REVENUE Revenue Use from Transport Pricing Deliverable 3

REVENUE Revenue Use from Transport Pricing Contract: GMA2-2001-52011

Funded by European Commission – DG TREN Fifth Framework Programme Competitive and Sustainable Growth Programme Key Action 2 – Sustainable Mobility and Intermodality

Deliverable 3 Case Studies Specification

Version 2.0 Date: 9th March 2005 Authors: S. Suter and U. Springer (ECOPLAN), A. de Palma and R. Lindsey (adpC), S. van der Loo (KULeuven), A. Ricci and P. Fagiani (ISIS), P. Moilanen (STRAFICA), M. van der Hoofd and M. Carmona (TIS), J. Baker (TTR) with contributions from partners

Project co-ordinator: ISIS (Italy)

Partners: ISIS (It), ADPC (Be), CERAS (Fr), DIW (De), ECOPLAN (Ch), INFRAS (Ch), ITS (UK), IWW (De), KULeuven (Be), LETS (Fr), NEA (Nl), PW (Pl), STRAFICA (Fi), TIS (Pt), TOI (No), TTR (UK)

REVENUE D3 CASE STUDIES SPECIFICATION

Revenue Use from Transport Pricing

Deliverable 3: Case Studies Specification Date: 9th March 2005

Authors: S. Suter and U. Springer (ECOPLAN), A. de Palma and R. Lindsey (adpC), S. van der Loo (KULeuven), A. Ricci and P. Fagiani (ISIS), P. Moilanen (STRAFICA), M. van der Hoofd and M. Carmona (TIS), J. Baker (TTR)

This document should be referenced as: S. Suter, U. Springer, A. de Palma, R. Lindsey, S. van der Loo, A. Ricci, P. Fagiani, P. Moilanen, M. van der Hoofd, M. Carmona and J. Baker, (2004), Case Studies Specification, REVENUE Project Deliverable 3. Funded by 5th Framework RTD Programme, ISIS, Rome, 9th March 2005

PROJECT INFORMATION

Contract: GMA2-2001-52011

Website: http://www.revenue-eu.org/

Commissioned by: European Commission – DG TREN; Fifth Framework Programme

Lead Partner: ISIS (It)

Partners: ISIS (It), ADPC (Be), CERAS (Fr), DIW (De), ECOPLAN (Ch), INFRAS (Ch), ITS (UK), IWW (De), KULeuven (Be), LETS (Fr), NEA (Nl), PW (Pl), STRAFICA (Fi), TIS (Pt), TOI (No), TTR (UK)

DOCUMENT CONTROL INFORMATION

Status: P (P=Public ; C=Confidential) Version : 2.0 Quality assurance: Co-ordinator’s review:

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Table of Contents

EXECUTIVE SUMMARY ...... 9 1. INTRODUCTION ...... 22 1.1. THE REVENUE PROJECT...... 22 1.2. KEY CONCEPTS AND CASE STUDY APPROACH ...... 24 1.3. STRUCTURE OF DELIVERABLE 3 ...... 29 2. REVIEW OF CURRENT PRACTICE IN TRANSPORT PRICING AND REVENUE USE...... 31 2.1. INTRODUCTION ...... 31 2.2. OVERVIEW OF PRICING SCHEMES IN EUROPE ...... 31 2.2.1. Pricing classifications ...... 31 2.2.2. Observed pricing schemes...... 34 2.3. EARMARKING AND OTHER REVENUE ALLOCATION RULES...... 42 2.3.1. Allocation classifications...... 42 2.3.2. Observed allocation schemes ...... 42 2.4. PUBLIC-PRIVATE-PARTNERSHIPS ...... 48 2.5. COMBINATIONS OF PRICING, REVENUE USE, SCOPE AND INSTITUTIONAL ARRANGEMENTS...... 49 2.5.1. Pricing and revenue use ...... 49 2.5.2. Revenue use and investment ...... 49 2.5.3. Regional scope of a pricing-/revenue allocation scheme and role of private actors in implementation...... 50 2.5.4. Government subsidies and their targets ...... 51 2.5.5. Geographically defined earmarking and allocation schemes ...... 51 2.5.6. Other revenue allocation schemes...... 51 2.6. FIRST COMPARISON OF PRACTICE AND THEORY ...... 52 2.7. CONCLUSIONS ...... 54 3. THEORETICAL GUIDANCE...... 55 3.1. INTRODUCTION ...... 55 3.2. KEY THEORETICAL ISSUES, RESEARCH QUESTIONS AND PRACTICAL GUIDANCE TO APPLICATION OF THE THEORY...... 55 3.2.1. Theoretical issue 1: The Cost Recovery Theorem...... 55 3.2.2. Theoretical issue 2: Funding investments and optimal transport pricing by a benevolent government...... 60 3.2.3. Theoretical issue 3: Tax and investment rules in an economy with several government levels...... 61 3.2.4. Theoretical issue 4: The common agency model...... 65 3.2.5. Theoretical issue 5: Earmarking in a dynamic political model ...... 66 3.2.6. Theoretical issue 6: Procurement of infrastructure services and the role of investment agencies ...... 67 3.3. KEY FEATURES OF OPTIMAL REGULATION SCHEMES ...... 72 4. THE MOLINO MODEL ...... 75 4.1. INTRODUCTION ...... 75 4.2. SCOPE OF THE ASSESSMENT WITH MOLINO ...... 75

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4.3. DATA REQUIREMENTS...... 75 4.4. A SIMPLE ILLUSTRATIVE EXAMPLE: TWO ROUTES IN PARALLEL...... 77 4.4.1. Demand and generalized price...... 77 4.4.2. Input and output data: Summary...... 80 4.4.3. Other costs...... 81 4.4.4. Social Welfare ...... 82 4.4.5. The decision process and the market structure ...... 84 4.4.6. The flow of funds ...... 85 4.4.7. Numerical example: Input parameters...... 85 4.4.8. Numerical example: Output results...... 90 5. ASSESSMENT OF THE REGULATION SCHEMES...... 94 5.1. INTRODUCTION ...... 94 5.2. EFFICIENCY ...... 94 5.2.1. Approach and definitions ...... 94 5.2.2. Major efficiency issues and sources of inefficiencies...... 95 5.2.3. Assessment methods and tools...... 99 5.3. EQUITY...... 102 5.3.1. Approach and definitions ...... 102 5.3.2. Major equity issues...... 103 5.3.3. Assessment methods and tools...... 105 5.4. TECHNICAL AND ORGANISATIONAL FEASIBILITY ...... 108 5.4.1. Approach and definitions ...... 108 5.4.2. Major technical and organisational/institutional issues...... 109 5.4.3. Assessment methods and tools...... 112 5.5. ACCEPTABILITY...... 113 5.5.1. Approach and definitions ...... 113 5.5.2. Step 1: Identification of the key acceptability issues of a regulation scheme ...... 114 5.5.3. Step 2: Stakeholder analysis...... 118 5.5.4. Step 3: Assessment of impacts as perceived by the stakeholder groups119 5.5.5. Step 4: Assessment of the overall acceptability of the regulation schemes ("conclusion") ...... 119 5.5.6. Assessment methods and tools...... 119 6. DATA COLLECTION...... 121 6.1. INTRODUCTION ...... 121 6.2. SCOPE...... 121 6.3. DATA COLLECTION TECHNIQUES ...... 121 6.3.1. Secondary sources and previous research work ...... 123 6.3.2. Interviews ...... 123 6.3.3. Closed-question interviews...... 124 6.3.4. Semi-structured interviews ...... 124 6.3.5. Focus groups ...... 125 6.4. CONTENT ANALYSIS ...... 127 6.5. QUESTIONNAIRES ...... 129 7. SUMMARY OF GUIDELINES FOR THE CASE STUDY WORK...... 132 REFERENCES ...... 136

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ANNEX A: REVIEW OF CURRENT PRACTICE: FACT SHEETS ...... 141 7.1. INTERNATIONAL ...... 141 7.2. AUSTRIA...... 142 7.2.1. Transport pricing ...... 142 7.2.2. Earmarking of revenues ...... 143 7.2.3. Revenue allocation scheme...... 143 7.3. BELGIUM ...... 145 7.3.1. Transport pricing ...... 145 7.3.2. Earmarking of revenues ...... 145 7.3.3. Revenue allocation scheme...... 146 7.4. FINLAND...... 147 7.4.1. Transport pricing ...... 147 7.4.2. Earmarking of revenues ...... 148 7.4.3. Revenue allocation scheme...... 148 7.5. FRANCE ...... 150 7.5.1. Transport pricing ...... 150 7.5.2. Earmarking of revenues ...... 151 7.5.3. Revenue allocation scheme...... 152 7.6. GERMANY...... 156 7.6.1. Transport pricing ...... 156 7.6.2. Earmarking of revenues ...... 157 7.6.3. Revenue allocation scheme...... 157 7.7. GREECE ...... 160 7.7.1. Transport pricing ...... 160 7.7.2. Earmarking of revenues ...... 161 7.7.3. Revenue allocation scheme...... 161 7.8. ITALY ...... 165 7.8.1. Transport pricing ...... 165 7.8.2. Earmarking of revenues ...... 166 7.8.3. Revenue allocation scheme...... 166 7.9. NETHERLANDS...... 169 7.9.1. Transport pricing ...... 169 7.9.2. Earmarking / non-earmarking of revenues...... 170 7.9.3. Revenue allocation scheme...... 170 7.10. NORWAY ...... 172 7.10.1. Transport pricing ...... 172 7.10.2. Earmarking of revenues ...... 172 7.10.3. Revenue allocation scheme...... 172 7.11. PORTUGAL...... 174 7.11.1. Transport pricing ...... 174 7.11.2. Earmarking / non-earmarking of revenues...... 175 7.11.3. Revenue allocation scheme...... 176 7.12. SPAIN...... 178 7.12.1. Transport pricing ...... 178 7.12.2. Earmarking / non-earmarking of revenues...... 178 7.12.3. Revenue allocation scheme...... 179 7.13. SWEDEN ...... 181 7.13.1. Transport pricing ...... 181 7.13.2. Earmarking of revenues ...... 181 7.13.3. Revenue allocation scheme...... 182

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7.14. SWITZERLAND ...... 184 7.14.1. Transport pricing ...... 184 7.14.2. Earmarking of revenues ...... 185 7.14.3. Revenue allocation scheme...... 185 7.15. UNITED KINGDOM ...... 187 7.15.1. Transport pricing ...... 187 7.15.2. Earmarking of revenues ...... 187 7.15.3. Revenue allocation scheme...... 188 CURRENT HIGHWAY DBFO SCHEMES ...... 192 LOCAL GOVERNMENT SCHEMES SUPPORTED BY THE GOVERNMENT...... 192

