considered before schemes based Transport, local authorities or other agen- on future road pricing revenues are imple- cies) risks losing policy flexibility if con- mented. tracts severely limit its ability to act. Such conflicts of interest are inevitable, of course, Revenue variability given that risk must be limited to attract Traffic predictions for the M6 Toll demon- investment at commercially viable rates. strate that forecasting future revenues can be problematic. Although traffic volumes have risen roughly in line with economic While there may be advantages for the taxpayer in growth over several decades there can be “ no guarantee that this trend will continue. reducing government’s exposure to financial risk, this A new oil crisis, perhaps caused by politi- must be balanced against the higher borrowing costs cal instability in the Persian Gulf region, consortiums face when there is uncertainty about future could dramatically increase motoring costs revenues ” and lead to a concomitant fall in toll revenues. However the long-term price elasticity of traffic is relatively low and after a period of adjustment following steep price The positive aspects of contractual rises, the upward trend tends to resume.77 restraints on government action should While there may be advantages for the also be mentioned. They may act as a pow- taxpayer in reducing government’s expo- erful deterrent to the somewhat arbitrary sure to financial risk, this must be balanced and short-term changes in direction that against the higher borrowing costs consor- have been a frequent feature of British 77. Glaister S and Graham D, Pricing Our Roads: Vision and tiums face when there is uncertainty about transport policy, and therefore contribute Reality, IEA, 2004, p 53. The future revenues. One solution is that gov- to the long-term stability that would authors have estimated the elasticity of car traffic with respect to ernments provide a minimum revenue attract large-scale investment for upgrad- fuel price at -0.35; that is, if fuel 78 prices rise by 10% then car traf- guarantee. Should toll receipts fall below ing the infrastructure. They can also limit fic will, after a period of adjust- an agreed level, the State (whether at local, the influence of special interests over gov- ment, fall by 3.5%. regional or national level) would top up ernment transport policy.79 78. See Dudley G and Richardson J, Why Does Policy the project’s income. Such an agreement Political risk may be reduced when rev- Change? Lessons from British could also reduce the element of political enue variability is outside the direct con- Transport Policy 1945-99, Routledge, 2003 risk (explored below) since there would be trol of government – for example, in the 79. Wellings R, an in-built financial disincentive for gov- DBFO schemes revenues were dependent ‘Environmentalism, Public Choice and the Railways’, in ernment to enact policies that might on shadow tolls rather than direct govern- The Railways, the Market and undermine a scheme’s viability. ment subsidies. In contrast, the collapse of the Government, IEA, 2006

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Railtrack demonstrates that investments ect. Historically profits from property can be extremely risky when the financial development have often made a significant viability of an enterprise is heavily depend- contribution to the viability of privately ent on direct government support. Clearly funded transport infrastructure and indeed such considerations should inform the expected appreciations in land values have design of schemes that seek to make use of often been the driving force behind the future road pricing revenues. construction of new routes. For example, Olympia and York, the developers of Technology costs Canary Wharf, were prepared to fund the Large-scale private investment may also construction of a new Tube line between require some limitation of the technologi- the Isle of Dogs and Waterloo.80 As part of cal risks of road pricing projects. The pos- a scheme to upgrade a particular route, a sibility of cost over-runs and delays, as seen consortium could be given planning per- recently in the German lorry charging sys- mission to build a new housing estate and tem, as well as numerous government IT retail units at a new intersection or station. projects, could deter potential investors. The expected development gains could The deployment of relatively modest, reduce the risks facing investors by provid- tried-and-tested technologies may help ing extra profits and a new source of traffic reassure private sector participants, though for additional revenues. Although govern- more sophisticated systems could offer a ment planning objectives might mean that greater range of services for travellers. this option was rejected in many localities, Assuming that the Government continues it nevertheless offers the prospect of greater to intervene in the transport sector, and private sector funding of improved trans- that this limits the development of appro- port infrastructure, as well as increasing the priate technologies through normal market supply of housing. discovery processes, one possibility would be for the public sector to assume responsibility for a high proportion of the tech- A favourable investment climate nological risks facing investors. This would To upgrade the UK’s transport infrastruc- be particularly appropriate for schemes ture will require a large increase in private where the public sector retains a large ele- sector investment in land transport. ment of control. Fortunately, the success of numerous PFI projects in the transport sector and the Potential upsides long history of private sector funding of Investors have to be clear about the cost communications networks suggest that and revenue risks associated with road these objectives are achievable under the pricing projects. However, private finance right regulatory framework; one in which could also be attracted to schemes by the the private sector has the maximum possibility of making additional revenues opportunity to innovate and take advan- beyond those derived directly from tage of additional profit opportunities. tolling. If tracking devices (black boxes) These objectives could be achieved by: were fitted in customers’ vehicles, service providers could offer satellite navigation, Using minimum payment guarantees smart breakdown services and vehicle and longer concessions (for example, monitoring (for mechanical defects, for 99 instead of 30 years) to limit risk and example) as part of the deal. attract a wider range of private Another possibility would be for the investors (including risk-averse pension 80. Harrison F, op. cit. development of land to form part of a proj- funds) at lower interest rates.

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Only passing revenue risk to the private Ensuring that private sector involve- sector when political risk is sufficiently ment takes place in a supportive politi- low and when the private sector can be cal environment. Policymakers should expected to have sufficient information have a direct interest in the success of about future passenger levels. schemes and the private sector should Removing regulatory obstacles to the not have to operate in an environment planning and construction of privately of ideologically driven opposition. owned and operated transport infrastruc- Contracts and regulatory structures ture. Road pricing is likely to transform should make sure that incentives for the the viability of such projects, which can private companies and public sector be undertaken at no cost to the taxpayer. actors are aligned to avoid the kind of Wherever possible choosing PFI con- conflict that has plagued projects such as tracts rather than less tightly defined Croydon Tramlink and the Tube PPP. and more complex PPP arrangements. Although PFI schemes may involve Finally, local and national government may transferring a higher proportion of have to forgo a degree of short-term policy construction and revenue risks to the control in order to reduce the revenue risks private sector, they also reduce the associated with political instability. A suit- potential for costly conflict and politi- able institutional framework is therefore an cal interference, to the benefit of both essential requirement for a large-scale pri- consortiums and taxpayers. vate sector contribution.

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If we want to use private finance to up grade investment has often been subject to sub- our transport infrastructure and introduce stantial cuts in response to short-term road pricing at a later stage, this will financial crises. It has been argued, for require a suitable institutional framework. example, that the dramatic reduction in This chapter therefore examines whether the road programme during the early to the institutions currently governing the mid-1990s (as well as the introduction of transport sector are appropriate (devolved the fuel duty escalator) had as much to do structures in Scotland, Wales and with high levels of government borrowing Northern Ireland are excluded). It also as a new-found emphasis on environmen- explores alternative arrangements and tal objectives.81 structures that could best limit the risks Transport is a less salient issue than facing investors and improve efficiency. either health or education because the effects of reductions and cuts in investment are not immediately apparent – unlike, say, The current system cuts to welfare benefits. The historical To limit political risks a degree of institu- record certainly suggests that short-term tional stability is necessary, but transport has political expediency has often overridden been subjected to a great deal of political arguments about transport’s long-term change in the recent past. The complexity of contribution to the economy in the form transport governance and its lack – in some of higher tax revenues resulting from areas at least – of clear lines of responsibili- increased economic growth. In 1998 ty deter potential private in vestors. David Newbery, Professor of Applied Economics at Cambridge University, The Treasury wrote: “Investment in relieving congestion At the centre, some readers may be sur- is controlled by Her Majesty’s Treasury, prised to hear, is not the Department for operating tight cash limits and steadily Transport but the Treasury, which sets the reducing the real resources available. Road rates of fuel duty and vehicle excise duty as transport among all other sectors has been well as levels of government expenditure singled out for tax increases to meet our on transport over the financial year. In agreed targets on global warming, and the effect, the strategic decisions on transport Government appears to be wedded to a policy are taken here. But this is not with- policy of rationing transport by congestion

81. See Dudley G and out problems because the Treasury has and reducing road investments to reduce Richardson J, op. cit. other interests apart from implementing an traffic growth.”82 82. Newbery D, ‘Fair and effi- effective transport policy. While the investment situation may cient pricing and the finance of roads’, 53rd Henry Spurrier The Treasury’s pivotal role has con- have improved marginally since this was Memorial Lecture, given at the tributed to the misallocation of resources written – tax increases have been held back Royal Society of the Arts, 5th May 1998, p 2 in the sector. In particular, transport and longer-term funding settlements intro-

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duced83 – it is clear that the fundamental need to consider alternative institutional institutional problems remain. Central- options for improving the attractiveness of isation of power in the Treasury increased transport infrastructure to private finance. under Gordon Brown’s chancellorship; although it remains to be seen whether this Other agencies will change now that he is Prime Minister. The Highways Agency,87 which was hived A strong case can be made that the off from the Department of Transport in Treasury’s broad control over transport 1994, is responsible for the construction, policy has been detrimental to long-term maintenance and (since 2006) manage- and efficient investment and, if continued ment of motorways and trunk roads; local into an era of road pricing, will deter pri- authorities are responsible for the remain- vate sector investment. On the other hand, der of roads. With its experience co-oper- Treasury oversight has prevented at least ating with the private sector through the some wasteful expenditure by other agen- procurement process, the Highways cies, such as local authorities. This valuable Agency could potentially play a key role function could however be performed both in harnessing private finance and under alternative institutional arrange- implementing road pricing schemes. Other ments. routine functions are carried out by Revenue and Customs (collection of fuel The Department for Transport duty) and the DVLA (collection of VED The Department for Transport oversees and registration of road vehicles). the transport sector in England and also Network Rail,88 a not-for-profit compa- undertakes high-level policy development ny, manages railway tracks and stations, and strategic planning; more routine func- and the DfT has been responsible for plan- tions have been hived off to other agen- ning and franchising since the abolition of 84 83. For example, a five-year set- cies. In the post-war period the depart- the Strategic Rail Authority in 2005. tlement with Transport for ment was accused of having too close a Private companies, such as Virgin and London, www.tfl.gov.uk/corporate/about- relationship with the road lobby and dis- National Express, operate rail services tfl/investorrelations/4717.aspx

playing bias in favour of roads and against through complex franchising arrange- 84. For an overview of the public transport.85 As with all government ments. The role of the rail sector in road Department for Transport’s responsibilities see departments, there is a danger that concen- pricing schemes would be dependent on www.dft.gov.uk/about/how/ trated special interests will gain influence whether it was decided to use part of the 85. Hamer M, Wheels Within 86 Wheels: A Study of the Road at the expense of the wider public. As at future revenue stream to fund improve- Lobby, Routledge & Kegan Paul, the Treasury, a bureaucratic culture may ments to rail infrastructure. Although the 1987; and Henshaw D, The Great Railway Conspiracy, stifle innovation and entrepreneurship. rail lobby could press for this, there are also Leading Edge, 1991

Moreover, the centralisation of power ways in which it might harm the rail indus- 86. Olson M, The Logic of within the department means that policy try. Using charges to cut congestion is like- Collective Action: Public Goods and the Theory of Groups, cannot be as precisely tailored to local con- ly to make driving more attractive to busi- Oxford University Press, 1965; ditions as it would be if local government ness travellers in particular; and conges- Niskanen W, Bureaucracy and Representative Government, had more autonomy. tion-based tolls could deter drivers from Aldine, 1971; Dunleavy P, Democracy, Bureaucracy and There have been several dramatic policy catching trains at mainline town centre sta- Public Choice: Economic shifts within the core institutions of trans- tions. Any institutional framework needs Explanations in Political Science, port governance in the past 15 years; to recognise the often symbiotic relation- Harvester, 1965 87. See: www.highways.gov.uk/ including the cuts in the road programme ship between road and rail travel. aboutus/about.aspx

in the mid-1990s, the decision to force 88. See: www.networkrail.co.uk/ Railtrack into administration in 2002 and Local and regional bodies aspx/111.aspx the recent abandonment of the lorry charg- Transport for London89 manages London’s 89. See: www.tfl.gov.uk/corporate/about- ing scheme. Such a record reinforces the buses, the Underground, the Docklands tfl/4510.aspx

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Light Railway, some overground railways Treasury despite the Mayor’s objections – and London trams, as well as a 400-mile have limited TfL’s control over the network of main roads, all the capital’s improvement to the Underground. The traffic lights and the congestion charging often strained relationships and frequent scheme. It is responsible for implementing legal disputes between TfL and the private the Mayor’s transport strategy for London. sector (see Chapter 3) suggest that rolling One possible institutional model, which out London’s institutional structure to the might be particularly popular with those rest of the country may not be the best keen to promote an “integrated” transport option for limiting political risk and policy, is to create equivalents to TfL in attracting private investment. other parts of the UK. However, it is Local authorities outside London are debatable whether TfL has led to more effi- responsible for local transport plans, five- cient transport provision in the capital. year strategies for the development of Although the level of central government local integrated transport, supported by a subsidy to London’s public transport has programme of transport measures. They increased substantially, it is far from clear submit bids to central government for that proportionate improvements in serv- the necessary funding (local authority ices have occurred (see box). Any assess- transport spending is largely funded ment is complicated by the role of the through central government subsidies Treasury and DfT in setting the framework and in general only a small fraction is within which TfL must operate. For exam- raised through local taxes). The Transport ple, the Tube’s public private partnership Act 2000 provided a legal basis for coun- contracts – pushed through by the cils to set up local charging schemes,