8. ANNEX B: RELATED RESEARCH PROJECTS ...... 193

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List of Tables

Table 2-1: Fuel and vehicle tax revenue in the EU member states...... 35 Table 2-2: Fuel tax on unleaded petrol and diesel (EUR / 1’000 litres, Dec. 2003) ...36 Table 2-3: Country overview table: Pricing ...... 39 Table 2-4: Country overview table: Revenue allocation schemes...... 45 Table 2-5: Public-Private-Partnerships in the transport sector ...... 48 Table 3-1: Empirical evidence of CRT-assumptions and relevance for case studies..58 Table 3-2: Empirical evidence on cost functions and relevance for case studies...... 59 Table 3-3: Overview of theory on multilevel government ...... 64 Table 3-4: Elements favouring the establishment of an investment agency or a PPP.70 Table 3-5: Features and preferable options for concessions/contracts: Motorways....71 Table 3-6: Features and preferable options for concessions/contracts: Railways ...... 71 Table 3-7: Regulation scheme and theoretical background...... 73 Table 3-8: Assessment of relevance to case studies ...... 74 Table 4-1: Main features of the regulation schemes modelled in MOLINO...... 76 Table 4-2: Relevant aspects of regulation schemes for the application of MOLINO .77 Table 4-3: Input variables...... 80 Table 4-4: Calibrated variables...... 81 Table 4-5: Utility variables...... 83 Table 4-6: Parameters of the welfare function...... 84 Table 4-7: Users selecting route 1 and 2 (vehicles/day, in 100’000 vehicles) ...... 86 Table 4-8: Length of time periods ...... 86 Table 4-9: Monetary costs ...... 86 Table 4-10: Tolls...... 86 Table 4-11: Other supply parameters...... 87 Table 4-12: Values of time ...... 87 Table 4-13: Percentages of total income devoted to transportation...... 87 Table 4-14: Elasticities of substitution ...... 87 Table 4-15: Other costs...... 88 Table 4-16: Subsidies...... 88 Table 4-17: Tendering parameters...... 88 Table 4-18: External costs ...... 89 Table 4-19: Regulatory regimes ...... 89 Table 4-20: Welfare parameters ...... 89 Table 4-21: Calibrated share parameters of the utility functions...... 90 Table 4-22: MOLINO output...... 90 Table 4-23: Results for βcent = 0.8...... 92 Table 4-24: Results for ГC = 2.25 ...... 92 Table 5-1: Overview table: Efficiency (example) ...... 102 Table 5-2: Incidence of taxes used to support highway services...... 105 Table 5-3: Overview table: Equity (example) ...... 108 Table 5-4: Overview table: Technical and organisational feasibility (example)...... 112 Table 5-5: Matrix of functional elements and acceptability requirements ...... 116 Table 5-6: Positions and influence of stakeholder groups: Result presentation table120 Table 6-1: Comparison of survey techniques ...... 129 Table 7-1: Options for assessment methods and tools applied in the case studies....135 Table 2: Eurocontrol unit rates for 2005...... 141

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List of Figures

Figure 1: Regulation scheme ...... 10 Figure 2: The four parts of the case study work ...... 11 Figure 1-1: Project structure...... 23 Figure 1-2: Elements of a regulation scheme...... 25 Figure 1-3: Approach for the case study work in REVENUE ...... 27 Figure 1-4: Structure of Deliverable 3 ...... 30 Figure 3-1: Main relevance of theoretical issue 1 for regulation schemes ...... 56 Figure 3-2: Main relevance of theoretical issue 2 for regulation schemes ...... 60 Figure 3-3: Main relevance of theoretical issue 3 for regulation schemes ...... 62 Figure 3-4: Main relevance of theoretical issue 4 for regulation schemes ...... 65 Figure 3-5: Main relevance of theoretical issue 5 for regulation schemes ...... 67 Figure 3-6: Main relevance of theoretical issue 6 for regulation schemes ...... 68 Figure 4-1: Decision tree for two routes in parallel ...... 78 Figure 4-2: Flow of funds ...... 81 Figure 4-3: Flow of funds ...... 85 Figure 5-1: Major efficiency issues of transport regulation schemes ...... 95 Figure 5-2: Major equity issues of transport regulation schemes ...... 104 Figure 5-3: Major technical and organisational issues...... 109 Figure 6-1: Classification of methods for data collection...... 122 Figure 6-2: Steps in preparing a focus group...... 127 Figure 6-3: Questionnaire design cycle...... 130 Figure 7-1: Basic approach to case study work ...... 132 Figure 7-2: Description of regulation schemes using the positive and normative insights gained from theoretical work of the REVENUE project...... 134

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Executive Summary

Aims and structure The REVENUE project has been designed to provide further inputs to the formulation and development of EU policies in the area of infrastructure charging and of using of revenues from the charging regimes in transport. The project has three main objectives: Assess current practice for transport revenue use; Develop guidelines for good use of the revenues from social marginal cost pricing; and Examine both current practice and the use of the guidelines on a set of case studies.

The project is structured into six work packages (WP). This Deliverable is the output of the 3rd work package "Case studies specification" which builds the bridge between the theoretical work in work package 2 and the 11 REVENUE case studies of the work packages 4 and 5. It aims to provide theoretical and methodological guidance for the case study work. Specifically, Deliverable 3 addresses the following four questions: What is the current practice of transport pricing and use of revenues from transport pricing in Europe? Chapter 2 provides an overview based on the country-specific fact sheets of annex A of this Deliverable. What theoretical guidance can be derived from the theory about optimal transport pricing and use of revenues as developed in work package 2? The formulation of operational or practical research questions based on the theory is a subject treated in chapter 3. What tools and methods are available and should be used to assess within the case studies the effects and the implications of different policies in the area of infrastructure charging and use of revenue ? Chapter 4 presents the MOLINO model, a standard tool that has been developed especially for the REVENUE project within WP2 and which will be used in several case studies to assess efficiency and equity implications. Chapter 5 provides the general framework for the assessment. Its application will ensure a certain degree of harmonization in the procedure and the content of the case studies. Chapter 6 supports the case study work in the area of data collection. How should the case study leaders approach and structure the work in order to achieve a certain degree of comparability? The basic approach to the case study work is first outlined in chapter 1 and then summarized in the final chapter 7. The content of both chapters is summarized in the following section of this Executive Summary.

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Basic case study approach

In the REVENUE project, transport charging and use of revenue are examined together as two parts of a so called regulation scheme: A regulation scheme consists of a specific combination of pricing, revenue use and investment rules (see Proost S. et al., 2004). In the case studies, different regulation schemes will have to be described and assessed. In order to harmonise this description between the case studies, further dimensions are added to complete the picture of a regulation scheme (see Figure 1): A regulation scheme also includes the organisation of government agencies involved and procurement procedures as well as technical and organisational aspects connected with the implementation of a regulation scheme. Further dimensions of a regulation scheme are the parts of the transport sector covered and the geographical scope (i.e. area of applicability).

The fundamental elements of a regulation scheme as presented in Figure 1 serve as basis for the structure of this deliverable, and the balance of the project. Figure 1 illustrates questions to be answered in order to describe the different elements of a regulation scheme.

Figure 1: Regulation scheme

Scope Pricing Revenue Invest- use & ment financing What sectors Which pricing What use of Which invest- Rules / sub-sectors rule? revenues, what ment rule? are covered? financing?

What actors are Who sets Who decides on Who makes Regulatory involved, with prices? revenue use and investment framework what functions? financing? decisions?

Private Payment? Revenue Tenders? Procurement or public Enforcement? collection & Contracts? & implementation provision? Exceptions? management?

The case study work will be structured into four parts as Figure 2 shows.

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Figure 2: The four parts of the case study work

Part 1: Background and objectives of the case study

Part 2: Description of regulation schemes A) Status quo B) Proposed scheme C) Optimal scheme

S P R&F I S P R&F I S P R&F I

Rules Rules Rules

REG REG REG

P&I P&I P&I

Part 3: Assessment of the regulation schemes

Criteria A) Status quo B) Proposed scheme C) Optimal scheme D) Further schemes Efficiency Equity Feasibility Acceptability

Part 4: Summary of findings and policy recommendations

Abbreviations: S = Scope, P = Pricing, R&F = Revenue use and financing, I = Investment REG = Regulatory Framework, P&I: Procurement and implementation

Part 1: Background and objectives of the case study The core of the first part is a description of the general framework of the case study: description of the geographical scope (case study area); the architecture of the system and simplified representation of the key features and key characteristics of the relevant parts of the transport system; brief description of the historical background and the current situation; political and institutional environment: recent / on-going discussions, decisions made in the past and to be made in the future respectively. Another key output of part 1 is the formulation of the policy issues that the case study should solve, i.e. the formulation of the research questions.

Part 2: Description of regulation schemes

In a second step, the research questions are translated by describing different regulation schemes. Status Quo = Description of the existing situation along the elements of a regulation scheme;

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Proposed regulation scheme = Description of a proposed solution along the elements of a regulation scheme; Optimal / superior regulation scheme: Description of a theoretically optimal / superior (compared to the status quo) solution along the element of a regulation scheme. An iterative procedure starting with a theoretically superior scheme and improving it after having assessed its implications will be necessary in most cases to design the first-best or optimal scheme. The theoretical insights gained in WP2 and summarized in chapter 3 of this deliverable provide the guidelines to design the theoretically superior scheme. Additional schemes: The case studies may define additional regulation schemes (e.g. schemes describing a second-best solution). Description means that the questions raised in Figure 1 are answered. For the description of the optimal / superior and - if there are - additional schemes, the findings of the theory summarised in chapter 3 serve as key inputs.

Part 3: Assessment of the regulation schemes The regulation schemes are assessed along four assessment criteria efficiency, i.e. the welfare implications; equity, i.e. the distributional effects; technical and organisational feasibility, i.e. barriers or advantages with regard to feasibility and practicability; acceptability, i.e. the perception of the regulation schemes to be acceptable.

The tools used to carry out the assessment will differ between the case studies: The MOLINO-model developed in WP2 of the REVENUE project provides a standard assessment tool to evaluate the efficiency and equity impacts of the different regulation schemes. Case study specific models (e.g. the ASTRA-model described in WP2) will be used in addition to the MOLINO-model or - in those cases where MOLINO is not applied - instead of MOLINO. It will be up to the case studies to provide a description of these models that have not been developed within the REVENUE project. In case studies where the research focus is not on efficiency implications and/or where the quantitative models cannot be applied, the assessment of the different regulation schemes will be based on rather simple quantitative analysis and on qualitative approaches.

Part 4: Summary of findings and recommendations

In part 4, the results achieved from the analysis will be summarised and discussed. Tradeoffs, for example between theoretical optimal solutions and feasibility issues, will be discussed.

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Review of current practice

Chapter 2 of this report contains a review of current practice in transport pricing and revenue use in Europe. The review is based on the country fact sheets of Annex A to this report. It covers the sectors road, rail, air, and water transport in the following countries:

Austria Greece Spain Belgium Italy Sweden Finland The Netherlands Switzerland France Norway United Kingdom Germany Portugal

Road pricing is dominated by taxes and charges. Fuel and vehicle taxes are common pricing instruments. Heavy goods vehicles are subject to the Eurovignette in several countries. Austria, Switzerland and Germany have introduced a heavy vehicle fee. The Swiss heavy vehicle fee contains some elements of social marginal cost pricing (SMCP): its level depends on the emission category of the vehicle, external cost estimates have been taken into account when the fee level was derived. Tolled highway networks exist in Italy, France, Portugal and Spain. In the other countries, road tolls are only collected for the use of specific facilities such as bridges or tunnels. In the road sector, the largest number of earmarking schemes is found. The revenues of road pricing are often assigned to road construction and maintenance. Typically, a significant share goes to the treasuries of the different state levels. A special case is the Swiss heavy vehicle fee, part of which is earmarked for railway construction. Private-public partnerships for both construction and operation of roads are found in many European countries. Intermodal fund solutions are only found in Switzerland and France (both are subject of REVENUE case studies).

In the railway sector, a broad variety of track access charges can be observed. Access charges usually depend on the distance travelled as well as the type or characteristics of the trains. Some pricing schemes also include elements of SMCP, for example surcharges for congested lines or peak hours. The revenues from the track access charges stay within the railway sector.

In urban public transport, users are usually charged distance-dependent tariffs, sometimes translated into zone systems. Since urban transport is generally not profitable, no taxes or charges are levied on the operators. To the contrary, urban transport operators usually receive substantial subsidies. Moreover, they are also recipients of earmarked revenues (for example in Austria, where 2.5% of the electricity tax are allocated to public transport).

In air transport, a broad range of levies exist: take-off and landing fees, passenger charges, parking charges, noise charges, etc. Airport charges are usually based on the maximum take-off weight or the number of passengers. Air transportation is exempted from fuel taxes in all European countries. In some countries (e.g. Switzerland, Austria),

13 REVENUE D3 CASE STUDIES SPECIFICATION taxes or charges (e.g. safety fees or noise charges) are earmarked for specific purposes such as noise abatement.

On inland waterways, target-oriented pricing is common practice. In the Netherlands, charging is explicitly forbidden by law except for some locks or bridges on the smaller waterways. Ports are often not regulated and thus free to set prices as they wish. Many ports are financially self-supporting, although port dues are only one of many sources of income. Earmarking of revenues only exists in France, where part of the hydro power tax must be spent on inland waterways. In the maritime sector, no earmarking of revenues has been identified.

There are three main insights from the review of current practice: Firstly, non-internal earmarking is most common in the road sector, with revenues being used in the same mode or for railway infrastructure construction. In the other transport sectors, an internal earmarking predominates, i.e. the revenues from pricing remain with the authority that levies the corresponding charges (e.g. rail infrastructure manager). Secondly, most earmarking schemes are combined with second-best or target- oriented pricing schemes, elements of SMCP are found only in a few countries. Thirdly, large transport networks are often held and managed by public companies, whereas smaller networks are increasingly managed by private enterprises, which is consistent with the findings in WP2 of the REVENUE project.

Theoretical guidance

The aim of the theoretical guidance for the case study work is to "operationalise" the theory developed in work package 2 of the REVENUE project by drawing from it both positive and normative insights: The positive insights help to understand the current state or proposals made in the political debate (in terms of regulation schemes: the status quo and a proposed scheme). The normative insights are used to describe directions of possible changes to achieve alternative, from a theoretical point of view improved regulation schemes (optimal or superior regulation scheme).

In chapter 3 of this deliverable, theoretical guidance is given in form of six theoretical issues each of them dealing with a major topic of the theory of WP2. The six issues provide the theoretical basis for the description of the different regulation schemes in the case studies. Below, we summarize how the six issues should be addressed in the case study work. For their content we refer to Deliverable 2 of the REVENUE project.

Theoretical issue 1: Cost recovery theorem (CRT)

The CRT specifies what proportion of the capital costs of a congestible facility are recovered under first-best marginal-cost pricing of usage. Full cost recovery is achieved if there are constant returns to scale in both usage and capacity expansion costs. WP2 discusses these assumptions and their influence on the validity of the theorem.

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Each case study will need to check whether the various conditions are satisfied in the particular case-study context, and hence which variant of the CRT, if any, is applicable. If no variant is applicable, it may be of at least theoretical interest to determine how closely the CRT “predicts” the actual degree of recovery. In any case, the case studies will have to assess what degree of cost recovery results for the various regulation schemes. (According to the CRT, for the first-best scheme the cost recovery ratio is simply equal to the elasticity of capacity costs.) The cost recovery ratio computed for each regulation scheme will indicate whether there is a need for additional funding, or whether a surplus can be expected.

Theoretical issue 2: Funding investments and optimal pricing by a benevolent government

The assumption is that a benevolent government aims to implement a regulation scheme that deals with deficits and surpluses in the transport sector in a welfare optimising way. The government intends to find a solution that maximises the sum of the individual benefits. This means, a cost-benefit rule is applied by the government taking into account the distortionary effects of non-optimal pricing regimes, the costs of inflexible earmarking schemes and the opportunity costs of infrastructure investments. Furthermore, equity implications can considered by using social weights when the individual benefits are summed (e.g. an increase of the income of low income groups receives a higher weight than an increase of income of high income groups).

The task of the case study will be to design a regulation scheme (i.e. the optimal / superior regulation scheme) that takes into account the approach described above. The key features of this regulation scheme are: Pricing: Starting point is a pricing scheme oriented at social marginal cost pricing. The case study will have to make clear to what extent the existing taxation of transport is replaced by the new pricing regime. The requirement to clearly define the pricing regime does only refer to the design of the optimal/superior regulation scheme but to the description of all regulation schemes. No inflexible earmarking scheme that prevents a welfare optimising allocation of the funds: The case study will have to specify what the consequences of earmarking solutions are, i.e. what sources of funds (transport charges/taxes, general taxation) are affected in what way. Investment decisions based on the application of a cost-benefit rule that trades off the benefits of the investment with its opportunity costs: In the status quo and - if there is one - in the proposed regulation scheme, the investment profiles assumed may be the result of political investment decisions that are not optimal from a welfare point of view. For the optimal/superior regulation scheme, an improved investment profile will have to be determined (incl. changes in investment volumes and in investment timing). Existing proposals based on sound investment appraisals should be the initial input in the iterative procedure identifying the optimal/superior regulation scheme. Handling of deficits and surpluses in the transport sector: Deficits are financed from taxes with the lowest marginal cost of public funds, surpluses are used to reduce taxes with the highest distortionary effects (i.e. with the highest marginal cost of public funds).

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The handling of both surpluses and deficits depends on the equity weights used by the government.

As mentioned above, it might well be that an iterative procedure is required to design the optimal regulation scheme.

Theoretical issue 3: Tax and investment rules in an economy with several government levels

Chapter 3 summarizes the potential implications for taxation, pricing and investment if decisions are taken at several different government levels (different countries, different levels within one country). The guidance for the case study work is given for different cases: Vertical tax competition where a lower government level is first of all interested in the implications of its pricing and investment decisions on its own budget but not on the budget of the higher state level. Horizontal tax competition where governments of the same level compete for the tax revenue of the same traffic (i.e. traffic using either parallel alternative routes or a series of links leading, for example, through different countries).

The case studies, in which pricing and investment decisions are taken at several and different government levels, will have to judge whether the outcome predicted by the theory (e.g. excessive charging, underinvestment) can be observed and can be used to explain the status quo and a proposed regulation scheme. For the design of the optimal regulation scheme, guidance is given on how to develop proposals which avoid tax competition problems (e.g. what change in responsibilities in the decision-making process, need for additional funds from the central government?).

Theoretical issue 4: The common agency model

The common agency model highlights the fact that lobbies have an influence on the design of regulation schemes. It gives an interpretation of which factors affect the behaviour of a lobby and of how their pressure can influence the design of a regulation scheme.

As in the case of the theoretical issue 3, the case studies will have to discuss whether the insights gained by the two models analysed in WP2 and summarized in chapter 3 of this deliverable can be observed in the case study specific situations (e.g. strong lobbying activities for solutions where a general tax is used to finance the supply of a public good from which the lobby members have large benefits, reward and outcome of the lobbying activities).

For the proposal of an optimal (or superior) regulation scheme, it will have to be assumed that the influence of lobbies exercising a negative influence (i.e. lobbies that do not stand for broad societal but rather narrow professional objectives) can be suppressed and that the benevolent government can develop a regulation scheme that maximises welfare according to the theoretical issue 2.

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For a further regulation scheme it may be assumed that a lobby succeeds in influencing the design of the regulation scheme. The assessment in part 3 of the case study work will show the implications of this success.

Theoretical issue 5: Earmarking in a dynamic political model

The aim of the model is to provide an explanation why earmarking is often fostered by politicians despite the fact that earmarking may lead to inefficiencies. Inefficiencies result from reduced flexibility in the allocation of funds which prevent funds from being invested in ways that generate the largest benefits.

Theoretical issue 5 will be addressed in the case studies as they will attempt to explain the design of the existing and proposed regulation schemes (e.g. can the presence or absence of earmarking be explained by the objectives, the behaviour and other characteristics of the policy makers involved, what arguments were supported by what actors?). Positive dimensions of earmarking such as stability, inter-temporal consistency, and prevention of fraud may at least be rationales for earmarking solutions.

For the optimal/superior regulation scheme, narrow earmarking solutions should be avoided. If there are differences in earmarking to the existing and/or proposed regulation scheme, the implications of these differences on the various sources of funds (taxes, charges, tolls) must be made clear.

Theoretical issue 6: Procurement of infrastructure services and the role of investment agencies

The analysis carried out in D2 chapter 4 completes the theoretical framework by highlighting that alternative designs of institutional arrangement behind the procurement of infrastructure services (investment, operations and maintenance) can have different impacts on the efficiency and equity of the regulation scheme. The theory of contracts and of incentives is the backbone of this insight. Chapter 3 of this report summarises the elements and circumstances that support different types of organisations. These range from fully public solutions to public-private-partnerships to solutions with specific investment agencies.

For the description of the existing and of proposed regulation schemes, guidance is given concerning the aspects that should by addressed (actors and missions/strategies, relation between actors, general frame of contracts, resources and constraints, system used for assessment, incentive schemes and regulation, organisational setting including its incentive components).