The performance of Transport for London

The draft Local Transport Bill 2007 suggests that the Government is keen to promote the creation of mini-TfLs in other cities by strengthening the role of existing passenger transport authorities or creating new ones in cities without them, like Bristol. TfL’s record for economic efficiency is mixed. While the number of bus passenger journeys has increased by more than a quarter since 2000-01, an impressive result, taxpayer-funded bus subsidies have in fact trebled. Bus fares have been kept relatively cheap and concessionary fares greatly extended, including free travel for under-18s, although the economic rationale for these policies is doubt- ful. Some accuse TfL of being institutionally “anti-car” and deliberately designing road schemes to make driving intolerable so that more people use public transport.90 Such bias is evident in the deci-

90. For example, Evening sion to direct a high proportion of congestion charge revenues to bus subsidies. In defence of this Standard, 23rd July 2007, p 7 decision, such expenditure is more rational in densely populated London than other cities. 91. Michael Gove MP, Public Bill There have also been concerns about the composition of the TfL board, appointed by the Mayor, Committee, Greater London 91 Authority Bill, 11th January which is accused of lacking political and geographical balance. The Association of London 2007, Clause 18 Government, representing the boroughs, has also criticised TfL for “excessive bureaucracy”.92 Other 92. Lloyd A, ‘Borough Transport common criticisms include failure to adequately consult local people and councils and lack of Spending Priorities and Relationships with TfL’, ALG accountability.93 Transport and Environment Committee, Agenda Item 7, Large increases in Treasury financial support, as well as significant private investment through the 2006, p 4 Tube PPP, make it difficult to accurately assess TfL’s performance. However, it is important that the 93. Robert Neill MP, Public Bill Government takes on board these criticisms before rolling out a TfL-type model to other cities Committee, Greater London Authority Bill, 11th January through strengthening the powers of passenger transport authorities. 2007, Clause 18

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while the recent introduction of the region in England must, in consultation Transport Innovation Fund will provide with the DfT, Highways Agency and substantial resources from central gov- Network Rail, produce a regional trans- ernment to support the introduction of port strategy to influence local transport local road charging schemes as part of a plans. Many of the criticisms of PTAs and package of local measures to tackle con- PTEs are also applicable to regional agen- gestion.94 These policies suggest that the cies which, lacking democratic checks, Government is planning to give local may be even more susceptible to bureau- councils a pivotal role in the introduction cratic growth and special interest cap- of road pricing. ture.98 In the metropolitan counties outside London (West Midlands, Greater Manchester, Merseyside, South Yorkshire, West Yorkshire and Tyne and Wear) “ A continued decline in public transport use, related responsibilities for transport are shared to PTE planners’ failure to match services to consumer with supervisory passenger transport demand, coincided with rapid increases in taxpayer authorities (PTAs) and associated passen- subsidies ” ger transport executives (PTEs), which secure services on behalf of the PTAs.95 These bodies currently plan and procure local public transport services. However, The European Union the draft Local Transport Bill 2007 envis- It seems likely that in the medium term the ages that their role will soon be extended to European Union will play a greater role in include the implementation of road pric- determining the precise evolution of trans- ing schemes in partnership with local port governance. In some member coun- councils.96 tries the EU has funded a high proportion Their record suggests that extending the of transport spending to promote regional powers of PTAs and PTEs is misguided. development objectives. The directive on Between their creation in the Transport interoperability of charging systems Act 1968 and bus deregulation in 1986, (2004/52/EU) may also limit the range of “the PTEs became in effect, municipal charging options and administrative struc- transport committees, with all the prob- tures possible in the UK: lems of public choice theory attached.

They tended also to develop into over- “This directive requires in principle that 94. For details see: staffed bureaucracies.”97 A continued electronic road charging and toll systems www.dft.gov.uk/pgr/regional/tif/tr ansportinnovation- decline in public transport use, related to should be both technically and contractual- fund?page=9#a1047

PTE planners’ failure to match services to ly interoperable i.e. that there should be a 95. See: www.pteg.net/About consumer demand, coincided with rapid Europe-wide mechanism to ensure that all pteg/01-ptes.htm increases in taxpayer subsidies. As econom- charge operators exchange information so 96. Department for Transport, The Draft Local Transport Bill, ic theory predicts, this central planning that users of a range of tolling and charg- Volume 2: Strengthening Local Delivery, The Stationery Office, model of transport provision, with limited ing services across Europe can register with 2007, pp 43-53

accountability, led to wasteful expenditure a single service provider of their choice and 97. Hibbs J, Transport Policy: and expanding bureaucracy. use a single on-board unit to access all The Myth of Integrated Planning, IEA, 2000, p 68 Government policy also seems to sup- charging schemes within the EU.”99 98. See, for example: port giving a greater role to larger region- www.gos.gov.uk/goyh/transp/rts/ al bodies in England. The Planning and It is also possible that the EU will intervene ?a=42496 Compulsory Purchase Act of 2004 stipu- in the setting of transport tax rates, per- 99. Department for Transport, Feasibility Study of Road Pricing lates that the Government Offices for each haps harmonising fuel duties. The in the UK, 2004, Ch 5

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European dimension creates another layer by the technology available at the time of of political risk for potential transport implementation. As Glaister and Graham investors, although there could be counter- have discussed, for large parts of the UK, vailing advantages in terms of reduced dis- particularly uncongested rural areas where cretion for the Treasury. travel also has a relatively low environmental impact, the administrative costs of charging may exceed the revenues and ben- Institutions and road pricing efits.100 Since congestion is concentrated in Introducing road pricing within the cur- the largest cities and particular inter-urban rent institutional framework would cer- transport corridors, it is clear from an eco- tainly be possible. However, depending nomic perspective that the greatest benefits partly on the technology deployed, new will come from introducing pricing in bodies may be needed to perform func- these locations. Rolling out charging to tions such as billing and enforcement. other areas will depend on administrative For example, should charging be operat- and technological improvements reducing ed through fitting on-board satellite navi- the marginal costs involved. gation technology units to vehicles, then The following section examines a range an administrative structure would need to of different options, from small local proj- be developed to gather the data and bill ects to nationwide schemes, with regard to customers. Travel information could be their suitability for attracting private processed and invoices sent to registered finance and improving the economic effi- owners or a pre-paid Oyster-style smart- ciency of the transport sector. card system could be used. The latter would probably require a network of out- Private toll roads lets where toll credit could be topped up. Potentially the most devolved solution, Enforcement would also be necessary to private toll roads are also the most radical deal with non-payment, both to ensure – and the least likely to gain political that non-paying vehicles were prevented acceptance. This would involve entrusting from using tolled roads and to recover control of roads, at least many trunk roads debts. Fraud prevention measures might and motorways (residential roads would be also be required. far more problematic), to private owners. The administrative requirements of any New toll roads could be privately devel- road pricing scheme(s) would also depend oped, while existing major routes could be on the system of taxation (discussed in sold off to companies that would then detail in the next chapter). For example, if introduce pricing (the receipts of such a vehicle excise duty and/or fuel duty were sale could be used to fund public transport abolished then this would change the role investment or returned to the public in of both the DVLA and Revenue and some other way). Alternatively, different Customs. The former’s role could be routes could be floated on the stock mar- reduced to vehicle registration matters, ket, either individually (for example, M1 while the latter could be limited to collect- plc) or in packages. ing value added tax on tolls. This kind of free-market solution would have many advantages. In the absence of bureaucratic involvement and political Local, regional or national? interference, the widespread misallocation A fundamental political question is at what of resources could be avoided. The private level of government road pricing should be sector could also be expected to innovate in 100. Glaister S and Graham D, op. cit., pp 96-97 introduced. The choice will be influenced order to make the maximum return on its

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road assets, perhaps by introducing high- delay new roads for decades and involve a technology traffic management systems high degree of political risk and large (see Chapter 6). Different methods of transaction costs. The recommendations charging could also be trialled, and meth- of the Barker Report, if put into practice, ods could be adapted to local circum- would speed up road projects, but the stances. For example, conventional toll wholesale liberalisation of the planning booths may be badly suited to certain system is almost certainly a bridge too routes. Thus any gradual extension of road far.101 A utility-regulation-style structure is pricing would be informed by a wealth of more likely to be feasible in the medium practical experience. term. Although competition among different modes of transport does exist – air, rail, Local authorities pipeline and shipping for example – the Another possible institutional structure privatisation of large parts of the strategic would give local authorities a pivotal role road network may well necessitate regula- in the administration of road pricing. tion to avoid potential abuse of monopoly Indeed, this framework could work in tan- power and to cap prices. The creation of an dem with privately-owned motorways and independent road regulator would be one trunk routes if councils kept responsibility option; alternatively an artificial industry for the remainder of the road network. structure could be imposed on the network Alternatively, local authorities could be given to ensure a certain level of competition. control of those trunk roads within their For example, regulation could ensure that boundaries, as has happened in London with the M1 and A1 were owned by different the Greater London Authority (administered companies. There would, however, be through Transport for London). some corridors without suitable alternative highways to ensure competition. One danger is that some traffic would divert to “free” government-owned roads once tolls “ The recommendations of the Barker Report, if put were introduced. Although the option to into practice, would speed up road projects, but the use free (but slower) roads would provide wholesale liberalisation of the planning system is almost some competition to keep tolls down, certainly a bridge too far ” their use might well have a negative impact on accident rates and ultimately, congestion could be displaced rather than cured. As long as councils were given sufficient Of course, in a properly functioning latitude by central government, local market the existence of “excessive” profits schemes tailored precisely to local condi- attracts competitors into a market: rival tions could be groundbreaking (see Table road firms would build rival routes. The 4.1). The democratic process, allowing land market would also adapt to push eco- unpopular administrators to be voted out, nomic activity away from expensive roads. may well remove the perceived need for Expectation of such effects (as well as the competition regulation. At the same time, need to optimise revenues) would also inter-borough competition would restrain keep toll rates in check. Nevertheless, fully local authorities from charging excessive functioning competition would require a prices: businesses might relocate if tolls

freely functioning land market and a fast were set too high. 101. Barker K, Barker Review of and responsive system for the construction Unfortunately, the current system of Land Use Planning, Final Report – Recommendations, The of new schemes. Planning procedures can local government finance would under- Stationery Office, 2006

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mine many of these possible incentive cant economic damage. Local democracy structures. More than three-quarters of may also be undermined by the often inces- council income derives from central gov- tuous relationship between council officials ernment grants rather than local council and local media outlets (they often rely on tax and business rate receipts. There may local government advertising for a large even be benefits from relative economic part of their revenue). There is a general decline, as it brings with it the prospect of danger that the self-interest of local coun- grandiose, status-enhancing Treasury- cillors and officials could triumph over eco- funded regeneration schemes. nomic efficiency. Moreover, the ability of local democracy The current funding regime creates to act as a check on council transport poli- perverse incentives that prevent boroughs cies is also questionable. Transport is just from both benefiting financially from one of many political issues and may not be policies that encourage economic growth decisive for voters. At the same time, local and losing financially when their policies elections are held only every four years – harm the local economy. The widespread enough time for policies to inflict signifi- introduction of local authority adminis-

Table 4.1: The advantages and disadvantages of localism

Advantages of a devolved approach Disadvantages of a devolved approach

Competition between areas promotes innovation The existence of market frictions means that some and efficiency and prevents local areas from monopoly pricing will persist and some localities being able to impose excessive charges. will be priced more attractively than others.

The local democratic process reduces the need The local democratic process is far from perfect for a regulator. in practice because: • of low election turn-outs; • elections are only every 4 years and may be determined by other issues; • of the self-interest of local councillors; • of the tendency for central government to meddle in local government; • local government finance is over-dependent on central government which creates perverse incentives.

There may be less need for expensive technologi- Reduced economies of scale for technological cal solutions. solutions.

Local schemes do not require any centralised Charging schemes might not be compatible across data collection. the country (although EU regulations address this).

Solutions can be tailored to specific local condi- Boundary problems whereby through-traffic tions by policymakers with local knowledge. (which doesn’t have an opportunity to vote in the area) is penalised. Trunk roads could however be kept in the hands of a national body, or prices regulated so such discrimination is disallowed.

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tered road pricing schemes would be ally lead to even tighter planning controls, more likely to bring about economic effi- with significant economic costs. ciency gains, therefore, if they were introduced alongside fundamental reforms to local government financing.102 One option would be to remove education and “ The widespread introduction of local authority welfare spending from councils, with the administered road pricing schemes would be more likely remainder of local authority expenditure to bring about economic efficiency gains . . . if they were being funded entirely through local tax introduced alongside fundamental reforms to local receipts (there could even be flexibility on government financing the kind of local taxes used). ”

Boundary effects: One particular problem for local authority based schemes is the existence of boundary problems. Modal issues: If road pricing is placed in the Congestion could be displaced to routes hands of local authorities then there is an just outside a borough and, since adminis- argument that other modes of transport, trative boundaries are largely artificial, cer- such as local rail services, should also come tain individuals could be excluded from under local jurisdiction. This institutional residents’ discounts arbitrarily as a result of structure would enable better co-ordination small variations in boundary locations. between road pricing schemes and public The existence of significant through traffic transport schemes. Certainly the gradual could tempt local councils to toll certain expansion of Transport for London’s respon- routes at very high rates in order to exploit sibilities to include some overground rail- travellers with no local vote (a problem ways, as well as major roads, indicates that with the turnpike trusts in the 18th centu- these arguments have gained favour within ry). This provides a strong argument for government. keeping trunk routes outside local author- There is a possibility, as discussed in ity control and possibly increasing the pro- Chapter 2, that high peak-time road tolls portion of roads classified as trunk routes. could displace commuters on to public Then there are the “second round” transport. If the railways were to remain effects associated with boundaries. If a toll- largely subsidised by the Treasury, the costs free authority were adjacent to a charging of local decisions could end up being borough then businesses and housing imposed on taxpayers everywhere; encourag- could be attracted to the toll-free area. At ing councils to introduce schemes that were the same time, local decision-makers economically damaging at a national level. would have to balance the economic bene- The possibility that local decisions could fits from such relocation with the econom- affect central government expenditure and, ic costs from increased congestion. In eco- potentially, revenue from fuel duty, would nomic terms, such inter-borough competi- create incentives for the Treasury to impose tion would result in a more efficient use of controls on local regimes. This in turn transport capacity and land. However, would limit the scope for innovation and the these freedoms could conflict with the tailoring of schemes to specific conditions. objectives of government planning policies (urban regeneration, the development of Regional bodies 102. See Travers T and Esposito L, I’m a Local Councillor, Get me brownfield sites etc.). Thus the desire to Some of the difficulties associated with local out of Here! Policy Exchange, prevent the relocation of economic activity administration could be avoided through the 2004 and Nothing to Lose but your Chains, Policy Exchange, as a result of local road pricing could actu- involvement of regional bodies. These agen- 2004

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cies could operate charging on trunk roads Turnout in local elections is already low and motorways, while setting a framework and residents may feel little connection within which local authorities could imple- with artificial regions such as the East ment their own schemes according to local Midlands, so the degree to which the dem- conditions. In this way, some of the bound- ocratic process could provide a check on ary problems discussed above could be avoid- the behaviour of regional officials is ques- ed. The regional institutions could also be tionable. The increased scale of operations given responsibility for local rail subsidies could reduce competition between areas, and franchising in order to avoid local costs whereas a decentralisation agenda would being loaded on to taxpayers nationally, and, promote economic efficiency in local hopefully, to improve co-ordination between authority schemes. A perceived absence of different modes. democratic accountability, combined with concerns about bureaucratic incentives and the lack of competition inherent in this model, could give central government the “ In order to gain a high proportion of the economic justification for strong supervision of gains from pricing it may only be necessary to impose regional authorities. There is therefore a charging on a relatively small fraction of the road network danger that an expensive new administra- . . . it would of course be easier to win public support for tive structure would be imposed with few a more limited proposal benefits. However, the Government has ” gradually extended the powers of bodies such as TfL, the PTAs and the Government Offices for the Regions, which suggests that There are, however, profound problems it is keen to develop a tier of transport insti- with the regional solution. Would the agen- tutions between the DfT and local councils. cies be unelected quangos or would a new layer of democratically elected government Targeting congestion hotspots be required? Either of these options is poten- An alternative to creating a number of tially unpopular, both with voters – who, in regional agencies would be to focus on 2004, rejected plans to create a regional introducing pricing in the worst conges- assembly for the North East of England – tion hotspots. In order to gain a high pro- and travellers.103 It is also extremely difficult portion of the economic gains from pric- to calculate the optimal scale of regional gov- ing it may only be necessary to impose ernance for the administration of road pric- charging on a relatively small fraction of ing. Should institutions be based around the road network. As Glaister and Graham particular conurbations or travel-to-work write: “As a charging scheme is extended areas or the current Government Offices for progressively to less dense areas the admin- the Regions? istrative costs are likely to rise while the The best solutions for economic effi- traffic affected and the economically efficiency may create apparently artificial cient prices that road users should pay – regions that clash with the traditional iden- and hence the revenue – are likely to rise tities and allegiances of the public, under- much less rapidly.”104 It would of course be mining their legitimacy and the decisions easier to win public support for a more they make. The creation of new counties, limited proposal, and the experience such as Humberside and Teesside, in 1974 gained could improve the efficiency of sub- 103. See: www.news.bbc.co. was deeply unpopular with local residents, sequent schemes. uk/1/hi/uk_politics/3984387.stm

104. Glaister S and Graham D, who felt attached to Lincolnshire, The schemes would have to be carefully op cit., p 94 Yorkshire and Durham. structured to avoid the displacement of

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traffic on to alternative routes. One solu- regulation on the lines of the privatised tion would be to introduce pricing for an utility companies (see below). entire transport corridor. On the route from London to the North West through National administration the West Midlands, for example, it may Although targeting congestion hotspots, at not be sufficient just to toll the M6 to con- least initially, has many economic and trol congestion – the A5, the A50 and sev- political advantages, the idea of a national- eral more minor roads may also need to be ly administered scheme appears to have included. considerable support among policymakers. This institutional framework could be Of course, a national administration introduced gradually, starting with the would also be capable of phasing in pricing worst bottlenecks on the network. In this by focusing on the most congested areas, way, administrative and technological rather than deploying a politically risky costs, which may be relatively high at first, “big bang” approach. Given the severity of would be comfortably exceeded by the eco- congestion in the UK, there is a strong case nomic benefits of charging. But finding for rapidly implementing schemes in the the right administrative structure for pric- worst affected locations using existing ing only heavily congested areas will not be technology. easy. Scheme boundaries may have to cut The DfT has sketched out certain com- across several different local authorities and ponents for a possible national institution- residents in some areas could feel unfairly al framework. However, one potential crit- penalised for congestion that they perceive icism is that the models discussed tend to as being the result of decades of govern- be contingent on relatively high-technolo- ment under-investment and mismanage- gy options, such as satellite vehicle tracking ment. and automatic number plate recognition, Notwithstanding such problems, a when worthwhile pricing schemes could be number of institutional options would be quickly introduced using tried-and-tested available. Pricing authorities could be set technology such as toll booths. For exam- up as partnerships between the local coun- ple, the DfT’s UK business model cils involved, although arguments over the describes the organisations and relation- weight of representation given to each ships necessary to operate an electronic partner and undesirable incentive struc- road charging scheme.105 tures – for example, to overcharge The Communications Gateway Entity through-traffic – could arise. There is also would handle communications with track- the usual danger that, without carefully ing devices installed in vehicles, which drawn-up rules, these authorities would be would forward location records to the On unable to limit political risk and would Road Services Providers. The latter’s respon- become dominated by special interest pol- sibility would be the installation and oper- itics. ation of the roadside infrastructure and IT Alternatively, separate government systems needed to detect and identify vehi- quangos or private companies could be cles for charging (perhaps using automatic created to administer each scheme – with- number plate recognition technology, as in a framework set by the DfT. A more with the London congestion charge). radical solution would be to auction each Payment Services Providers would register pricing concession to the private sector, customers, issue bills and collect payment. 105. Department for Transport, Feasibility Study of Road Pricing raising substantial funds for infrastructure The model also envisages the creation of in the UK, 2004 www.dft.gov.uk/pgr/roads/roadpr investment in the process. The private an independent Data Clearing Operator, icing/feasibilitystudy/studyreport/ operators could be subject to independent which would collect data from the On feasibilitystudyofroadpricin4002

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Road Services Providers and pass the infor- PTAs and regional bodies. And, of course, mation to the Payment Services Providers. the continuing institutional dominance of In theory this would protect the anonymi- the Treasury and the Department for ty of users, since the billing component Transport would bring with it political would be detached from the tracking risks that could deter private investment in component. However, many citizens new infrastructure. Yet, despite these prob- worry about the State gaining access to lems there would seem, still, to be plenty of data on their movements and it is not opportunities for the involvement of pri- clear that such a system would be able to vate finance. deny data access to the police or security services. A role for mobile phone companies: Since the private sector would carry out billing and enforcement – in the same way that Capita has operated (and IBM will from “ Mobile phone companies could compete by offering November 2009) the London congestion different tariffs to customers, or pre-paid, pay-as-you-go charge – one possibility would be for systems, with further anonymity benefits ” mobile phone companies to play a role. These firms have demonstrable expertise at processing huge volumes of information and tend to be trusted by customers. The model aims to “provide a viable and Indeed it would be possible to introduce competitive market for the provision and data protection legislation that prevented operation of road user charging systems the State from obtaining access to informa- and services, with the long-term objective tion held about people’s movements – an of providing these cost effectively”.106 The option that could ease the public’s fears proposed structure may have been about being tracked. designed with the EU framework in mind A number of different models are possi- (see above), just as an EU directive influ- ble. The companies could compete by enced the structure chosen for the privati- offering different tariffs to customers, or sation of British Rail, with central govern- pre-paid, pay-as-you-go systems, with fur- ment rather than market forces determin- ther anonymity benefits. Mobile phone ing the level of vertical integration. On the companies could bid against one another railways this raised transaction costs and for a particular billing concession. In addi- increased the amount of government sub- tion to an agreed margin on operating sidy required. There is a danger that some- costs, they could benefit from additional thing similar could happen on the road profit streams derived from offering a network, with disputes over the responsi- range of services to travellers beyond the bility for billing errors or journey delays, core billing function – real-time traffic for example. data, weather forecasts, internet access or The level of competition will tend to be even satellite television. Thus the auction- restricted to the provision of support serv- ing or franchising of billing services could be ices rather than what really affects the eco- an additional source of private funds for nomic efficiency of any scheme – toll lev- transport investment, although the practical- els and infrastructure provision. Policy- ities would clearly be dependent on whether makers currently seem in favour of central pricing was local, regional or national. government continuing to control these UK investment in transport is low, at vital elements, albeit in consultation with least when judged by international com- 106. Ibid. other stakeholders such as local authorities, parison. These new sources of funds could

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make a substantial difference to the quali- reassuring motorists that the future level of ty of transport provision and promote road charges would not be increased mere- widespread public acceptance of pricing. ly in order to finance additional roads.”108 Continuing central government control, To avoid the danger that the Treasury con- on the other hand, will fuel suspicion and tinued to insist on influencing the invest- undermine economic efficiency. More ment budget because the company devolved options have already been dis- remained in the public sector, Newbery cussed, but it is also worthwhile consider- advocates clear regulatory independence ing a national level alternative for the insti- and parliamentary scrutiny. tutional framework. The unhappy experience of Railtrack has damaged the case for involving the private Network Road/Roadtrack: The fundamen- sector in transport generally, yet there is no tal deficiencies of government manage- reason to believe that the same difficulties ment in transport have been recognised would be replicated on the road network by Newbery.107 He equates these deficien- where the possibilities for contestability, flex- cies with those of other ‘nationalised ibility and competition are so much greater. industries’ that were privatised in the The artificial institutional structure of the 1980s. They suffered from low productiv- railways has often made it difficult to sepa- ity, poor allocation of investment and low rate the responsibilities of train operators returns on capital. Different special inter- and Network Rail – leading to a lack of ests pursued different goals, leading to accountability and expensive transaction policy compromise and inefficiency. The costs. However with roads, responsibility for solution was to privatise the industries vehicles lies with individuals. and subject them to regulation, particularly in cases, such as water, where they were perceived to be “natural” monopo- “ The unhappy experience of Railtrack has damaged the lies. case for involving the private sector in transport generally, Newbery therefore suggests applying yet there is no reason to believe that the same difficulties this model to the road network, through would be replicated on the road network . . . responsibility the creation of a new company that he calls Roadtrack (by analogy with Railtrack), for vehicles lies with individuals ” although perhaps a more appropriate title at the time of writing in 2007, would be Network Road. This corporation would be Of course, there are further issues that free to raise capital by borrowing and there would need resolving. For example, would would clearly be scope for various public Network Road manage all roads or just private partnership arrangements. As with trunk roads and motorways? If the latter the utilities, it would be regulated by an option were chosen the organisation could independent body, Ofroad, responsible for evolve from the Highways Agency. Would it setting standards and monitoring perform- be organised nationally or at a regional level? ance. Ofroad would agree the level of road Notwithstanding these choices, it is clear user charges, planned dividend or interest that the utility regulation model has been payments, capital expenditure or forecast compatible with large-scale private invest- operating expenditures. ment in infrastructure upgrades. For exam- According to Newbery: “A regulated ple, since privatisation tens of billions of Roadtrack would have the advantage that pounds of capital investment have been

it would be able to secure funding to allow forthcoming in the water industry, primarily 107. Newbery D, op. cit. the efficient planning of investment, whilst to meet EU regulations. 108. Ibid., p 10

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The Network Road model would also ing competition, innovation and entrepre- be compatible with competition among neurship. As such, a facilitative institution- service providers for the operation of pric- al arrangement should be sought. ing systems. Indeed, as with the telecom- Accordingly, government plans to munications sector, where the former administer urban pricing schemes through monopoly BT was subject to regulation, passenger transport authorities and execu- private infrastructure companies could tives require careful scrutiny. The history build (or buy) their own roads to provide of PTE-run bus services and the perform- competition. Since “public” roads would ance of Transport for London indicate that no longer be free at the point of use, this this model risks bureaucratic growth, inef- would be a practical and economically ficient expenditure, capture by special viable prospect, especially because the util- interests, lack of accountability and large ity regulation framework could limit the rises in taxpayer subsidies. Private investors revenue risks associated with the direct in transport schemes may face ideological political control of transport prices. opposition and attempts to undermine A still more radical option would be to their revenue stream. Matters could be privatise Network Road, thereby raising greatly improved by ensuring a greater capital on future pricing revenues. degree of political balance in PTAs and Flotation receipts could be earmarked for PTEs, as well as Transport for London. infrastructure investment or, vehicle own- PTAs could include representatives of local ers could be given free shares in the com- businesses and the TfL board could be pany to reflect in part their historic fiscal made up of borough representatives rather contribution and to increase public sup- than being appointed by the Mayor. port. The probability of local schemes enhancing economic efficiency will be increased if the introduction of road pric- An opportunity for reform ing is combined with reform of local gov- The introduction of road pricing repre- ernment finance such that a far lower pro- sents a unique opportunity to improve portion of spending is funded through substantially the institutional governance central government grants. Competition of UK transport. for local tax revenues may be the best way While a wide range of institutional to reduce wasteful expenditure and prevent structures are compatible with the intro- policy capture by special interests. duction of road pricing and the concomi- Uncertainties over local tax structures could tant deployment of private finance to introduce additional risks, so it would be improve Britain’s transport infrastructure, preferable if reforms were implemented certain frameworks look more likely to before private investment was sought. promote efficient long-term investment in Since congestion is concentrated in the transport infrastructure than others. major cities and certain inter-urban bottle- Road pricing could transform the necks it is difficult to envisage a useful role prospects for private sector involvement in for English regional authorities in trans- the transport sector, whether through PFI port governance. It is not clear how their infrastructure projects, construction of pri- involvement would enhance the efficiency vately-owned toll roads, flotation of parts of either borough or PTA/PTE-based con- of the network or auctioning concessions gestion-targeting or national schemes. A to service providers. These developments simpler framework could reduce adminis- would improve infrastructure provision at trative costs and make political risks more no cost to the taxpayer as well as introduc- transparent to potential investors.