For the optimal/superior regulation scheme, the case studies will have to check whether there are elements and circumstances that would favour other organisational solutions than the ones existing in the status quo regulation scheme. The suggestions of chapter 3 give guidance on how a better solution should look like. A stronger involvement of the private sector and - where feasible - an increase or an establishment of competition between actors (e.g. operators) are the key issues in this context. The final aim is to derive reduced cost parameters reflecting the higher cost efficiency of better solutions (i.e. for the optimal/superior regulation scheme). The basis for the assumptions on reduced costs must be made transparent.

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The MOLINO model

The MOLINO has been developed within the REVENUE project (WP2) for use in the REVENUE case studies to evaluate pricing, financing and investment policies in transport, i.e. of REVENUE regulation schemes.

It consists of six main parts: Demand model: Given the level of generalized cost, the demand model computes the number of users of each mode in each time period. The demand model can deal with passenger as well as freight demand for any combination of modes. Supply model: Given the number of users selecting the different modes, the supply model computes the level of congestion on the different modes. Equilibrium model: Based on the demand and supply functions, the equilibrium model determines the corresponding fixed point solution in terms of prices and congestion levels. Evaluation criteria. The direct outputs of the model are: flows, travel times, tolls levied. Indirect output (social welfare function, toll revenues, etc.) can be computed using the direct output. Control. There are a variety of control variables: pricing, access control, maintenance policies and investment policies. The model can be run with different policy objectives (welfare maximization, revenue maximization, cost minimization, etc.) and for the whole system or for a part of the system. Accounting model. For each setting, this model computes the accounts for some of the agents.

Chapter 4 of this deliverable provides a simple illustrative example of an application of the MOLINO model: two parallel roads that are used by low and high income users. In the example, five regulation schemes are modelled: no toll equilibrium; tolled roads; marginal social cost equilibrium; Nash equilibrium; mixed oligopoly.

The illustrative example provides the following insights for the case study work: First, the example shows how the model needs to be structured for the given example. It depicts the decision tree of users and how the model is calibrated. Second, the input data for the illustrative example are described. They include the number of trips of high and low income users, generalized costs, taxes and tolls, the duration of peak and off-peak hours, and the length of the roads. Third, the social welfare function to measure efficiency implications is described and its components are explained. The welfare function is an equity-weighted sum of nine different terms which measure

- the utility of high and low income users;

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- the effects of the regulation schemes via the redistribution of tax revenues (transport and general charges and taxes) and profits (of infrastructure managers and of operators);

- external costs.

In an accounting scheme, the flow of the funds is sketched. Finally, a set of hypothetical input values is provided, which are used to run the model. For the five regulation schemes, results (total welfare, welfare for high and low income users, toll revenues) are provided. A brief discussion of the results concludes the illustrative example.

Assessment of the regulation schemes

Chapter 5 provides a common framework for the assessment of the different regulation schemes in the case studies. The assessment of the regulation schemes in the case studies will have to start from this framework and will have to adjust it to the specific situation of each case study.

For each of the four assessment criteria, it describes the approach and definitions used; the major efficiency implications to be addressed; the options that are available with regard to the assessment methods and tools used in the case studies.

The results of the assessment are reported in an overview table for each criterion.

The first assessment criterion is efficiency. There are four options for the case studies to analyse efficiency implications: The MOLINO model as described above is the first option to analyse the efficiency implications of different regulation schemes. It allows a comprehensive welfare assessment. Other models (transport models amended with a specific module to calculate efficiency effects or system dynamics models) will be used in case studies where they are already available and very suitable to represent the specific case study characteristics. If modelling is not feasible or efficiency is not the focus of a case study, the efficiency assessment can be carried out by using qualitative methods (option 4) or by estimating quantitative estimates (option 3) .

For the assessment of the equity implications or distributional effects, three notions of equity are distinguished: Horizontal equity is concerned with the effects of transport regulation schemes on individuals which are comparable in wealth and ability. Vertical equity focuses on the distribution of costs and benefits between individuals of different income classes. Spatial equity deals with the regional distribution of the costs and benefits of transport regulation schemes.

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The same four options as in the case of the efficiency implications are available to carry out the assessment of the equity implications. The MOLINO (option 1) model distinguishes between two different types of transport users. If high income and low income transport users are modelled, vertical equity effects can be assessed with MOLINO. To analyse spatial equity, the model should distinguish users from different regions (e.g. urban vs. rural users). Other modelling approaches are viable as well. In the case studies where MOLINO is not applied, quantitative or qualitative analyses of the most relevant distributional effects shall be conducted. To calculate accessibility gains, for example, estimates of time savings on major routes could be used to gain insights regarding the spatial equity of transport regulation schemes. If a qualitative approach is chosen, the scope of the regulation scheme (which regions or users are affected?) and key design features (pricing rule, discounts and exceptions, revenue use etc.) should be examined.

The third assessment criteria is the technical and organisational feasibility of the different regulation schemes analysed in the case studies. The aim is to work out the most important differences between the regulation schemes. The differences refer to the following point: Technical feasibility: Differences with regard to

- the availability and reliability;

- the interoperability and compatibility;

- the cost; of the technology needed to implement the schemes. Organisational feasibility:

- possibility for implementation within the existing organisational and institutional framework or need for a comprehensive reform;

- number of institutional and administrative levels involved in the implementation and operation of the scheme;

- number of public and private authorities involved in the implementation and operation of the scheme;

- major changes in financial flows between different government levels and different actors.

There are two options with regard to the methods and approaches used to carry out the assessment. Option 1 contains new empirical work (e.g. expert-interviews), option 2 remains limited to the exploitation of existing studies and to expert judgements of the case study teams. Option 2 is relevant for case studies in which the feasibility question is not a main area of research interest.

Finally, the acceptability of the different regulation schemes has to be assessed in the case studies. A stepwise procedure is the basic approach. The relevance of the four steps will however differ between the case studies: Step 1: Identification of the key acceptability issues of the regulation schemes which are relevant for the case study. The text provides a list with such issues:

- Problem perception and main public concern;

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- Principles, approaches and data sources used to design the regulation scheme;

- Perceived effectiveness and efficiency of the regulation scheme;

- Allocation of tasks and responsibilities for designing and implementing a regulation scheme;

- Technologies needed to implement the regulation scheme;

- Use of revenues;

- Distributional effects and equity issues;

- Fairness of the design of the regulation scheme. Step 2: Identification of the stakeholders and examination of the influence and degree of organisation of the stakeholder groups Step 3: Assessment of the impacts of the regulation schemes as perceived by the different stakeholder groups and of the resulting positions towards the regulation schemes Step 4: Estimation of overall acceptability, based on the findings of the steps 2 and 3

As in the case of the criteria technical and organisational feasibility, case studies with a research focus on acceptability will carry out new empirical work (e.g. a survey among haulier companies). The other case studies will chose option 2 and limit the acceptability analysis to the exploitation of existing studies and to expert judgements of the case study teams.

Data collection

In some case studies, the focus of the work is not on the assessment of efficiency and equity implications using quantitative models (especially the MOLINO model described in chapter 4). Rather, acceptability questions and the political decision-making process are in the centre of interest. Here, also qualitative data collection methods become important. Chapter 6 of this deliverable gives a short survey of possible approaches that could be used in the case studies. The survey covers personal interviews; closed-question interviews, surveys; semi-structured interviews; focus group; content analysis; questionnaires.

For each approach, it is described under what circumstances the application make sense (e.g. objectives of the work, available budgets). The research The chapter gives advice on procedural steps and specific techniques. Finally, factors that should be considered to ensure a successful use of the approach are summarised. It is up to the case study work the chose the most suitable approach for the specific case.

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1. Introduction

1.1. The REVENUE project In recent years, transport pricing research has provided major contributions to the shaping and formulation of EU policies. Following the 1995 Green Paper and the subsequent White Paper (1998), pricing principles have been established and cost valuation methodologies have been tested, leading to basic policy recommendations. These are reflected in the revision of the Common Transport Policy (2001) and in several EU Directives and proposals thereof (e.g. on rail – 2001, on HGVs – 2003). As part of the process, it has clearly emerged that the impact of pricing policies will heavily depend (in terms of effectiveness, efficiency, equity, acceptability) on the use that will be made of the revenues generated by transport pricing schemes. The REVENUE project has been designed to address this specific issue, thus providing further input to the formulation and development of EU policies in the area of infrastructure charging. The REVENUE project therefore has three objectives: To assess current practice for transport revenue use; To develop guidelines for good use of the revenues from social marginal cost pricing; and To examine both current practice and the use of the guidelines on a set of case studies. The project is structured into six work packages shown in Figure 1-1. The first work package "Setting the stage" formed the starting point of the project and therefore identified a set of policy and research questions to be addressed, the European research background and some common references. It developed an overview of the state of the art of the relevant issues and thereby provides the conceptual background of the work.

Work package 2 "Theoretical framework" developed the theoretically sound framework for integrating the efficient use of transport infrastructure in the short run, and the efficient provision of infrastructure in the longer run (central issues are how revenues should be used and how deficits are covered when investment needs are high). This 3rd work package "Case studies specification" builds the bridge between the theoretical work in WP2 and the case studies. 11 case studies will be carried out within the work packages 4 and 5:

Interurban case studies (WP4) Urban case studies (WP5)

Case study 1: Interurban road and Case study 8: Oslo railway financing in Finland Case study 9: Warsaw Case study 2: German heavy goods Case study 10: Edinburgh vehicle (HGV) toll Case study 11: Acceptability and Case study 3: Swiss agglomeration spatial equity issues for urban road and railway funds user charges

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Case study 4: French multimodal national interurban fund Case study 5: Zurich Airport Case study 6: Rotterdam port Case study 7: Road haulers’ acceptability of HGV charges

The policy conclusions and the recommendations derived from the project work will be developed and summarised in the final 6th work package.

Figure 1-1: Project structure

Setting the stage

(Work Package 1)

Theoretical

Framework (Work Package 2) Case studies specification

(Work Package 3)

Inter-urban case Urban case studies studies (Work Package 4) (Work Package 5)

Policy conclusions and recommendations

(Work Package 6)

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The aim of this Deliverable 3 is to provide theoretical and methodological guidance for the case study work. Specifically, Deliverable 3 addresses the following four questions: What is the current practice of transport pricing and use of revenues from transport pricing in Europe? What theoretical guidance and what operational research questions can be derived from the theory about optimal transport pricing and use of revenues as developed in work package 2? What tools and methods are available and should be used to assess within the case studies the effects of different regulation schemes? How should the case study leaders approach and structure the work in order to achieve a certain degree of comparability?

Particular emphasis is placed on a common understanding of the key concepts and a consistent framework of the analysis. The next section summarises the key concepts and provides an introductory overview of the approach that will be followed in the case study work. The approach is discussed in detail in the following chapters of this deliverable.