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Combined with their apparent lack of sider converting the Highways Agency into public support and accountability, there is an independent body (Roadtrack/Network therefore a strong case for reviewing the Road) with responsibility for administer- involvement of the Government Offices ing motorways and trunk roads. An evolu- for the English Regions in transport policy, tionary process would ensure that the new as well as examining other ways in which organisation benefited from the HA’s governance could be streamlined. expertise in PFI procurement in order to Road pricing offers the opportunity of raise funds for investment. Once wide- detaching transport investment from spread road pricing was introduced, the Treasury control. An institutional frame- agency would set tolls under the supervi- work that insulated the sector from the sion of an independent regulator who political risks associated with the current ensured fair competition with competing degree of central direction would create a private entrants to the road market and favourable climate for long-term infra- supervised contractual relationships with structure investment by the private sector. private service providers. The Government has made progress by However, changes to the system of creating a legal framework that allows local transport governance, though vital, may institutions to keep road pricing revenues not on their own be enough to persuade and decide how they are spent. But it also private finance to invest in our transport needs to address this issue with regard to infrastructure. The system of transport tax- inter-urban roads. Policymakers must con- ation also needs examining.

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Introduction The outcomes of road pricing will be sal taxes such as VAT. In the financial year affected considerably by the fiscal frame- 2004-05 revenues from fuel duty and work within which schemes operate. Other VED raised £32 billion (see Chapter 1), motoring taxes (VED, fuel tax etc) while expenditure on the road network imposed alongside road user charges may was approximately £8 billion. However, a undermine the viability of pricing projects significant proportion of this £8 billion is by reducing total consumer demand and not used for the direct benefit of absorbing resources that might otherwise motorists. Instead it is spent addressing be going to pay for investment. the externalities motorists impose on Given the severity of the congestion pedestrians, cyclists and bus passengers problem on the UK network, and the and on discouraging drivers from using knowledge that from a practical perspective particular routes through traffic calming new infrastructure can be slow to come on measures. The £24 billion annual surplus stream, there might be significant economic of receipts over expenditure would be suf- gains from commencing schemes as soon as ficient to construct at least 1,200 miles of practically possible, without waiting for leg- six-lane motorway, enough to double the islative changes to motoring taxation. This size of the motorway network in just two chapter examines Britain’s current tax years.109 If all government transport regime for land transport and assesses how expenditure is included the annual sur- compatible it is with the need to raise sub- plus does drop significantly to around stantial funds for infrastructure upgrades. £14 billion; but this sum would still be Schemes’ dependence on long-term road almost sufficient to build Crossrail.110 pricing revenues also makes developments in Given an appropriate fiscal framework, future policy highly relevant. In particular, substantial funds could therefore be avail- possible tax increases and charges related to able for investment in improving infra- climate change and other environmental structure.

109. Average construction costs impacts must be assessed for their likely Road users also pay additional charges for a six-lane motorway have impact on both road pricing revenues and such as workplace parking levies, parking been estimated at £6.46 million a km in 2003 prices, giving the the investment climate for transport proj- fees and fines and face significant expendi- staggering figure of 2,300 miles per year. See Archer C and ects. How can economic efficiency be recon- ture resulting from government and EU Glaister S, Investing in Roads: ciled with environmental objectives and how regulation on such matters as vehicle stan- Pricing, Costs and New Capacity, Imperial College might potential fiscal reforms affect the via- dards, MOT tests and vehicle import quo- London, 2006 bility of future revenue-based schemes? tas. Although difficult to quantify exactly, 110. The total cost of Crossrail these amounts could, if deregulation freed was put at between £15 billion and £16 billion in 2005. Current taxes them up for spending elsewhere, be con- See:‘Funding concerns keep Road users currently pay fuel duty and sidered as a potential source of additional Crossrail project in the sidings’, The Times, 7th May 2007 vehicle excise duty in addition to univer- revenue for investment.

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There is an economic argument for Report. The fuel protests of 2000 proba- imposing apparently high charges on driv- bly increased the reluctance of the ing. Fuel duty and VED are said to con- Chancellor to raise rates, particularly in tribute to economic efficiency by reflecting the context of historically high oil prices. the wider external costs of road use, such as Moreover, drivers switching from petrol accidents and environmental damage, to diesel engines, which provide greater including that associated with climate fuel efficiency and therefore result in change. Attempts are often made to correct lower consumption, have also reduced such market failure by imposing a tax at a fuel duty receipts.116 rate that reflects the social cost of an activity, though some market failures result from government intervention.111 Thus the Treasury has justified increases in fuel duty “ Revenues are used for general expenditure rather than for the role they play in “discouraging un- to compensate directly those individuals affected by the necessary journeys, encouraging fuel effi- external effects of road travel or to pay for environmental cient cars, and … reducing emissions of improvements ” carbon dioxide”.112 However, during the fuel protests of 2000 Tony Blair seemed to provide a different rationale: “We could, of course, cut Sceptical voices have suggested that the more off the fuel duty if we reversed the levelling-off of revenues from motoring extra investment we have announced on taxes, along with the possibility of electric schools, hospitals, transport and the police. vehicles, have been key elements in the Government is about choices,” he said.113 Government’s desire to introduce road Revenues are used for general expenditure pricing. Additionally, as discussed in rather than to compensate directly those Chapter 2, there are strong efficiency argu- individuals affected by the external effects ments for replacing the blunt instruments of road travel or to pay for environmental of fuel duty and VED. Yet setting efficient improvements. road prices is no easy task, particularly if As the transport economist John Hibbs the State wishes to limit the role of market put it: “Private carriages were taxed from mechanisms and wants to balance efficien- an early date, and in 1775 a duty of one cy with environmental and egalitarian

halfpenny per mile was imposed on the objectives as well as the preferences of the 111. See Rothbard M, For a New stage coaches. There is no difference in electorate. Difficult decisions will have to Liberty: The Libertarian Manifesto, revised edition, Fox principle between taxes on travel and the be made on transport taxation, including and Wilkes, 1994

taxation of alcohol and tobacco – or, in to what extent pricing revenues should 112. Financial Statement and their day, the window tax and tea duty. replace fuel duty and VED, and whether Budget Report, March 1998, www.archive.treasury.gov.uk/bud Where demand is highly inelastic, govern- additional revenue should be sought from get/1998/chap5.htm

ments will impose taxes (and ‘escalate’ pricing to fund investment. 113. Interview with the BBC, 5th them).”114 November 2000: www.news.bbc.co.uk/1/hi/uk/10 Yet the contribution of fuel duty to Revenue neutrality 07786.stm total government receipts has been falling Public opinion surveys indicate that sup- 114. Hibbs J, op. cit., p 107 in relative terms, from 6.3 per cent of net port for road pricing would increase if the 115. Calculated from the Treasury Public Finances tax and national insurance receipts in the new charges were matched by broadly Databank, 21st August 2007

financial year 2000-01 to 5.1 per cent in equivalent reductions in fuel duty and/or 116. Road User Charging: A 2005-06.115 In part this reflected the VED.117 In this scenario the guiding princi- Road Map, Social Market Foundation, 2007

scrapping of the fuel duty escalator (intro- ple would be revenue neutrality, in the 117. See, for example, RAC duced in 1993) in the 1999 Pre-Budget sense that the amount of revenue taken by Foundation, 2006, op. cit.

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the Treasury would remain constant. useful investment. Indeed, as long as the sav- However, there is clearly a difference ings from reduced congestion outweigh the between revenue neutrality for the Trea- running costs of schemes there will be an sury and fiscal neutrality for road users. economic benefit (the pitfalls discussed in This divergence arises because road pricing Chapter 2 would need to be addressed). could involve significant set-up and Road users as a whole will be better off for as administration costs, particularly if a long as the running costs plus the additional nationwide scheme were adopted. If these charges amount to less than their savings amounted to £5 billion per year, for exam- from reduced congestion. A substantial eco- ple, this would be equivalent to a 9p rise in nomic surplus should still be available for fuel duty (assuming a constant level of investment in infrastructure improvements. road use) or a 15 per cent increase in the overall level of motoring taxation.118 Such Investment potential increases in running costs would make it The M6 Toll scheme financed infra- politically more difficult to raise addition- structure investment of £485 million al sums for private investment through using future toll revenues. The total road pricing. project cost was put at about £900 mil- Yet if a project-based approach were lion. The standard toll for cars in 2007 taken initially – targeting the worst conges- was a relatively modest £4. tion hotspots – administration costs would The London congestion charge pro- most likely be insignificant in relation to duced total revenues of £213 million in overall road-user taxation. At the same 2006-07 and, due to high operating time, radical reform of transport taxes costs, net revenues of £123 million.120 would be very difficult when only small This revenue stream could have been parts of the network were priced and the used to raise capital for investment, to remainder remained free at the point of part-fund the Crossrail project for use. Some form of fuel duty rebate system example. A more efficient congestion might be possible on priced routes, but charge with far lower operating costs realistically, whatever the strength of the might have produced sufficient net rev- economic argument, the sheer magnitude enues to raise £2 to £3 billion of invest- of fuel duty receipts means that the ment. (A precise figure is not given as it Treasury is unlikely to be willing to relin- would depend on unknowns such as quish them in the short to medium term. interest rates and repayment schedules.) It is therefore worthwhile considering sce- The proposed Cardiff scheme, narios where revenue additionality is although yet to be finalised, may raise achieved. For example, fuel duty and VED £426 million for infrastructure invest- receipts could be held broadly constant in ment based on future revenues from a real terms, while additional revenues were £4 charge for cars entering each of two 118. For running cost estimates see: Department of Transport, sought from road users to pay for running cordons between 7 and 10 am on week- Feasibility Study of Road Pricing costs and extra investment of new schemes. days. This is a substantial capital sum in the UK, Annex J, Costs, 2004 www.dft.gov.uk/pgr/roads/roadpr Both the M6 Toll and the London conges- for a medium-size city. icing/feasibilitystudy/studyreport/ annexjcosts tion charge are examples of such a model, The planned scheme for Manchester,

119. For example, a road-fund since users pay the charge on top of fuel which will charge cars up to £5 a day, is style hypothecation of tax rev- duty and VED. expected to bring in net revenues of enues. Although the level of infrastructure £118 million per annum. The future 120. Transport for London Central London Congestion improvement would be limited under rev- revenue stream will be used to borrow Charging – Impacts Monitoring enue additionality compared with other £2 billion to pay for capital investment Fifth Annual Report, 2007 119 www.tfl.gov.uk options, it could still encourage much in expanding the Metrolink network,

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as well as a number of other public £1.5 million per km with a six-hour peak transport projects. Central government time weekday scheme.121 This sum would be will also provide a further £1 billion more than sufficient to pay for widening to through the Transport Innovation Fund. eight lanes or, indeed, to construct a brand new six-lane motorway in parallel.122 Projects focusing on particular congestion If pricing were subsequently extended to bottlenecks certainly appear to be financial- inter-urban routes then very small addi- ly viable. For example, a 10p per vehicle-km tional charges could raise significant fund- charge on a six-lane motorway priced to run ing (see Table 5.1). For example, a 1p a km close to capacity could in a year raise around charge for cars and light vans (just £1.60

Table 5.1: Total annual road pricing revenue at different per km rates (current traffic levels)123

Goods vehicle charge (pence per km)

1 2 5 10 15 20 30 50

1 1.6 1.8 2.3 3.2 4.1 5.0 6.8 10.4 2 3.0 3.2 3.7 4.6 5.5 6.4 8.2 11.8 3 4.4 4.6 5.1 6.0 6.9 7.8 9.6 13.2 4 5.8 6.0 6.5 7.4 8.3 9.2 11.0 14.6 5 7.2 7.4 8.0 8.9 9.8 10.7 12.7 16.1 6 8.6 8.8 9.4 10.3 11.2 12.1 13.9 17.5 7 10.1 10.2 10.8 11.7 12.6 13.5 15.3 18.9 8 11.5 11.6 12.2 13.1 14.0 14.9 16.7 20.3 9 12.9 13.1 13.6 14.5 15.4 16.3 18.1 21.7 10 14.3 14.5 15.0 15.9 16.8 17.7 19.5 23.1 Car and light van charge (pence per km)

Motorways and trunk roads (£ billion)

121. Calculation: 10,000 vehicles/hour x 6 hrs x 253 working Goods vehicle charge (pence per km) weekdays x 10p = £1.52 million.