1.2. Key concepts and case study approach

In the REVENUE project, transport pricing and use of revenue are examined together as two parts of a regulation scheme as defined in WP21: A regulation scheme consists of a specific combination of pricing, revenue use and investment rules. Beside this compulsory "core part," additional dimensions complete the range of a regulation scheme: They also include the organisation of government agencies involved, procurement procedures and technical aspects (e.g. implementation of transport pricing in practice). The latter influence the cost efficiency but also the acceptability of a concrete regulation scheme. Further dimensions of a regulation scheme are the parts of the transport sector covered and the geographical scope (i.e. area of applicability).

These fundamental elements of a regulation scheme as presented in Figure 1-2 provide the basis for the structure for this deliverable, and the reminder of the project. The analysis to be carried out in the case studies will start from different regulation schemes. The Figure 1-2 shows the relevant questions to be answered to describe the different elements of a regulation scheme ("cells" of Figure 1-2).

1 See Proost/de Palma et al. (2004), Theoretical framework, REVENUE project Deliverable 2.

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Figure 1-2: Elements of a regulation scheme

Scope Pricing Revenue Invest- use & ment financing What sectors Which pricing What use of Which invest- Rules / sub-sectors rule? revenues, what ment rule? are covered? financing?

What actors are Who sets Who decides on Who makes Regulatory involved, with prices? revenue use and investment framework what functions? financing? decisions?

Private Payment? Revenue Tenders? Procurement or public Enforcement? collection & Contracts? & implementation provision? Exceptions? management?

The basic approach within the case studies is to describe and to compare different regulation schemes: the status quo; a proposed new scheme; the theoretically optimal (or at least superior to the existing) scheme; additional schemes.

The status quo corresponds to the existing regulation scheme in reality and represents the benchmark for the comparison.

Some case studies will deal with specific proposals for a new regulation scheme - if such proposals do exist in reality (e.g. proposals from the responsible administration, proposals from political parties). In both cases, the theoretical findings of work package 2 (WP2) will help to understand or to explain the proposed design of these regulation schemes.

For each case study, a theoretically optimal scheme or at least a regulation scheme that is theoretically superior to the status quo will be developed, based on the outcome of WP2. An iterative procedure starting with a theoretically superior scheme and improving it after having assessed its implications will be necessary in most cases to design the first-best or optimal scheme. Each case study will at least analyse these types of regulation schemes.

Each case study will have to decide whether additional regulation schemes should be analysed or not (e.g. schemes that have been in force before the existing scheme has been implemented).

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The regulation schemes will be assessed in the case studies by applying the following four assessment criteria: efficiency, i.e. the welfare implications; equity, i.e. the distributional effects; technical and organisational feasibility, i.e. barriers or advantages with regard to feasibility and practicability; acceptability, i.e. the perception of the regulation schemes to be acceptable.

Different assessment tools and approaches will be used in the assessment, including the use of quantitative models and qualitative analysis. A description of the procedures and methodologies as well as data requirements is given in following chapters.

The Figure 1-3 summarises the approach for the case study work in the REVENUE project. The figure shows that the case study work will be structured in four parts:

Part 1: Background and objectives of the case study The first part of the case study will contain a brief description of the historical and the current background, the characteristics of the relevant parts of the transport sector, the geographical scope and the political environment.2 As far as possible and useful, this information will be accompanied by illustrative tables, figures or maps.

The case study will address a variety of issues. It will not be possible to treat all of them in the same depth of analysis. Therefore, the focus, the key questions to be addressed and the type of answers resulting from the analysis have to be made clear in part 1 of the case study work.

Part 2: Description of regulation schemes

As mentioned above, at least three regulation schemes should be described using the framework summarised in Figure 1-2.

First, the status quo will be described. A sketch of existing rules, the regulatory framework, and details regarding procurement and implementation should be given for the four dimensions of a regulation scheme as distinguished in Figure 1-2: scope (geographical region, transport sectors covered, time horizon, etc.); pricing (basic principle, organisation and technical implementation); revenue use (allocation rules for the funds, fund management, etc.); investment (investment rules applied, decision making process and bodies, contracts, etc.).

2 The institutional aspects of transport policy formulation and implementation are being studied in the TIPP project. The results of TIPP may prove to be useful in providing insights into the institutional aspects of the REVENUE project (see http://www.strafica.fi/tipp/).

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Figure 1-3: Approach for the case study work in REVENUE

Case study work in WP4 and WP5 Interfaces to other project parts

Part 1: Background and objectives of the case study - Background of the case study (history, current status etc.) - Relevant scope (parts of transport sector, case study area etc.) - Focus of case study work

Part 2: Description of the regulation schemes Positive analysis of WP2: Explanation of Status quo ( benchmark) existing / proposed schemes Chapter 3: Guidelines for analysis Proposed new scheme Normative analysis of WP2: Derivation Optimal (superior) scheme of proposals for better regulation schemes Chapter 3: Guidelines for derivation Further scheme(s) Case study specific proposals

Part 3: Assessment of the regulation schemes („Evaluation scheme“)

Assessment criteria Assessment tools Model development inWP2 Chapter 4: Application of Efficiency MOLINO MOLINO, data requirement

Equity Other models Case study specific

Techn./org. feasibility Specific quant. analysis Guidelines of WP3 Chapter 5: Approaches Acceptability Qualitative analysis Chapter 6: Methodologies

Part 4: Summary of findings and policy recommendations Inputs to D4/5 and to - Main findings (incl. trade-offs between assessment criteria) WP6: General insights and - Policy recommendations recommendations

The findings of WP2 will help to explain and understand the regulation scheme of the status quo. Chapter 3 of this report contains guidelines on how to transfer the theoretical insights into the case studies.

Second, one or more proposed new regulation schemes will be portrayed. An example of a proposed new scheme is the Oslo package 2, which represents an extension and adaptation of the current city toll ring. If there are no plans for a change or adaptation of

27 REVENUE D3 CASE STUDIES SPECIFICATION the current system or concepts for a new scheme, this part may be skipped. Again, the main parameters of the proposed regulation scheme shall be described, using the common framework described above. Furthermore, it should be explained what reasons have lead to the new proposal (e.g. what are the objectives of the adaptation or change, and who brought the proposal forward)? Again, the theoretical findings of WP2 will serve as a basis for this analysis. Chapter 3 of this report contains the corresponding guidelines.

Third, the case study will describe one theoretically optimal regulation scheme. The design of the scheme will be based on the normative part of the analysis of WP2. Chapter 3 of this report derives from the theoretical work in WP2 guidelines on how to design a theoretically optimal or at least a regulation scheme that is theoretically superior to the status quo regulation scheme. It may well be that the definitive design of the theoretically optimal scheme can only be derived in an iterative procedure: The guidelines of chapter 3 provide the basis to define an initial proposal of the design of the scheme. The assessment carried out with the tools applied in part 3 of the case study work (see below) will provide additional insights how the design could be improved. In this context, improvements refer to an increase in efficiency, i.e. to possible additional welfare gains. In comparison to the existing scheme, the advantages of the optimal/superior regulation scheme can be on the pricing side (e.g. social marginal cost pricing), on the revenue side (for example more efficient investment procedure, application of more advanced investment rules), or in the link between revenue collection and use (for example cross-modal financing, financing of investment with revenues from transport pricing or with tax money). In the iterative procedure, variants will have to be tested to identify the best solution.

It is up to the case study leaders to define additional regulation schemes (for example second-best approaches including cost recovery targets or schemes that maximise the benefits of specific actors/institutions) to be described and assessed.

Part 3: Assessment of regulation schemes

As mentioned above, the assessment of the regulation schemes will be based on the four evaluation criteria as defined in the description of work of the REVENUE project: Efficiency; Equity; Technical and organisational feasibility; Acceptability.

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In case studies where the research focus is not on efficiency effects and/or where the quantitative models cannot be applied, the assessment of the different regulation schemes will be based on rather simple quantitative analysis and on qualitative approaches. Relevant theoretical concepts and analytical methods which could be applied are described in chapter 5 of this report.

Because of limitations in the resources available for the case study work, tradeoffs will have to be observed: For example, a case study focussing on efficiency issues and applying the MOLINO model will have to chose rather simple approaches for the analysis of acceptability issues (e.g. no new empirical work) - and vice versa.

Part 4: Summary of findings and policy recommendations

In part 4, the results achieved from the analysis will be summarised and discussed. Tradeoffs, for example between theoretical optimal solutions and feasibility issues, will be discussed.

Part 4 of the case study work provides key inputs to the deliverables of WP4 and 5 as well as to WP6 where the overall policy conclusions of the REVENUE project will be drawn.

1.3. Structure of Deliverable 3

Deliverable 3 is divided into seven chapters. Figure 1-4 shows the structure of the deliverable and the links between the different chapters. Furthermore it is indicated in which chapters the four tasks of work package 3 according to the Description of Work (DoW) are addressed: Chapter 2 reviews the current approaches adopted for transport pricing and use of revenues in practice in Europe. It summarizes the main findings contained in the fact sheets of annex A. The aim is to put the case study work in a broader context and to give a very first comparison between practice and the theory of WP2. The main recommendations of transport economics as addressed in Deliverable 2 will be used in chapter 3 to derive key features of optimal regulation schemes for transport pricing and revenue use. Chapter 3 builds the bridge between the theoretical part of the REVENUE project and the case study work. Since some of the case study work will use the MOLINO-model developed in WP2 as an assessment tool, its key elements are briefly sketched in Chapter 4, together with a first illustrative application of the model. The illustrative application allows to achieve a clearer picture of the suitability of MOLINO for the case study work and of the data needs connected with a use of MOLINO. Chapter 5 deals with the assessment to be carried out in the case studies. It discusses the four assessment criteria as well as potential approaches to carry out the assessment. Chapter 6 contains guidance for the case study work about methodologies used to collect information and data. The focus is put on methodological approaches and procedures suitable to address rather qualitative issues, such as the decision making process and the question of acceptability of different regulation schemes.

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Chapter 7 transforms the analysis of the preceding chapters into summarising guidelines for the case study work (Chapter 7). These guidelines will ensure a certain degree of harmonization in the study work with WP4 and WP5.

Figure 1-4: Structure of Deliverable 3

Chapter 1: Introduction

Chapter 2: Review of current practice (task 3.1)

Chapter 3: Theoretical guidance (task 3.2)

Chapter 5: Chapter 4: Chapter 6: Evaluation scheme The MOLINO Data collection for the case studies model (task 3.3) (task 3.4)

Chapter 7: Guidelines for case study work

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2. Review of current practice in transport pricing and revenue use

2.1. Introduction

Chapter 2 provides a review of current practice in Europe regarding transport pricing and revenue allocation schemes in the different transport sectors, i.e. road, rail, urban public and air transport as well as inland and maritime waterways. Currently, there is no uniformity in the way transport revenues are collected and allocated in terms of investment options, geographical regions and expenditure categories.