122. See for example, Archer C 1 2 5 10 15 20 30 50 and Glaister S, op. cit., p 17, Imperial College, London, 2006. 1 4.9 5.2 6.1 7.5 9.0 10.4 13.3 19.1 The capital cost of motorway widening by one lane in each 2 9.5 9.8 10.7 12.1 13.6 15.0 17.9 23.7 direction is estimated at £6.69 3 14.1 14.4 15.3 16.7 18.2 19.6 22.5 28.3 million per km – a very similar 4 18.7 19.0 19.9 21.3 22.8 24.2 27.1 32.9 cost to constructing a brand new six-lane motorway. 5 23.3 23.6 24.5 25.9 27.4 28.8 31.7 37.5 123. Figures calculated using 6 27.9 28.2 29.1 30.5 32.0 33.4 36.3 42.1 data from Department of 7 32.5 32.8 33.7 31.5 36.6 38.0 40.9 46.7 Transport, Transport Statistics 8 37.1 37.4 38.3 39.7 41.2 42.6 45.5 51.3 Great Britain, 2006, Chapter 7. In practice rates charged should 9 41.7 42.0 42.9 44.3 45.8 47.2 50.1 55.9 vary across different parts of the 10 46.3 46.6 47.5 48.9 50.4 51.8 54.7 60.5 network to address congestion.

Car and light van charge (pence per km) Different rates would also affect traffic levels and therefore All roads (£ billion) impact on overall revenue, depending on the elasticity of demand.

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for a 100-mile journey), and a 5p per km ical levels, it can be seen that the sums charge for goods vehicles using trunk roads accruing to the Exchequer would be signif- and motorways (perhaps operated by icant. Since dramatic reductions in conges- Network Road) would produce gross tion would also reduce opportunity costs annual revenues of £2.25 billion – enough and increase productivity, boosting eco- to treble current annual infrastructure nomic growth, the extra revenue in the investment levels on these parts of the net- medium term could be even greater. If the work.124 Alternatively, such a revenue public can be made aware of the dynamic stream, which could grow over time as effects of road pricing, this should increase prices and/or traffic increased, could be support for the measure – especially if the capitalised to provide very substantial sums extra revenue could, in time, be used to for transport investment (perhaps in the facilitate cuts in fuel duty and VED. region of £30 billion). Applied to all roads as part of a national scheme, the above charges of 1p and 5p The carbon problem could produce £6 billion per annum gross, Keeping road user charging levels down is enough perhaps to double current invest- a political necessity if road pricing is to ment in all road infrastructure or to raise a gain public acceptance. But it will make it very substantial capital sum. Indeed with harder to meet EU targets for a 20 per cent potential investment capital running into reduction in 1990 levels of carbon emis- tens of billions it could be necessary to sions by 2020. If fuel processing is includ- stagger funding to take account of possible ed, road transport accounts for a quarter of limits to the amount of private capital UK emissions, a significant share, so policy- available to be invested in transport infra- makers may wish to raise fuel duty further structure as well as possible capacity con- and vary vehicle excise duty to encourage straints in the construction industry. Thus greater fuel efficiency and lower emissions. the introduction of even relatively small Notwithstanding the potential unpopu- road-user charges could revolutionise the larity of such measures, a key difficulty level of transport investment in the UK. would be setting an appropriate tax rate. The model based on future revenue According to Stern: “The academic literature appears to be feasible within the current provides a wide range of estimates of the fiscal framework. Indeed there is further social cost of carbon, spanning three orders reason (explored in the paragraph below) of magnitude … from less than $0/tCO2 to to believe that schemes will have a positive over $400/tCO2 [in 2000 prices]. This is overall effect on government finances. obviously an extremely broad range and as

124. Based on 2005 data pre- such makes a policy driven by pricing based sented in Department for The economic dividend on an estimate of the social cost of carbon Transport, Transport Statistics 125 Great Britain, 2006. It is If projects based on future revenue success- difficult to apply.” assumed that the effect of such a small charge on demand fully eliminated a significant proportion of Clearly calculations such as this are would be negligible, that running congestion, as well as other economic loss- largely speculative, since they must make a costs would be low relative to toll receipts, and that pricing es from inadequate roads and infrastruc- large number of assumptions about future revenues would be additional to ture, then the economic benefits would be developments as well as individuals’ sub- existing investment in new infrastructure. See Glaister S and substantial. If, for example, time savings jective valuations. Nevertheless, the esti- Graham D, op. cit., for estimates worth £10 billion per annum were mates contained within the Stern Review of the effect of pricing on traffic levels. achieved, then the resulting additional eco- can be used to illustrate the level of taxes

125. Stern Review on the nomic activity would produce extra rev- that could be applied if the principles of Economics of Climate Change, enue for the Treasury. Assuming an overall Pigovian welfare economics (whereby neg- The Stationery Office, 2006, p 125, www.hm-treasury.gov.uk tax rate of 40-50%, based on recent histor- ative externalities are taxed) were accepted.

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Stern suggests that the current social In the light of government policy on cli- cost of carbon could be around $85/tCO2 mate change there could be strong pressure (in 2000 prices), which would equate to to include a charge for carbon emissions as about 11 pence for a litre of petrol126 (or if part of any future fiscal framework for road an equivalent levy were imposed through a pricing. This might comprise a continua- pricing scheme, perhaps around 1p per tion of fuel duty at a lower rate or some vehicle kilometre for a typical car). Of kind of flat rate charge per mile driven or, course, current fuel duties in the UK are building on recent changes, vehicle excise several times higher than this figure, mean- duty bands based on the average CO2 ing the economic case for further rises may emissions of different models of vehicle. be questionable, depending on one’s view However, compared to fuel taxes, the latter of other external costs.127 Moreover, it two options are poor proxies for the should be noted that Stern’s estimate is far amount of carbon released.129 higher than the mean figure that various surveys of studies have produced. Thus, even charges based on high estimates of the social costs of climate change are unlikely “ Thus as a method of tackling carbon emissions, fuel to affect significantly the viability of duty has a number of advantages . . . In contrast, the schemes based on future road pricing rev- integration of carbon charges into road prices could enues. create unnecessary complexity ”

Longer-term options Of course, once road pricing had been widely introduced policymakers would be Thus as a method of tackling carbon faced with the decision as to whether to emissions, fuel duty has a number of abolish fuel duty and VED and replace advantages. Fuel use is highly correlated them with a levy on tolls. The amount of with CO2 emissions and the tax is cheap fuel duty paid currently is very closely to collect. Moreover this form of taxation related to the amount of CO2 produced by would be compatible with the phased a journey (except on certain modes of pub- introduction of road pricing or the intro- lic transport which receive a fuel duty duction of tolls only in congestion rebate from the Government), but road hotspots. In contrast, the integration of prices would necessarily be linked closely carbon charges into road prices could cre- to congestion and not emissions. Indeed, ate unnecessary complexity, for example unlike the current fiscal framework of fuel by creating the requirement to charge dif- 126. Spark P, ‘Discussion of the Stern Review’, Cambridge duty and differentiated VED, pricing ferent amounts for different vehicle Energy, 2006, based largely on congestion will not charge engine sizes and different speeds of travel. www.cambridgeenergy.com/arch ive/2006-11- more polluting cars significantly more than Such pricing could detract from the eco- 10/cef10Nov2006spark.pdf

other vehicles, because their effect on traf- nomic efficiency of schemes by both 127. To provide perspective, fuel fic speeds is the same. Congestion pricing increasing running costs and reducing tax on a litre of petrol in the UK (exclusive of VAT) is currently could also lead to a substantial decline in price responsiveness to congestion. And it around 50p, the price at the the cost of road use in areas outside the would almost certainly have to be intro- pump is £1. 128. Glaister S and Graham D, major cities and a relatively small number duced on a national scale to capture all op. cit. 128 of inter-urban bottlenecks. Thus it is CO2 producing journeys, thereby severely 129. CO2 released per mile possible that in the absence of fuel duty or limiting the options available for intro- depends inter alia on the kind of vehicle, the way it is driven, some kind of carbon levy, widespread road ducing pricing. speed and conditions. VED is the same for a vehicle that is pricing will lead to increases in overall CO2 The greatest danger with fuel duty is barely used as for one that is emissions. that, falling under Treasury control, the used regularly.

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temptation will remain to increase the tax A separate issue is that, in the absence of to pay for general expenditure. A more effi- accurate data on the costs and benefits of cient policy would be to subsume fuel duty climate change, setting the level of the cap within an overall carbon tax that was is an arbitrary political decision that could applied equally to all economic sectors. harm economic competitiveness while hav- The method of tax collection could remain ing little effect on environmental impacts. the same, but the carbon content of the The same kind of knowledge problems will fuel would determine the rate. In this way also face policymakers when they attempt the Treasury would be prevented from tar- to set fuel duty rates or environmental geting the transport sector as a special rev- levies based on other external impacts of enue source since any rises would also have road use. to be applied equally to domestic fuel (a high-salience political issue). A further advantage would be that the carbon tax Other externality charges would help ensure cuts in emissions took One of the rationales behind maintaining place in the most cost-effective sectors, fuel duty in addition to either a carbon tax perhaps for example at power stations or the participation of transport within the rather than in transport. There is therefore EU emissions trading scheme, is that road a strong economic case for equalising the users are also responsible for the produc- taxation of different CO2 sources. tion of other externalities apart from con- The Government however favours a dif- gestion and CO2 emissions. ferent option. Its UK Climate Change Attempts to measure the external costs Programme of 2006 proposes emissions of UK road transport, although method- trading systems for surface transport and ologically questionable, do tend to agree envisages including road transport in the that by far the largest cost associated with EU emissions trading scheme (ETS), pos- road use is congestion. Because this partic- sibly from 2013.130 ular externality would be largely removed While tradable individual allowances for by road pricing (even with a relatively motorists have been considered, the costs small number of schemes focusing on the of regulating very large numbers of people major cities and inter-urban bottlenecks), make it more likely that fuel producers will it would be hard to justify – on economic be given the responsibility for obtaining efficiency grounds – the kind of large rises CO2 allow ances to cover the emissions in taxation that could jeopardise future resulting from the fuel they sell. The addi- road pricing revenues. Sansom et al. com- tional costs would be passed on to road ment: “If more differentiated road charg- users in price rises for petrol and diesel. ing mechanisms were introduced, the case While this kind of cap and trade system for increasing fuel duties as an, albeit weak, should help ensure that emissions are cut in tool for improving economic efficiency the most cost-effective economic sectors, would be diluted.”132 130. ‘Road Transport and the EU according to the DfT: “Inclusion of road There are also impacts such as noise and Emissions Trading Scheme’, Department for Transport transport in EU ETS could … sit alongside localised air pollution (see Table 5.2). Discussion Paper, www.dft.gov.uk/pgr/sustainable/c other forms of direct intervention such as Unfortunately it is extremely difficult to limatechange/euemistrascheme fuel duty.”131 Thus it seems likely that the quantify these effects and decide an appro- 131. Ibid., p 8 costs of emissions trading would be added priate levy since, to some extent, they have 132. Sansom T, Nash C, Mackie on top of fuel taxes, which would under- already been internalised by land and P, Shires J and Watkiss P, Surface Transport Costs and mine one of the fundamental bases of effi- property markets and furthermore, the Charges: Great Britain 1998, cient cap and trade schemes – that different underlying causes are difficult to separate Institute for Transport Studies, 2001 sources of emissions are treated equally. out.

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of agricultural land for development.135 Table 5.2: Fully allocated Should road users pay for the side-effects environmental costs of UK of these planning policies? road transport in 1998 So when national or local policymakers (central estimate, adjusted have to set an environmental levy, whether to 2007 prices)133 through the continued use of fuel duty or as a variable charge added to road tolls, Climate change £1,793m there is a powerful argument for taking Air pollution £4,028m account of the influences of government Noise £2,965m planning policy and compensation already TOTAL £8,786m paid via the land market.

Accident costs When new roads are built or existing Another possible justification for high roads widened, nearby property owners are road-user taxes or price levies is to pay for compensated for the loss in value due to the social costs of road accidents. With over noise and other forms of pollution. 3,000 deaths in 2005 and many more seri- Subsequent buyers can expect to pay less ous injuries, these are very significant. for properties negatively affected by roads, However, it is not clear to what extent there so to some extent the noise and air pollu- are genuine net economic costs beyond tion they experience is voluntary and has those already covered by road users’ insur- been accounted for in the property market. ance premiums. Indeed, previous calcula- Although property owners are not com- tions have failed to take adequate account pensated for increases in traffic on existing of the impact on government finances of roads, it seems likely that in recent years fatalities, for example, in terms of savings cleaner and quieter engines, as well as qui- on long-term pensions, NHS and welfare eter road surfaces, have reduced the associ- benefits.136 Setting an accident levy on road ated external effects. Certainly local air prices that reflected real externalities could pollution levels have fallen substantially be impossible given the difficulties associat- over the past 20 years, yet this has not been ed with obtaining accurate data on the reflected by any reductions in the rate of extent to which costs have already been fuel duty.134 internalised through insurance.137 Moreover, when governments and their Accordingly, while the human cost of economists treat noise and local air pollu- accidents is extremely high, there is no 133. Original estimates from tion levels as simply the result of road use strong economic rationale for imposing a Sansom et al., op cit.

they fail to consider all the underlying government accident levy in addition to 134. See: The Strategy Unit, op. causes. For example, strict planning regula- road tolls. Interestingly however, as dis- cit., p 58-58 tions have prevented British cities from cussed in Chapter 2, the integration of road 135. Evans A and Hartwich O, Unaffordable Housing: Fables adapting to cars. Whatever their prefer- pricing and insurance payments could pro- and Myths, Policy Exchange, ences, most home owners are prohibited vide strong incentives for improved safety. 2005 136. Although it would be moral- from living in quieter locations with clean- Better technology (for example, airbags) is ly questionable for the govern- er air (as well as less congestion) because also contributing to a reduction in casual- ment actually to compensate insurance companies for savings government policies force them to live in ties. Thus accident costs should not be a in pension payments, healthcare cramped cities, in many places still heavily reason for imposing large additional levies. costs etc. due to road fatalities. reliant on unsuitable Victorian streets. 137. Sansom et al., op. cit.. They state that ‘No information Indeed, new housing developments con- Capital costs exists on aggregate injury and tinue to be built next to major roads and Some contend that road users should pay death related payments by insurance companies to road motorways, although there is no shortage for the capital cost of the road network; the accident victims’, p 77

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interest forgone on its net asset value. the valuation problem discussed above. Newbery has calculated a capital value of Estimating the value of infrastructure out- £120 billion for the road network at 1998 side the market system is extremely prob- prices. At a discount rate of 6 per cent this lematic. Nevertheless, the introduction of would mean road users paying £7.2 billion pricing should elicit far better information per year.138 about the capital value of different parts of the road network, since valuations can then be informed by revenue yields. The notion that road users should cover capital “ Many road users may feel that they have already paid charges does not therefore support the for these capital costs through what they perceive as continuation of fuel duty and VED after excessive motoring taxes ” the widespread introduction of road pricing. Indeed, these taxes would in all likeli- hood decrease asset values by reducing potential tolling revenues and distorting Many road users may feel that they have the allocation of resources among different already paid for these capital costs through economic sectors. Capital costs thus pro- what they perceive as excessive motoring vide a further strong argument for a coher- taxes. Clearly the accuracy of this view- ent approach to transport taxation and point depends on whether it is accepted taxes in the wider economy. that historical revenues have more than covered the external costs of road transport and to what extent these costs have Allocating investment been the consequence of government Once the imminent introduction of road intervention in transport and land mar- pricing guarantees a future revenue stream, kets rather than the result of motoring per the decision then arises as to where invest- se. Thus the methodological difficulties of ment should be allocated. A key question calculating social costs complicate the will be to what extent investment should decision of what road users should justly be based on investors’ assessments about pay towards capital costs. consumer demand and profitability (i.e. A further consideration is whether road guided by market mechanisms) and to users should pay all the capital costs or what extent it should be directed by local whether property owners should pay a pro- or national level policymakers. portion, perhaps through local taxes. For At one end of the spectrum could be example, many rural roads and urban resi- private toll roads, for which the infrastruc- dential streets are constructed primarily to ture is funded by the purchases of con- provide access to properties and tolls could sumers gaining direct utility from it. At the probably never cover capital and running other end of the spectrum could be some- costs. The cross-subsidy of such infrastruc- thing like the current system of transport ture would hardly be equitable. Yet in prac- funding, with user charges (and fuel duty, tice it will be difficult to decide how to VED etc.) going into a general pot to be split charges between property owners and spent on the welfare state as well as differ- road users, although given the right insti- ent transport projects at the discretion of tutional framework pricing could at least the Treasury and DfT. provide better data on the distribution of In the middle are schemes such as the costs and revenues over the network. London congestion charge, where the net If it is accepted that such charges should revenues are spent on transport, in this case 138. Newbury, op. cit., p 23 be levied in full, policymakers would face mostly on subsidising bus services. Yet the

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London scheme has more in common with To avoid waste, central government the central planning model than the mar- could, of course, regulate both the modal ket-based model of transport investment. mix of investment and require that projects The congestion charge revenue is not meet certain financial criteria. But this being used directly to provide services for could prevent local bodies tailoring schemes the travellers that pay it, for example, by to local circumstances, while bolstering cen- investing in measures to improve traffic tral control and Treasury interference in speeds in central London, such as building budgetary decisions. Thus the best option flyovers and widening roads. may be to reform local government finance There are both economic and political so that councils experience the full econom- problems with centralised schemes. ic consequences of their transport policy Economically the price signals from decisions, as discussed in Chapter 4. motorists paying congestion charges are not translated into investment decisions, and therefore potential gains in allocative efficiency are lost. Outside London, where “ The apparently successful implementation of the there tend to be proportionately fewer cordon toll ring around Oslo in Norway depended on a public transport users and less comprehen- large fraction of revenues being earmarked for road sive public transport networks, the eco- improvements ” nomic case for earmarking road pricing revenues for, say, local bus services or tram networks, may also be far weaker. Motorists will outnumber public transport Similar decisions would have to be taken users in many localities, so that such an at national level should pricing be intro- allocation of revenues is likely to raise duced on motorways and trunk roads. opposition to road pricing schemes. The Should a share of revenues be earmarked apparently successful implementation of for cross-subsidising the rail network, for the cordon toll ring around Oslo in example, even though those paying the tolls Norway depended on a large fraction of would not necessarily benefit from such revenues being earmarked for road expenditure? The economic case for such improvements.139 Motorists thus felt that an allocation of resources seems extremely they would benefit directly from the intro- weak, particularly since after the introduc- duction of charging. tion of pricing and the equalisation of envi- The bias against cars that arguably exists ronmental taxation travellers would be well in some local and national administrations equipped to make rational choices. (see Chapter 2) raises the danger that rev- However, this kind of expenditure model enue will be earmarked for wasteful proj- would have particular appeal to certain ects, which fail to produce a commercial influential fractions of the electorate, such return on the capital invested (threatening as rail commuters in the Home Counties. 139. See Langmyrh T, ‘Learning the involvement of the private finance) and Fortunately the gains from congestion from Road Pricing Experience: Introducing a Second- do little to improve the economic efficien- pricing are likely to be sufficient for signif- Generation Road Pricing cy and international competitiveness of the icant improvements in economic efficiency System’, Planning Theory and Practice, 2, 1, pp 67-80, 2001 transport sector. We can also expect local to be achieved even if a large fraction of 140. See, Tricker R, Fereday D, authorities to spend revenues to benefit local revenues is detached from consumer Pickup L, Norheim B, Bekken J- residents, especially in swing wards where demand and spent for political reasons. T, Shepherd S, Laird J, Nash C and Suchorzewski W, Revenue votes count most, in order to maintain Accordingly some economists have focused Use from Transport Pricing: political support, rather than focusing on on models that bolster political support for Report on the Implementation of Urban Case Studies, Deliverable 140 providing services for travellers in general. pricing by widely distributing revenues 5, ISIS, 2006

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among the general population. Goodwin UK’s economic competitiveness by both has suggested applying what he terms “the reducing congestion and providing new rule of three”.141 A third of the expenditure funds for investment. could be used for the development and In the longer term, road pricing, even if maintenance of new road infrastructure, restricted to just those areas severely affected where the investment would be cost-effec- by congestion, presents an opportunity to tive; a third for public transport; and a reform radically the current system of trans- third for reducing the general tax burden. port taxation and expenditure. Pricing According to Small, since efficient pricing would undermine the already weak econom- can produce “more than enough revenue to ic case for continuing to use fuel duty and fully compensate all losses” it should be vehicle excise duty; both crude methods of possible to attract political support from a addressing the external impact of road use. wide range of interests with a package of However, a new levy on fuel might be transport improvements and tax cuts.142 appropriate should policymakers wish to The timetable for introducing road pric- address the carbon emissions of the road ing will affect expenditure decisions and transport sector, whether through a carbon thus the feasibility of various spending tax or the inclusion of road transport in the packages. The economic case for using a EU emissions trading scheme. Such a pol- high proportion of future revenues for icy should be applied equally across all eco- transport investment is likely to be greatest nomic sectors to ensure that emissions early on, with the first schemes targeting reductions are achieved in the most effi- the very worst congestion hotspots. Later, cient way. Additional climate change relat- as tolling becomes more widespread, addi- ed initiatives, particularly those targeting tional transport investment may not be as individual sectors such as road transport, cost effective in terms of the extra revenues would damage the economic efficiency of produced. At this stage finding other ways either a carbon tax or a cap-and-trade of disbursing toll surpluses could be more scheme, and therefore should be avoided. important. However, in some urban areas Eventually policymakers may also want high costs may mean that cost-effective to introduce an environmental levy on transport investment is not possible on a road prices to reflect impacts such as noise scale sufficient to absorb revenues, even in and local air pollution. In setting rates, the early stages of road pricing. In these they should attempt to account for the circumstances, the reform of local finance effects of planning policies in exacerbating discussed in Chapter 4 could ensure that environmental consequences and the toll receipts were nonetheless used to pro- extent to which environmental quality has mote economic growth, for example, by been internalised in the land market. reducing business rates. Further research in this area, perhaps incorporating non-welfare economics approaches, could help policymakers set Conclusion efficient rates. Nevertheless, the magnitude Existing and planned schemes, together of current road user taxes, combined with 141. Goodwin P, ‘The Rule of with hypothetical charging models, suggest the small additional charges needed to Three: A Possible Solution to the Political Problem of Competing that under revenue additionality minimal fund substantial infrastructure improve- Objectives for Road Pricing’, user charges could produce very substantial ments and the low price elasticity of traffic, Traffic Engineering and Control, 29, 10, pp 495-497, 1989 funds for investment. Thus in the short to mean that even levies based on high esti-

142. Small K, ‘Using the medium term, within the current fiscal mates of external costs are extremely Revenues from Congestion framework, the introduction of road pric- unlikely to undermine the viability of Pricing’, Transportation, 19, pp 359-381, 1992 ing does have the potential to improve the future revenue-based projects.

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Complementing road pricing with struction began in the winter of 2004 and other measures it was rolled out in three phases over the Using future road pricing revenues to fund following two years. infrastructure improvements is not the New lighting, gantries, electronic and only available option for addressing con- static signing, emergency roadside tele- gestion and other inefficiencies in the phones and refuge areas, CCTV and advi- transport sector. Since the construction of sory speed limits were commissioned first. additional “hard” transport infrastructure Then the area was designated a “controlled is generally a time-consuming process, pri- motorway”, introducing mandatory vari- vate finance deals based on future revenues able speed limits on the M42. Finally, the could be used for other strategies, such as hard shoulder was converted so that it can better traffic management, that promise to be used as an extra running lane during improve conditions in a shorter time- peak periods or accidents, thereby provid- frame. Rapid and noticeable improve- ing additional capacity. ments for travellers will be essential in maintaining political support for both private sector involvement and subsequent user-charging. “ Active traffic management, demand management and The following measures, broadly cate- capacity enhancement, are not alternatives to road gorised into active traffic management, pricing, but complementary ways of using road pricing demand management and capacity revenues” enhancement, are not alternatives to road pricing, but complementary ways of using road pricing revenues. The road is controlled by traffic officers who are able to monitor the road via CCTV. Active Traffic Management Electronic signs over the motorway can A number of methods offer the prospect of direct motorists to drive on the hard shoul- reducing congestion through making bet- der at busy times. When this measure is in ter use of existing capacity. Active Traffic use a 50mph sign is displayed above the hard Management (ATM) can be thought of as shoulder to indicate that it can be used and, a tool-box of technologies and procedures for safety reasons, a maximum 50mph speed for use on their own or in combination. limit is also displayed above the other lanes Britain’s first pilot ATM scheme, devel- on the carriageway. Lower speeds can also oped by Serco, was launched on a particu- reduce congestion by decreasing the gap larly busy 17km section of the M42 out- between vehicles and improving traffic flow. side Birmingham. The Government Drivers in trouble can pull into the emer- announced the project in July 2001, con- gency refuge areas located at half kilometre