In order to identify common pricing and revenue allocation schemes across Europe, a classification of pricing and revenue recycling schemes has been developed. The classification will also allow to put the specific case studies of WP4 and WP5 in a broader context, and especially to identify which of the theoretical issues raised in WP2 are relevant for which type of pricing and revenue allocation schemes.

The geographical scope of the analysis covers the following countries:

Austria Greece Spain Belgium Italy Sweden Finland The Netherlands Switzerland France Norway United Kingdom Germany Portugal

For each of these countries, a national fact sheet has been produced (see Annex A). The country fact sheets contain information about pricing and revenue allocation as well as public-private-partnerships and organisational aspects, and form the basis for the synthesis of the review of current practice in this chapter.

The information sources used to gather data for the country fact sheets cover the work already carried out in previous projects such as CUPID, IMPRINT EUROPE, but also various local websites, government websites and other publications. For a short description of previous EU research projects that were considered for REVENUE we refer to Annex B.

2.2. Overview of pricing schemes in Europe

2.2.1. Pricing classifications

When classifying different pricing principles and instruments, a strict set of definitions had to be followed. The concepts and categories used in the collection of the country facts are listed below.

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Pricing instruments Charges and taxes are the two types of pricing instruments to be identified in the national transport pricing regimes. The corresponding concepts are explained below: Charge: A levy which requires a direct and clear service in proportion of the payment on the part of the public or private provider. Examples of charges are: infrastructure access charges (vignettes enabling use of a section of network, road tolls, bridge/tunnel charges, rail track access charges, airport landing fees, lock fees, port charges, etc.), freight tariffs, public transport fares and vehicle insurance payments. Tax: A levy that must be paid with either no discernible service in exchange from the State or a service that is not in proportion to the payments. Examples of taxes are: annual vehicle registration taxes, passenger taxes, fuel duty, value added tax on fuel duty, taxes for scrapping and environment related taxes (e.g. carbon tax).

Pricing principles The identification and synthetic description of the pricing principles, per mode, in each country, were carried out in the light of the following concepts:

First-best pricing Under first-best conditions (perfect information, divisible investment, convex costs), optimal prices in transport networks correspond to short-run marginal costs (SRMC). The European Commission has given high importance to the use of SRMC in transport pricing in its 1998 White Paper.3 Two variants of marginal cost pricing can be distinguished: Pure social marginal cost pricing (SMCP): Prices are set equal to the short-run price relevant cost4 consisting of the producer marginal cost (e.g. reconstruction, wear&tear, maintenance cost), the price-relevant user cost (congestion cost, scarcity cost) plus the marginal transport system external cost (environmental cost, external accident cost). No consideration is given to the financial implications of the pricing scheme in terms of surpluses or deficits for each mode. Marginal cost pricing: With this pricing scheme, the price-relevant user cost and the transport system external costs are disregarded and prices are based on the marginal producer cost alone. Short-run marginal-cost pricing entails setting prices equal to short-run marginal costs given the existing infrastructure. In contrast, under long-run marginal cost pricing prices are set at a level that would obtain with infrastructure (capacity) optimally adjusted conditional on the given level of usage. Short-run and long-run marginal cost prices coincide if infrastructure provision is optimal. In practice, SRMC suffers four fundamental problems: imperfect information, missing acceptability, missing incentives to announce correct infrastructure needs and missing procurement for the right institutions considering all transaction costs.5

3 See European Commission (1998), White Paper on Fair Pricing for Transport Infrastructure Use. 4 See Jansson and Lindberg (1997), Transport Pricing Principles in Detail. 5 See Rothengatter (2003), How Good is First Best? Marginal Costs and Other Pricing Principles for User Charging in Transport.

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Second-best pricing When first-best conditions do not prevail and prices are set optimally conditional to constraints or imperfections, the result is second-best pricing. Second-best pricing entails deviations from social marginal costs. These deviations may be dictated by cost recovery objectives, i.e. financial constraints either by mode or for the transport sector as a whole. The most common ones are listed here: Mark-ups can be added to the marginal costs in order to achieve cost coverage. One particular form of a mark-up is Ramsey pricing which requires that prices are increased and that the increase is inversely proportional to the price elasticity of demand.6 With this scheme, the mark-ups above marginal social costs may differ between transport services (e.g. peak vs. off-peak, passengers vs. freight). Multipart Tariffs. Multi-part tariffs consist of fixed, blockwise7 variable and variable parts. They can flexibly be adjusted to the cost and demand characteristics and are Pareto-superior to linear tariffs once a defined level of cost recovery is desired.8 Fully Distributed Cost schemes (FDC) are another form of second-best pricing, which takes SRMC as a starting point and allocates the remaining costs according to selected parameters.9 It can involve high differentiation and additional incentive elements. Finally, transport pricing may be designed in order to achieve specific targets normally set in a political procedure. The targets can refer to different issues such as a maximum level of transport volume, a maximum level of air pollutants exhausted by road traffic, or financial targets. The constraints in the case of second-best pricing and the objective of the target-oriented pricing approach may address the same issue (e.g. a certain cost recovery degree). The remaining difference is that second-best pricing approaches intend to meet the constraint in a most efficient or optimal way which is not the explicit goal of target-oriented pricing approaches. Average cost pricing is an example of a target-oriented pricing approach (cost recovery is the target). In average cost pricing schemes, prices are set equal to the sum of financial costs divided by the total traffic volume of that mode. No distinction is made between sunk and variable costs, and external costs are disregarded. All transport services (freight, passengers etc.) are treated equally, but the prices are not the same because of different units of measurement (e.g. passenger-km or freight ton-km). If a more differentiated average cost pricing regime is envisaged (e.g. a distinction between sub-modes), the cost allocation problem arises, i.e. the indeterminacy in deciding how to allocate common costs.

6 The inverse elasticity rule applies if demands are independent. When demands are interdependent the pricing formulas are considerably more complicated. 7 An example of blockwise variable costs are the use of electricity supply in railways, that diesel train operators do not use and thus do not pay for. 8 See Rothengatter (2003), How Good is First Best? Marginal Costs and Other Pricing Principles for User Charging in Transport. 9 See Peter (2003), Railway Infrastructure: Pricing and Investment. Paper for the fifth IMPRINT- EUROPE seminar.

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2.2.2. Observed pricing schemes

In this subchapter, the main findings on pricing schemes are discussed by mode. For a more detailed description, please refer to the country fact sheets in Annex A. It should be stressed that a detailed analysis of the advantages and disadvantages of the different solutions was beyond the scope of this research project.

Road Road transport taxes in Europe comprise vehicle taxes and fuel taxes. In addition, value- added tax (VAT) is levied on sales of vehicles, fuels and services. An overview of total tax revenue by category and country is given in Table 2-1.

Vehicle taxes include annual ownership taxes, driving license fees and insurance taxes. They often have a flat rate (a percentage of the vehicle value), but there are also countries where the rate varies by vehicle type (e.g. Belgium and Germany) or engine size (Austria). Some countries also have a tax to cover the cost of the scrapping the vehicle at the end of its lifetime. In Denmark, Germany, Italy, Sweden an the UK, annual ownership taxes account for a sizeable share of total revenues from road transport.

34 REVENUE D3 CASE STUDIES SPECIFICATION

Table 2-1: Fuel and vehicle tax revenue in the EU member states

Austria* Belgium Denmark Germany Spain France Greece* Ireland* Italy NL Portugal Finland Sweden UK bill. bill. DKK bill. bill. bill. bill. bill. bill. bill. bill. bill. bill. SEK bill. £ bill. 2002 2002 2002 2002 2002 2002 2003 2001 2002 2002 2003 2000 2003 2002 Purchase or transfer 1 VAT on vehicles servicing/repair parts, tyres 2.035 2.631 N.A. 24.000 4.293 11.812 N.A. 0.613 18.619 2.012 1.180 1.520 14.500 11.240 new vehicle sales 1.125 17.830 2.270 6.839 0.413 0.722 second-hand vehicle sales 0.075 1.820 0.064 0.589 0.086 0.085 services and repairs 0.641 3.155 4.384 N.A. 1.205 accessories and spare parts 0.790 1.1951.959 N.A. 0.114 2 Fuel and lubricants (VAT +excise duties) 3.706 4.710 15.932 40.190 14.490 30.111 1.575** 1.726 30.820 7.248 3.224 3.023 41.100 21.898 3 Sales & registration taxes 0.436 0.340 14.487 0.937 1.406 0.810 0.799 1.895 3.117 1.016 1.173 Annual ownership taxes 1.290 1.339 7.943 7.592 1.690 1.204 0.567 0.546 4.550 2.040 0.117 0.432 7.800 4.337 Driving license fees 0.007 0.055 0.057 0.004 N.A. 0.048 Insurance taxes 0.262 0.362 1.821 3.300 0.429 3.323 3.700 N.A. 0.196 Tolls 0.545 5.351 0.011 0.890 N.A. Customs duties 0.093 0.580 0.114 Other taxes 0.618 0.234 0.331 0.283 0.275 0.485 0.397 0.102 0.111 0.069 7.000 3.701 TOTAL 8.892 9.716 40.514 78.000 22.171 55.417 3.360 3.786 60.474 14.528 5.720 6.344 70.400 41.224 EUR (bill.) 8.9 9.7 5.4 78 22.2 55.4 3.4 3.8 60.5 14.5 5.7 6.3 7.8 58.7 Grand Total: 340 bill. EUR

Source: ACEA (2004), Tax Guide 2004. * Estimates ** Fuel only (amount for lubricants N/A)

35 REVENUE D3 CASE STUDIES SPECIFICATION

Fuel taxes (VAT and excise duties) account for about 50% of total revenues in all European countries. More than half of the fuel price paid at the petrol station can consist of taxes; the exact level varies by fuel type (see Table 2-2).

Table 2-2: Fuel tax on unleaded petrol and diesel (EUR / 1’000 litres, Dec. 2003)

Country Petrol Diesel Austria 407 282 Belgium 507 290 Denmark 539 368 Germany 654 470 Spain 396 294 Finland 587 319 France 586 389 Greece 296 245 Ireland 443 368 Italy 542 403 Luxembourg 372 253 Netherlands 616 323 Portugal 507 300 Sweden 490 349 United Kingdom 750 750 EU minimum rate 287 245

Source: ACEA (2004), Tax Guide 2004.

Value-added tax on sales of vehicles and repair parts or services account for 20 - 30% of total revenues in all countries. In Germany, for example, VAT on servicing and repair parts amounted to 24 bill. EUR, more than a quarter of total revenues (78 bill. EUR).