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intervals next to the hard shoulder and traffic management that promises to equipped with emergency telephones. improve flows on motorways and dual-car- Regular lanes can also be opened and closed riageways. Limited restrictions on trucks from the control room by displaying a red X overtaking have long been employed on on the electronic lane signals above the car- German autobahns, particularly on riageway. This is particularly useful when stretches with only two lanes in each direc- there is an incident which requires fast access tion. When lorries try to overtake one by emergency services. another, especially on hills, they can slow Initial evidence suggests that the traffic down for several miles; the resulting scheme has been successful at increasing bunching of faster cars also leads to acci- the reliability of journey times, improving dents. safety, and keeping motorists better The Highways Agency has begun trial- informed. Accordingly the Highways ing lorry overtaking restrictions on short Agency is currently studying the detailed sections of the A1(M) in Co Durham and business case for these schemes.143 The cost the A14 in Northamptonshire. Providing of the M42 pilot has been estimated at these pilots are successful there will be a £40 million for the infrastructure and strong case for rolling out this inexpensive £3.2 million per year for operating costs.144 measure to other sections of the network Thus this ATM project appears to offer that are particularly affected, such as the significant cost benefits over widening, four-lane sections of the M11 and the which would have been particularly M20. These kinds of restrictions could also expensive on this edge-of-city location be applied as part of more comprehensive requiring complex intersections. The total PFI-funded ATM schemes, although their economic benefits have been estimated to widespread introduction might be opposed be in the region of five times the amount by the road haulage industry. spent on the project.145 Other forms of active traffic manage- High occupancy lanes ment currently under trial in England are Carpool or high-occupancy vehicle motorway access management146 and the (HOV) lanes are reserved for passenger employment of dedicated Highways vehicles carrying at least two people. They Agency traffic officers.147 After the pilots, it are intended to encourage car sharing, seems likely that economies of scale could thereby reducing the number of vehicles be achieved if ATM were rolled out to for a given number of travellers. The lanes more locations; and the time taken from are created using the hard shoulder, by approval to implementation could be widening roads or reassigning an existing reduced significantly. The introduction of lane. High-occupancy toll (HOT) lanes ATM provides an excellent option for PFI simply charge single-occupant vehicles if schemes based on future road pricing rev- they chose to use HOV lanes. Tolls are col- 143. www.publications. parlia- enues, both as a stand-alone project and in lected either electronically, by manned ment.uk/pa/cm200607/cmhansrd combination with other capacity improve- booths or using automatic number plate /cm070508/text/70508w0004.htm recognition. HOT lanes utilise wasted 144. www.publications. ments, such as road widening. The situa- parlia- tion is more complex for multi-use urban capacity on HOV lanes and may also be ment.uk/pa/cm200203/cmhansrd /vo030318/text/30318w01.htm streets with conflicting interests – this is an used to raise revenue for investment in new

145. www.highways.gov.uk area for further research and pilot projects. capacity. /knowledge/1334.aspx The first high-occupancy toll lane was 146. www.highways.gov.uk Lorry overtaking restrictions introduced on a state route in Orange /knowledge/9150.aspx The introduction of overtaking restrictions County, California in 1995, and was fol- 147. www.highways.gov.uk/ knowledge/601.aspx for heavy goods vehicles is another form of lowed by a number of others in both the

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US and Canada. The new lanes have elim- idea could be extended to allow single- inated delay for those who pay to use them occupancy vehicles to pay to use the lane and evening peak time delays for vehicles too – a move that may well prove popular in the mixed lanes have also been politically. reduced.148 There are persuasive economic arguments against simple high-occupancy vehi- In some locations cars could be allowed to drive in cle lanes: the lanes may waste valuable “ under-utilised bus lanes for the payment of a fee . . . road capacity when underused. High- occupancy toll lanes use capacity better There has been talk of allowing high-occupancy vehicles and raise revenue. A third alternative to use the M4 bus lane ” would be to introduce simple toll lanes on congested sections of highway. Both high- occupancy and single-occupancy vehicles would be charged the same rate, though Demand management the tolls would be more affordable for car Another range of policies is designed to sharers. reduce demand for car travel both to In the UK, where peak time congestion reduce congestion and the environmental delays can be very severe, it may be possi- impact of driving. These measures focus on ble to charge relatively high prices for the planning controls and regulating the geo- use of free-flowing lanes. Accordingly, graphical pattern of economic activity as future toll lane revenues could fund widen- well as transport itself. Policymakers ing schemes such as those being undertak- deploy them in an attempt to co-ordinate en on parts of the M1 and M25. Compared the competing demands of economic effi- with other road pricing schemes, such proj- ciency, equity and environmental protec- ects are likely to be politically popular since tion. they are voluntary, users of both the free and tolled lanes experience time savings Parking restrictions and taxpayers must no longer fund invest- Local authorities frequently use parking ment. Clearly such schemes could form one charges to discourage commuters from element of more comprehensive privately driving to work (to reduce peak-time con- financed ATM projects. gestion), while setting rates for shorter There may also be urban locations stays low enough not to put off shoppers where premium lanes could be introduced. from driving to town centres. Thus many In some locations cars could be allowed to municipal car parks are characterised by drive in under-utilised bus lanes for the sharp increases in charges beyond a four- payment of a fee. Since enforcement based hour stay. Another strategy is to introduce on automatic number plate recognition residential parking permits in areas around technology is often already in place this railway stations and town centres. The for- could be a very inexpensive way to make mer discourages commuters from under- better use of existing capacity on urban taking part of their journey by car; the lat- roads and raise additional revenue for ter deters driving to work. The London investment. Bus lane charges would also Borough of Richmond has recently 148. Sullivan E, ‘Evaluating the enable private finance to fund both the increased the scope of permit policy by Impacts of the SR 91 Variable widening of roads for new bus/toll lanes charging higher fees for residents owning Toll Express Lane Facility’, 1998. Cited in Dahlgren J, High and enforcement/tolling infrastructure. large 4x4 cars which, it is argued, have a Occupancy/ Toll Lanes: Where There has been talk of allowing high-occu- particularly negative environmental Should They Be Implemented?’, Transport Research Part A 36, pancy vehicles to use the M4 bus lane. This impact. pp 239-255, 2002

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Under the Transport Act 2000 councils However, parking policies can, like pric- may also impose workplace parking levies, ing, have the positive effect of encouraging although so far none has done so. Com - businesses to relocate away from the most panies also pay additional business rates for congested areas, thereby making better use parking spaces. These policy options again of spare transport capacity. They do how- target peak-time car commuters. ever raise concerns about the fate of traditional town centre locations. Furthermore, as a fixed cost of travel, parking fees are a lower proportional burden on those mak- “ Many local authorities treat their parking spaces more ing longer trips, and may as a result be like public goods and so ultimately spaces are allocated regressive since higher income groups tend on the basis of queuing” to live further away from inner cities. Given these problems and their questionable overall economic efficiency, one of the advantages of urban road pricing is that Although parking policies can target it would eliminate the perceived need for particular classes of road users in an complex and unpopular parking policies, attempt to lessen congestion, they are an aspect of road user charging that could clearly less efficient than well-organised help win public support were it given suf- road pricing schemes, which can differen- ficient emphasis. tiate according to the distance travelled and traffic levels. Rather than allowing the Planning controls balance of supply and demand to deter- Deterring car travel and encouraging pub- mine prices, many local authorities treat lic transport have been key components of their parking spaces more like public spatial planning policies, particularly since goods and so ultimately spaces are allocat- the mid-1990s.150 Out-of-town developed on the basis of queuing. There is no ments have been discouraged; the empha- technical reason to treat parking as any- sis has been on developing compact cities thing other than a purely private good; it to limit travel-to-work distances and create being both rival and excludable, but too urban densities that promote the viability often the internal efficiency of parking of bus and train services. The redevelop- allocation ranks secondary to its use in ment of brownfield sites within cities, achieving other objectives. Research has rather than greenfield sites on the periph- shown that cruising for a street-parking ery has been an important part of the pol- space is common in congested traffic icy. More directly, some local councils have because some people prefer to queue than restricted the number of parking places on pay to use a car park. Shoup estimated new developments to discourage car own- from a review of 16 studies in 11 cities ership. worldwide that on average 30 per cent of While the aims of these policies may traffic in central business districts is look- have been laudable, their economic cost ing for a parking space, with the average has been very high. New dwellings in search time being just over eight min- Britain are among the smallest in the 149 149. Shoup D, The High Cost of utes. A further drawback of parking developed world. In fact they are probably Free Parking, American Planning restrictions is that they do little to reduce smaller now than they were in the 1930s, Association, Planners Press, 2005 through traffic. In fact, by discouraging when the country was only a quarter as

150. Department of the parking and thus freeing up road capacity rich. A lack of land supply has also con- Environment Planning Policy it may even encourage through-traffic on tributed to the high cost of homes and the Guidance 13: Transport, The Stationery Office, 2004 to urban routes. current affordability crisis.

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In the commercial sector, planning ket value (OMV); goods and service tax is restrictions have increased the cost of 5 per cent of value at import; additional floor space and may therefore have con- registration fee is 110 per cent of OMV, tributed to the decline of manufacturing. and one-time registration fee is S$140. There is also evidence that the controls have contributed to higher retail prices in the UK compared with other EU coun- Since road pricing is capable of efficiently and directly tries.151 “ The impact on congestion and the envi- addressing the environmental impacts of transport there is ronment is also questionable. Rather than a strong case for reviewing the future role of land-use reg- significantly increasing use of public trans- ulation in this area ” port, compact cities have arguably concentrated car traffic into a smaller space, increasing levels of congestion and pollution.152 Thus a 1360cc Peugeot 206 with OMV While limiting car dependence is only S$14,870 would actually cost S$51,414 to one of the aims of planners alongside con- put on the road.153 servation of the countryside, urban con- Unfortunately there is a perverse incen- tainment and inner-city regeneration, it tive problem associated with imposing high must take at least some responsibility for taxes on vehicle ownership; having paid so the large negative effects planning policy much for a vehicle, owners are encouraged has had on housing and business. Since to use them more. In 2003-04 average road pricing is capable of efficiently and annual car use in Singapore was 20,171km directly addressing the environmental per car compared with only 11,500km per impacts of transport there is a strong case car in London.154 Clearly road pricing is for reviewing the future role of land-use more effective at tackling congestion than regulation in this area. ownership charges that are imposed whether vehicles are being driven or not. Quotas and rationing Measures that limit car ownership may also In other countries policymakers have gone deny those on relatively low incomes the beyond indirect measures and introduced employment and leisure opportunities asso- systems that ration car ownership. In ciated with motoring, thereby increasing Singapore, in addition to congestion social polarisation. charging that limits vehicle use, various Mexico City uses a system, motivated 151. Evans A and Hartwich O, motoring taxes are imposed in order to initially by environmental concerns, called 2005, op. cit.

reduce vehicle ownership. Singapore’s vehi- hoy no circula (known abroad as “one day 152. See: O’Toole R, The Best cle quota system is used to limit annual without a car”).155 Every weekday vehicles Laid Plans, Cato Institute, 2007 growth in vehicle numbers to 3 per cent. having either of the day’s two hoy no cir- 153. Cost S$ for cars registered in July 2007, Certificates of Entitlement – which permit cula numbers as the last digit on their reg- www.onemotoring.com.sg/publis a new vehicle to be driven for ten years – istration plates are banned from driving; h/onemotoring/en/lta_informatio n_guidelines/buy_a_new_vehicle/ are rationed and auctioned off to the high- the aim being to cut car use on weekdays car_cost.MainPar.0047.File.tmp/ est bidders every fortnight. The price paid by 20 per cent. But better-off households Car_Cost_Update.pdf 154. TfL and Singapore Land is called the quota premium. As of June have got around the system by buying Transport Statistics, cited in 2007 the quota premium was S$16,181 extra cars; thereby reducing the pro- World Cities Report, Commission for Integrated for a car under 1600cc and S$19,802 for a gramme’s effectiveness. It is certainly a Transport, March 2005 car above 1600cc (S$1 ≈ £0.33). In addi- very crude method of tackling congestion www.cfit.gov.uk/docs/2005/worl dcities/index.htm tion, in 2007 custom duty on imported because it does not discriminate between 155. See: www.mexicocity. cars is currently 20 per cent of open mar- motorists with different time values. com.mx/nocircula.html

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Capacity enhancement powerful alliances with local residents. As An alternative is to try to satisfy demand mentioned in Chapter 5, a better way to by increasing the capacity of infrastructure. tackle carbon emissions would be to intro- In many countries funding is achieved duce an economy-wide carbon tax. through some form of hypothecation, so One argument often deployed against that a proportion of road-user tax receipts new road space is that demand is so great are earmarked for transport projects.156 In that the new capacity will quickly fill up the absence of both road pricing and a with traffic.162 “Induced” traffic, as it is neutral tax system, allocating investment termed, is the consequence of the historical efficiently is difficult. Typically planners mismatch between the supply and demand tend to underestimate the demand for road of roads. It is the result of central control of space and capacity increases are inadequate investment and the lack of economic infor- to tackle congestion.157 On the other hand, mation in the absence of pricing. User- many public transport schemes, such as the charging promises both to eliminate con- Channel Tunnel and numerous tram proj- gestion caused by induced traffic and guide ects, overestimate demand for their servic- investment in infrastructure upgrades so es, leading to wasteful investment.158 that it matches demand for road space more closely. Road building Road pricing may therefore make road The obvious solution to congestion is to building a more attractive option, by end- build more roads and widen existing ones. ing the need for taxpayers to fund invest- The Roads for Prosperity programme adopt- ment, including an environmental charge, ed this approach in the early 1990s, which eliminating induced traffic problems and saw a substantial increase in the rate of facilitating a far more efficient allocation of road investment.159 However, new con- investment. However, opportunities for struction met with stiff opposition from the construction of new capacity are likely environmentalists who engaged in direct to be severely limited within many urban action to prevent schemes such as the M3 areas. Pricing will mean that the economic extension at Twyford Down.160 The viability of such schemes, which may Department of the Environment also involve the compulsory purchase of hun- undermined the policy from within the dreds of homes (as with the M11-Hackney 156. Nakagawa D and Matsunaka R, Funding Transport Government with support from the link road), or expensive bridging and tun- Systems: A Comparison Among Developed Countries, Pergamon, Treasury (there was a high budget deficit at nelling (for example the Limehouse link in 1997 the time). The programme was abandoned Docklands), can be more accurately 157. See Congleton R and in the mid-1990s and road building assessed. Bus projects or spatial dispersal Bennett R, “On the political economy of state highway expendi- slowed to a virtual halt. And perhaps could often bring greater economic bene- tures: some evidence of the rela- because of the environmental protests, the fits in large cities. tive performance of alternative public choice models”, Public Government now prefers to widen existing Choice, 84, pp 1-24, 1995 roads rather than construct brand new Public transport improvements 158. See Babalik E, op cit. ones, even though the former is a far more Another approach to addressing conges- 159. Department of Transport, 161 Roads for Prosperity, HMSO, expensive way of adding new capacity. tion problems is to increase investment in 1989 Environmental concerns around build- public transport, to improve quality of 160. Bryant B, Twyford Down: ing more road capacity could be addressed service and decrease overcrowding prob- Roads, Campaigning and Environmental Law, E and FN by increasing compensation payments to lems. Such improvements would encour- Spon, 1996 affected residents (as in France) and paying age more people to use buses, trains and 161. Archer C and Glaister S, them at the start of the construction trams rather than cars in order to reduce op. cit. process, which would restrict the opportu- congestion and the environmental impact 162. Department of Transport, SACTRA report, HMSO, 1995 nities for radical environmentalists to form of travel. Broadly speaking, this has been

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the Government’s strategy in recent years, ment in these modes based on future road together with supportive measures such as pricing revenues will be most appropriate the parking restrictions discussed above. in these locations. However, where public Unfortunately, since public transport is transport expenditure is wasteful of subsidised, the cost to taxpayers has been resources road pricing will further weaken very high: the annual subsidy of buses, the case for continued subsidy by under- trains and trams, which account for a small mining justifications that it is contributing fraction of passenger travel, is in the region to congestion relief and environmental of £10 billion. But passengers could be lost protection. if the subsidy is reduced and higher fares charged. Government, at local and national level, where public transport expenditure is wasteful of has also encouraged public transport use “ through concessionary fares, for example, resources road pricing will further weaken the case for for the under-18s and over-60s. However, continued subsidy by undermining justifications that it is these mean that a high proportion of jour- contributing to congestion relief and environmental neys (on buses in particular) are of limited protection ” economic value. A further problem is that subsidised rail journeys encourage long- distance commuting and therefore carbon- intensive lifestyles; commuters, living in Conclusion rural areas, will use trains to get to work While some of the policies discussed can but cars for leisure and shopping trips. Rail ease congestion, they are generally very commuters are also wealthier than average, crude tools compared to road pricing. meaning that the current level of subsidy is Many have negative economic side-effects, questionable on environmental, economic which may undermine their cost-effective- and egalitarian grounds.163 It is an example ness. In contrast, road user charges tackle of “churning” within the tax system, congestion directly and can be set at levels returning money to middle-class taxpayers that both eliminate delays and allow opti- through subsidies when it would be more mal use of road capacity. efficient to reduce taxes and have them pay However, in some instances additional for services directly. strategies may make road pricing more The extent to which car journeys can be effective. In particular, Active Traffic substituted is also questionable. A high Management offers the prospect of proportion of bus and train journeys ter- increasing capacity at relatively low cost. minate in the centres of large conurba- Together with minor changes such as lorry tions, particularly Central London. Public overtaking bans and bus lane tolling, transport may not be viable in areas with implementing wider ATM promises to medium to low population densities and it reduce congestion relatively quickly. In also tends to be unsuitable for journeys some locations, however, even use of from suburb to suburb and for trips charges and ATM combined may not be involving multiple destinations. Extending sufficient to address the high demand for provision to such an extent that significant road space. Depending on the costs of cuts in car usage were achieved may there- construction, road building would then be fore be prohibitively expensive. a viable option. The decision would be Widespread road pricing should give guided by prices and the financial return public transport a competitive advantage on new roads could be calculated more 163. The Strategy Unit, op. cit., in large congested conurbations. Invest- accurately. Given supportive fiscal and p 19

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institutional frameworks, investment The privately financed improvement of should closely match demand, leading to a infrastructure must therefore involve more efficient allocation of infrastructure more options than simply building new expenditure. At the same time, the pricing roads and railways. It should also include of environmental costs would encourage a series of complementary measures to road builders to minimise the impact of reduce congestion in the short term projects, perhaps by choosing routes that before road pricing is introduced. Such a avoided housing or using ATM systems to strategy could play a critical role in main- limit external effects (for example, by cut- taining political support for continued ting speed limits through urban areas at private sector involvement in transport night). projects.

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On international comparisons of transport complex public private partnerships may capacity and congestion the UK comes be appropriate, while the future introduc- close to the bottom of the tables. These tion of widespread pricing should bring a problems threaten British business and more commercial approach through the future economic growth. Fortunately, not construction of privately owned and oper- only can road pricing alleviate the coun- ated toll roads. Wherever possible, howev- try’s endemic congestion, but it can also er, complex schemes with a high level of provide a new source of funding for a political intervention, such as the London major upgrade of the transport network. Underground PPP, should be avoided. We We have demonstrated that the addition also recommend that government, espe- of relatively small infrastructure charges cially local authorities, makes greater use of can provide sufficient resources to increase private sector expertise in PFI procurement current investment levels substantially. Yet to ensure better value for money and fewer road pricing remains unpopular and many contractual difficulties. motorists are suspicious that it will end up A strong preference for local, regional or being yet another tax on driving. We pro- national pricing schemes has not been stat- pose, therefore, that projects should be ed in this report. This is because an evolu- begun before road pricing is introduced. tionary approach may be the best option. Travellers would then see clear evidence of A “big-bang” introduction of a national the direct benefits of road user charging system may introduce unnecessarily large and understand that a significant share of political and technological risks that will future revenues was being spent on trans- act as a deterrent to private sector involve- port rather than absorbed by the Treasury ment. It could also delay the implementa- for general expenditure. The maintenance tion of valuable smaller projects that can of public support, or at least acceptance, target the worst congestion bottlenecks. will be essential if the economic benefits of Adequate technology already exists to widespread road pricing are to be obtained. deploy our future revenue model in such The Private Finance Initiative has been schemes. Given the severity of Britain’s shown to be a suitable method of funding congestion problems, a series of such proj- improvements and could build upon the ects should be begun without delay – for success of the design, build, finance and example, the introduction of active traffic operate road schemes undertaken in recent management at a number of traffic years. As Chapter 3 explains, there is hotspots. strong evidence that, under the right con- While the deployment of future pricing tractual conditions, the PFI offers good revenues promises to improve conditions value for money in transport procurement. for transport users, there are dangers. Other funding methods should not, how- Decisions on how to spend the funds ever, be precluded. In some projects, more could become overly politicised and influ-

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enced by institutional bias in favour of isation by allowing local authorities to public transport. Exemptions could be implement charging schemes and spend granted to certain user classes, extra regen- revenues how they wish. This report sug- eration funding sought, planning controls gests decentralisation should go further. tightened and taxpayer subsidies increased Localism – making local spending depend- as car commuters are displaced on to ent on local revenues – can help to ensure already overcrowded trains and buses – all pricing receipts are spent wisely. It would such consequences could undermine the provide a strong incentive for transport cost effectiveness of pricing. Investment in policies that boosted economic growth infrastructure is likely to be economically rather than satisfied special interests. efficient only if it retains a strong relation- There is also a strong case that an inde- ship to consumer demand. Thus, wherever pendent body should govern the trunk feasible, a significant share of road-user roads and motorways before the introduc- revenues should be spent on road improve- tion of pricing on these routes. This meas- ments, especially since a high proportion ure could create a stable environment for of car journeys cannot practically be investment, in marked contrast to the undertaken by public transport. However, rapid shifts in policy and expenditure that this is not to say that a share of toll receipts have characterised DfT and Treasury con- cannot be spent on bus and train projects trol in recent times. Thus the introduc- – this may be particularly appropriate in tion of widespread road pricing offers a the largest conurbations where road unique opportunity for wholesale reform capacity improvements are not cost effec- of transport governance both at local and tive. Nevertheless, there is a strong argu- national level. However, it should be ment that public transport users should noted that institutional change is not a pay a larger share of the costs of their jour- necessary requirement for funding infra- neys to ensure that more accurate compar- structure improvements through the isons can be made with priced roads when deployment of private finance. This both investment and travel decisions are model can still be implemented within the taken. current structure of governance, albeit less efficiently. The introduction of road pricing also raises fundamental questions about trans- Localism – making local spending dependent on local “ port’s fiscal framework, as discussed in revenues – can help to ensure pricing receipts are spent Chapter 5. By internalising congestion and wisely. It would provide a strong incentive for transport environmental costs, user-charging under- policies that boosted economic growth rather than satis- mines the case for imposing special taxes fied special interests” on motorists such as fuel duty and vehicle excise duty. Yet if road pricing is introduced gradually, it will complicate the tax situation: particularly busy parts of the Expenditure decisions are, of course, network may be priced, while the remain- dependent on the institutional framework der remains free at the point of use. At the governing transport. As Chapter 4 explains, same time, the sheer scale of motoring tax- the continued central control of infrastruc- ation would make it difficult for the ture investment constitutes an additional Government to find alternative sources of layer of unwelcome political risk for poten- revenue or cuts in public expenditure. The tial private investors. The Government has situation is improved, however, by the already introduced an element of decentral- dynamic economic benefits of road pric-

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Conclusions and recommendations

ing, even if it is applied only to those loca- A greater danger may be political oppo- tions suffering persistent congestion prob- sition to private sector involvement in lems. The Treasury will receive a substan- infrastructure projects. The recent prob- tial tax boost from the increased economic lems of Metronet and the London growth resulting from reduced congestion Underground PPP have made it even and from capacity improvements resulting more difficult to promote private invest- from increased infrastructure investment. ment in transport projects – to both pub- There is therefore a compelling argument lic sector policymakers and potential pri- that increments in fuel duty and VED vate sector partners. However, the invest- should be restrained if a number of charg- ment model proposed in this report is ing schemes were introduced in some of very different. the busiest locations. One argument for raising the fiscal burden is to meet the Government’s targets for It has been demonstrated that current road user taxes UK carbon emissions. However, it has “ far exceed even the very high estimates of the social been demonstrated that current road user taxes far exceed even the very high esti- costs of a ton of carbon contained within the Stern report mates of the social costs of a ton of carbon . . . We therefore recommend that in the medium term the contained within the Stern report. It also Government seeks to equalise the taxation of different seems likely that the most cost-effective emissions sources ” emissions reductions will be found in sectors other than transport. We therefore recommend that in the medium term the Government seeks to equalise the taxation First, the kind of investment required to of different emissions sources. If policy- upgrade the infrastructure is unlikely to be makers are intent on meeting their tar- forthcoming from the Treasury. Objectors gets, then this strategy will see that this is must therefore demonstrate how they done in the most economically efficient would fund it by alternative means. manner. Secondly, since investor returns will come The same overall strategy should be from future tolls from users, unlike the employed to deal with the other environ- London Underground PPP and many mental impacts of transport, such as noise other projects, the accusation cannot be and local air pollution. As with climate made that taxpayers’ money is being used change, methodological difficulties make it to fuel private profits or that public spend- extremely problematic to quantify envi- ing is somehow being mortgaged. Thirdly, ronmental costs and apply an appropriate the inclusion of minimum revenue guar- charge on vehicle use. Further research is antees within contracts should reassure needed to address the fundamental limita- investors on political risk. They would act tions of current valuation techniques and as a very strong disincentive to officials to enable external costs to be efficiently wishing to undermine a scheme’s financial internalised by means other than arbitrary viability by introducing subsidised public politicised tax rates. Nevertheless, the rela- transport in competition, for example. tively small charge necessary to fund infra- Indeed, there are numerous ways of limit- structure upgrades means that even harsh- ing private sector risk through contract er fiscal conditions and/or high environ- and the UK is able to draw on a high level mental charges are unlikely to undermine of specialist expertise and experience of the viability of projects based on future PFI and PPP projects. Thus the future rev- pricing receipts. enue-based projects advocated here can

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avoid the difficulties that have beset a can succeed within different fiscal and small number of recent schemes. institutional frameworks and requires only The economic costs of congestion and small additional road-user payments to inadequate infrastructure are too severe for have a positive impact. The introduction the Government to continue a policy of of road pricing gives Britain a unique prevarication and delay. The upgrading of opportunity to obtain the high quality the country’s transport networks cannot, infrastructure that befits one of the world’s and need not, wait another 20 or 30 years. wealthiest countries. It will take political Our proposal to finance improvements courage to implement but the benefits will privately using future road pricing receipts be many and enduring. With so much promises to quickly deliver substantial room for improvement and a robust and benefits to travellers. We have shown that up-front solution available, it would be this model is both flexible and robust; it foolish to delay.

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After years of high taxation and underinvestment in transport we face gridlock on our roads and deadlock in transport policy. While the case for road pricing is clear and has been made for a long time, the public is wary of anything that could turn out to be yet another stealth tax. Towards bettertransport The solution we propose and investigate is to improve our infrastructure now and to repay the costs using road pricing revenues collected in the future. This way, the infrastructure can be built without delay and the funding gap met using private Towards better finance. Not only would our infrastructure be improved but we would have adopted the most efficient means of managing road space for the future. transport

This report explores the experience of PFI in transport. It then moves on to detail the institutional and fiscal frameworks Funding new infrastructure governing the sector. It finds that while our current systems of with future road pricing revenue governance and taxation are broadly compatible with road Richard Wellings andBriarLipson,editedbyOliverMarc Hartwich pricing and the concomitant deployment of private finance, certain frameworks look more likely to promote efficient long- term investment in transport infrastructure than others.

Richard Wellings and Briar Lipson edited by Oliver Marc Hartwich

£10.00 ISBN: 978-1-906097-12-7 Policy Exchange

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