In addition to the taxes described above, there are various types of road charges:

A well-known example is the HGV Eurovignette scheme10 that has been implemented in the Netherlands, Belgium, and Sweden (as well as Luxembourg and Denmark, that were not considered in this project). A vignette is bought for a fixed price per vehicle

10 Established through the Eurovignette Directive 1999/62/EC which is currently (March 2005) under revision.

36 REVENUE D3 CASE STUDIES SPECIFICATION per year. Similar “vignette” schemes are in place in Austria, Switzerland (only for bikes, cars and light goods vehicles) and France.

In several countries, heavy vehicle charges are differentiated according to number of axles (Austria) or number of axles and emission category (Germany). The HGV charges are levied only on motorways in Austria and Germany. These schemes, as well as the Eurovignette schemes can be considered as Fully Distributed Costs (FDC) schemes. In Switzerland, HGV charging takes place on all roads, and is dependent on the kilometres driven, the permissible vehicle weight and the emission category of the truck.

Traditional motorway charging exists in many countries; it is the most common form of pricing in case of private concessionaires operating the motorway. Motorway charging can be distance-based or gate-based. Usually multipart (second best) tariffs are used, and in some cases externalities are also considered.

Additionally, tolls are collected in various countries for the crossing of bridges, tunnels etc., but in the majority of countries this happens only at a very small number of locations. These tolls are mentioned in the country reports, but in the summary Table 2-3 only if they occur on a wide scale. Tunnel and bridge tolls are nearly always target- oriented, and are usually based on average cost pricing.

Cordon tolling implies charging road traffic to enter a particular zone. The most well- known example is London where £5 must be paid to enter the City. This type of scheme also exists in Durham (UK) and in Norway (Oslo, Bergen, Trondheim). The tolls are based on average cost pricing.

Rail For the purpose of this study, railway pricing has been defined as the pricing mechanisms between railway infrastructure managers and train operating companies. Manage- ment and operation have been separated in almost every EU member state now, and normally access charges are paid by the operators for using the network (exception being Greece where no charges exist for the time being).11

Normally, operators pay rates that are differentiated according to train axle load, distance travelled, type and size of station served – these are multipart tariffs. Besides, a target-oriented component is used when paying for services such as shunting, catenary, gauge change facilities etc. In the Netherlands, the law stipulates that each component (track use, station use and signalling) must be self-sufficient, meaning that each component has its own target-oriented pricing. In Austria, the wear and tear component is calculated according to marginal cost pricing.

However, some countries have a charging system based on marginal cost pricing (Switzerland, UK). Some countries include elements of SMCP – surcharges for congested lines, peak times. There is one private operator in Portugal that pays charges according to a performance contract – below a certain traffic level, charges are waived.

Taxes are limited to fuel taxes and in some countries train companies are granted tax breaks, with reasoning behind it being that the environmental burden of (electric) trains is lower than that of road transport.

11 Based on the Directive 2001/14/EC on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification.

37 REVENUE D3 CASE STUDIES SPECIFICATION

Urban Public Transport Normally, pricing mechanisms between PT operators and (local) governments do not exist, as PT is nearly always loss-making. In some countries however, urban PT benefits from reduced fuel taxes. Ticket prices often have price-cap mechanisms. However, in Greece they are target-oriented (aiming for 50% cost coverage).

Aviation Airport pricing involves a broad range of charges such as airport take-off and landing fees, local air traffic control (ATC) fees, and handling fees. These charges often have a multipart-tariff structure, at least in the large airports with scheduled flights; most of them are target-oriented. ATC charges are set by Eurocontrol and are target-oriented. The pricing scheme is based on distance flown, aircraft weight and country unit rate (see Annex A). Airport charges usually depend on the Maximum Take-Off Weight (MTOW) or engine noise (usually according to the ICAO noise chapter categories). The passenger tax is always calculated according to average cost pricing. In Greece, an additional tax is levied for the development of new airport infrastructure.

A number of airports levy noise or other environmental charges, some of which are earmarked (see next chapter). Moreover, some airports have imposed (higher) security fees since 11 September 2001. Kerosene is exempted from VAT by the Chicago treaty in case of international flights. On domestic flights, VAT is charged in the Netherlands, Norway and Switzerland.

Inland waterways Very few examples exist of taxes and charges in inland waterways. Target-oriented average cost schemes are in place in several countries (all using charges), while Finland is the only country that also has a second-best (multipart tariff) pricing regime. In some cases, pricing is explicitly forbidden by law. The 19th century Mannheim Act prohibits pricing on the Rhine, one of Europe’s most important waterways; and in the Nether- lands, where inland waterways are very extensive and account for a significant amount of overall freight transportation, charging is also forbidden by law. However, one may have to pay for passing some locks or bridges on the smaller waterways.

Ports Ports are often not regulated and therefore free to set their dues as they wish. In practice, this leads to a pricing strategy where competition plays a decisive role. In many cases, ports are financially self-supporting, although port dues are only a part of a larger spec- trum of incomes. Both second-best pricing and target-oriented pricing systems are common. In France, a form of Ramsey pricing is also used.

38 REVENUE D3 CASE STUDIES SPECIFICATION

Table 2-3: Country overview table: Pricing

Mode

Country Road Rail Urban PT Air * Inland waterways Maritime

Austria Second best FDC (HGV charges) + fuel Second-best (Multipart Passenger charges (average Target-oriented charges. Not applicable. & vehicle taxes. Private car light tariffs). Aimed at cost cost). Second-best landing motorway charges are average cost recovery. charges (Multipart tariffs), (vignette). Tunnel/road tolls (average plus security fees. cost or multipart tariffs).

Belgium Eurovignette HGV charging (Second Second-best (Multipart Passenger charges (average Taxes and charges. Target- Second-best charges best FDC) + fuel & vehicle taxes (the tariffs, with elements of cost). Second-best landing oriented and competitive (multipart tariffs). latter varying by car type). One tolled SMCP). charges (Multipart tariffs), pricing. tunnel. plus noise and environmental charges.

Finland Fuel & vehicle taxes. Taxes and charges. Lower VAT rate Passenger charges (average Target-oriented charges Second-best charges Second-best (Multipart (8%) cost). Second-best landing (multi-part tariffs). (multipart tariffs). tariffs, with elements of charges (Multipart tariffs) that SMCP). Cost coverage is are target-oriented (aimed at achieved. Some tax full cost recovery). breaks.

France Target-oriented motorway charging Second-best (Multipart Passenger charges (average Charges (Average cost). Charges, often (second best, multipart tariff) with tariffs). cost). Target-oriented second according to Ramsey elements of marginal cost pricing. Fuel best landing charges (multi- pricing. and vehicle taxes. Also vignette (target- part tariffs). Noise charge. oriented).

39 REVENUE D3 CASE STUDIES SPECIFICATION

Mode

Country Road Rail Urban PT Air * Inland waterways Maritime

Germany Fuel & vehicle taxes that vary by Target-oriented, second Fuel tax breaks. Passenger charges (average Charging on some channels Second-best charges fuel/vehicle type, second-best heavy best multi-part tariffs cost). Second-best landing and some tax breaks (Multipart tariffs) and vehicle charge (“LKW-Maut”) on that distinguish between charges (Multipart tariffs). some tax breaks highways (FDC). train type , service type, line type. Elements of SMCP (congestion charges). Reduced electricity taxes.

Greece Some second-best road charging No pricing in railways Tickets are average Passenger charges (average Target-oriented charges Target-oriented (multipart tariff). Target-oriented in cost and target- cost). Second-best landing charges case of concessions, one of them with a oriented (should charges (Multipart tariffs). toll ceiling. Fuel and vehicle taxes cover about 50% of Additional development costs) charges.

Italy Second-best motorway charging Second-best (Multipart A price-cap is in Passenger charges (average Target-oriented (multipart tariff). Distinguishes five tariffs, with elements of place for ticket cost). Second-best landing charges vehicle classes. Charges are target- SMCP). Also target- prices. charges (Multipart tariffs) oriented and use a price-cap formula. oriented and using price- with elements of SMCP. cap formula. Noise charge. Fuel and vehicle taxes. Tolled tunnels.

Netherlands Fuel & vehicle taxes. Second-best Second-best (Multipart Average cost Passenger charges (average Target-oriented charges, Second-best (multipart Eurovignette HGV charging (FDC). tariffs). Target-oriented. pricing. A price-cap cost). Second-best landing mostly no pricing at all tariffs) Two tolled tunnels (target-oriented Some elements of SMCP is in place for ticket charges (multipart tariffs). multipart tariffs). (externalities may be prices. Charges with elements of included). SMCP (emission and noise charges). Domestic flights pay fuel tax.

Norway Fuel taxes have SMCP and MCP Tax breaks for electric Taxes only in case Passenger charges (average No pricing. Target-oriented elements. Cordon tolls. Charges for trains. of petrol. Other cost). Second-best landing charges. bridges/tunnels etc. with multipart- energy sources are charges (Multipart tariffs). tariffs and some elements of SMCP. not taxed. Domestic flights pay fuel tax.

40 REVENUE D3 CASE STUDIES SPECIFICATION

Mode

Country Road Rail Urban PT Air * Inland waterways Maritime

Portugal Second-best motorway charging Second-best (Multipart Target-oriented Passenger landing charges Target-oriented average Target-oriented (multipart tariff) and bridge tolls tariffs). One operator has average cost (average cost). Fees are cost pricing. (multipart tariffs) charges based on pricing. target-oriented second-best performances. charges (Multipart tariffs). Fuel, vehicle and other taxes.

Spain Second-best motorway charging Charges only on Madrid- Passenger landing charges No pricing identified Target-oriented (multipart tariff). Fuel and vehicle Lleida high-speed line. (average cost). Second-best taxes. Second-best, multipart charges (Multipart tariffs). tariffs. No charging yet on the rest of the network.

Switzerland Heavy vehicle fee (second-best FDC Second-best pricing Target-oriented Passenger charges (average Basle only: Target-oriented Not applicable including externalities). Fuel and (Multi-part tariff) with pricing. cost). Landing and handling charges, average cost vehicle taxes. Vignette for passenger elements of MCP. charges are target-oriented pricing. cars. average cost pricing with elements of SMCP (differentiated emission and noise charges).

Sweden Flat vehicle taxes. Fuel tax (level set Second-best pricing Tax breaks. Passenger charges (average No pricing identified. Target-oriented. Some such as to internalise externalities). (Multi-part tariff), some cost). Second-best landing tax breaks for non- Eurovignette (second best FDC with tax breaks charges (Multipart tariffs) fossil fuels. Fairway elements of SMCP). charges are target- oriented.

UK Fuel & vehicle taxes. Some charging Marginal cost pricing, Target-oriented Passenger charges (average schemes (second-best). Cordon pricing plus (sometimes) a basic pricing. cost). Second-best landing in two cities (average cost). charge. charges (Multipart tariffs)

* Excluding ATC charges, since they are calculated in the same way throughout all countries (see Annex A).

41 REVENUE D3 CASE STUDIES SPECIFICATION

2.3. Earmarking and other revenue allocation rules

2.3.1. Allocation classifications

The country fact sheets only include allocation rules which have a (semi-)permanent character and are based on a law or similar legal government document.

Earmarking is a specific type of allocation rule where not only the beneficiary and/or purpose of the revenue is specified, but also the percentage of revenue that must be allocated. It is important to have knowledge about the rules and/or criteria that are applied to decide on investments and on fund allocation, in order to analyse the impact of the decisions in terms of efficiency. The fact sheets describe if and how transport revenue is earmarked – sometimes non-transport revenue is earmarked for transport spending, and vice versa. This is an important dimension to be considered both in the comparison of current practice to the theory (in Chapter 3) and in the development of the case studies (WP4 and WP5).

2.3.2. Observed allocation schemes

In this subchapter, the main findings on allocation schemes are discussed by mode. A concise overview of pricing schemes is given in Table 2-4. For a more detailed description, please refer to the country fact sheets in Annex A.

Road As road is the transport that generates most surplus revenue, it is not surprising that this mode has the largest number of earmarking and allocation schemes associated with it.

Road revenue is often earmarked for the improvement of existing road infrastructure and the construction of new roads and tunnels. In Austria, revenues from motorway charging (from HGV by electronic charging and LGV/cars by vignette charging) are allocated to ASFINAG, an enterprise under private law owned by the federal state. ASFINAG plans, manages and finances the Austrian motorway and highway system. In Germany, revenues from HGV charging go to the VIFG, which is a company under private law owned by the federal state. VIFG spends the revenues on transport projects defined by the federal government, in the first instance for motorways and federal primaries. Belgium is another example where revenue goes to the regions. Geographical equity issues are important in both countries.

In case of road being operated by a private concessionaire, road revenues are often internally earmarked. In this way, concessionaires can recover their investment or finance new investment. At the end of the concession period, it is common that the revenues from road charging are obtained by the state.

Intermodal funds only exist in two countries: France and Switzerland. France recently implemented the AFITF intermodal fund.12 This fund receives motorway toll revenue as well as government subsidy, and uses the resources for the construction of new infrastructure, predominantly high-speed rail. The AFITF budget for 2005 foresees a

12 AFITF = French Agency for Transport Infrastructure

42 REVENUE D3 CASE STUDIES SPECIFICATION government grant of 200 mill. EUR, and revenues from the tolls of motorway concessionaires of 280 mill. EUR, as well as a rent of 155 mill. EUR that the concessionaires must pay for the use of the land that they occupy. The main projects that AFITF will finance in 2005 include the TGV Est and the high-speed link Perpignan-Figueiras. Other projects that will receive financing in 2005 are railway lines (TGV Rhin-Rhône, Nîmes-Montpellier, Haut-Bugey), port works of the “Fos 2XL” initiative, motorways (A19 Orléans-Courtenay, A41 Annecy-Genève), and some studies and preparation of new projects (TGV Sud Europe-Atlantique, the Lyon-Turin railway and the canal Seine-Nord Europe). In total AFITF will assist in the financing of 35 projects until 2012, and invest 7.5 bill. EUR (with the total cost of those project being 20 bill. EUR). The AFTIF fund is subject of the French REVENUE case studies.

The other example of an intermodal fund is the FinöV13 fund in Switzerland where 67% of the revenue form the heavy vehicle fee are spent on heavy rail infrastructure construction, the vast majority of it being invested in the Gotthard and Lötschberg railway tunnels. 33% of the HVF revenue goes to the regions, which use it, among other things, for road construction and maintenance. At the moment, the fund is heavily indebted because of the high construction costs (current level of debt: 2'378 mill. CHF). Total income of the fund in 2003 was 1’098 mill EUR (291 mill. CHF from the VAT, 440 mill. CHF from the HVF, 331 mill. CHF from the fuel tax, and 34 mill. CHF from sales of transit rights), total expenditure for construction equalled 1’979 mill. CHF. The FinöV fund will be analysed in the Swiss REVENUE case study.

A special scheme exists in the United Kingdom, where revenue from road pricing schemes must be invested in the transport sector during the first ten years.

In most cases, fuel tax revenues go to the general budget without any earmarking. However, there are some earmarking schemes: In Finland and the Netherlands, a small part of the fuel tax is earmarked to cover the expenses made for guaranteeing the supply of fuel by maintaining a strategic oil reserve. VAT is usually charged as well. In Germany, 3% of the fuel tax is earmarked for urban public transport. In the UK, any increase in the fuel tax above inflation level must be used for transport projects. In Switzerland, 50% of the revenues from the fuel tax belong to the treasury. The other 50% are used for construction and maintenance of the national motorway network as well as the construction of the new transalpine railway tunnels. For an overview of total fuel tax revenues, see Table 2-1.

Vehicle taxes are sometimes earmarked too. In Germany and Switzerland, these taxes are earmarked for the regions. Finally, the car scrapping tax that is used in some countries is internally earmarked.

Rail Cost coverage for the railway infrastructure managers varies dramatically but rarely reaches 100%, and railway revenues were always observed to stay within the same mode. Some road pricing revenue is earmarked for rail infrastructure (see intermodal funds and Austrian HGV charging in the road section above). All charges paid by railway operators belong to the infrastructure managers (internal earmarking).

13 FinöV = Bau und Finanzierung von Vorhaben des öffentlichen Verkehrs ("Construction and financing of projects of public transport).

43 REVENUE D3 CASE STUDIES SPECIFICATION

Urban Public Transport Urban Public Transport is often a beneficiary of allocation schemes of other modes, and these allocation schemes sometimes even extend beyond transport. For example electricity taxes are earmarked in Austria, where 2,5% of the tax must be used for urban public transport. France also has a municipal tax scheme in which a special tax, payable by any company larger than 9 employees, is used for local public transport based in the city where the company is based.

In the Netherlands, a fund exists for the allocation of revenues from public transport ticket sales. All public transport except trains use one ticket system (the so-called “strippenkaart”). Revenues from this system are allocated to the various operators in the country in negotiations that take place in a three-year interval. This system has no incentives built into it. In Portugal, parking fees are sometimes used for the financing of urban public transport.

Aviation Aviation-related taxes are usually earmarked. Noise charges are the most common type, which is 100% earmarked for noise abatement measures, such as insulation of houses in the vicinity of large airports. There are also security taxes that are earmarked for aviation security measures at airports.

The aviation charges are usually internally earmarked for the authority that levies them. Thus, landing fees, handling fees etc. stay within the airport that supplies these services, while navigational airspaces are earmarked for the Air Traffic Control authority for every country whose airspace is used, even if the flight just crosses that airspace without landing.

Some countries have a slightly different allocation scheme. In France, there is an aviation fund (BAAC) that collects all aviation charges and redistributes them over the various airports that it operates. In practice, this means that the two Paris airports are cross-financing other, smaller airports. In the United Kingdom, all airports that fall under BAA (the British Aviation Authority) must transfer 7,5% of their profits to the BAA. Finally, another issue in airport financing is the single-till/dual-till question. Both options are common in Europe at the moment, but a thorough examination of these fell beyond the scope of the REVENUE project as it would required a very detailed investigation of airport finances.

Inland waterways Normally, the charges levied for the use of inland waterways, locks and other facilities are internally earmarked for use by the charging authority. The only country where a specific revenue allocation scheme was observed is France, where part of the hydro power tax must be spent on inland waterways.

Ports Port dues and charges are normally earmarked internally. Some specific charges, such as the fairway charges in Sweden and Finland, are intended to be spent on that activity.

44 REVENUE D3 CASE STUDIES SPECIFICATION

Table 2-4: Country overview table: Revenue allocation schemes

Mode Country Road Rail Urban PT Air Inland waterways Maritime

Austria All road charges (vignette, HGV and others) Charges belong to 2.5% of electricity tax is Airports receive charges, No allocation scheme Not applicable. are fully earmarked for road construction and the infrastructure used to help finance security tax fully identified maintenance. 58% of the HGV charges are manager. urban PT (both earmarked for security earmarked for underground constructions. infrastructure and expenses. operation).

Belgium Road charging and tax revenues are passed to Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges the regions the infrastructure enough for cost coverage Noise and environmental identified belong to the ports. manager. and stays with the charges fully earmarked operators. for their respective purposes.

Finland A small part of the fuel tax is earmarked for the The track charges Ticket revenue is not Revenue use decided by Some of the charges Fairway charges are fuel supply. must be used for enough for cost coverage airport authorities. must be used for fully earmarked. Port railway mainte- and stays with the waterway maintenance dues and charges nance. The track tax operators. belong to the ports. goes to the general budget.

France Road revenue goes to AFITF, the newly created Charges belong to Ticket revenue is not Noise charges are 100% A tax on water consump- Port dues and charges intermodal fund. This fund decides about the the infrastructure enough for cost coverage earmarked for noise tion is used for the main- belong to the ports. allocation of resources. There is no fixed manager. and stays with the abatement expenses. tenance of inland water- allocation rule. A considerable amount of the operators. Charges go to a aviation ways. €15m of collected fund’s budget is spent on high-speed railway fund that deals with user charges are ear- infrastructure construction. A special company tax aviation investments marked for development (for all companies > 9 nationally. of tourism, transport and employees) is 100% recreation. earmarked for urban PT.

45 REVENUE D3 CASE STUDIES SPECIFICATION

Mode Country Road Rail Urban PT Air Inland waterways Maritime

Germany The net revenues from the heavy vehicle fee Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges (ca. 2.4 bill. EUR) are fully earmarked to the infrastructure enough for cost coverage identified belong to the ports. infrastructure: 50% to motorways, 38% to manager. Part of the and stays with the railways and 12% to waterways. track access charges operators. are used to repay Vehicle taxes go to the regions (Länder), investment grants parking fees to the municipalities. 3% of fuel from the federal tax is earmarked for municipal public transport. government.

Greece In case of a concession, road charges are fully No allocation Ticket revenue is not Airports receive charges. Charges are earmarked Port dues and charges earmarked to recover the investment. Upon scheme identified. enough for cost coverage Airport development internally. belong to the ports. achieving this, the charges will go to the and stays with the taxes are earmarked for general state budget. operators. an airport development fund.

Italy Concessionaires pay 20% of the charges to the Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges government as VAT. The rest remains within the infrastructure enough for cost coverage In case of public-private identified belong to the ports. the concessionaires manager. and stays with the airports, the aeronautical operators. charges go to the state, the handling fees to the concessionaire. Noise charges are fully earmarked for noise expenditure.

Netherlands A very small bit of fuel tax is earmarked for Charges belong to Ticket revenue goes to a Airports receive charges. Charges are earmarked Port dues and charges expense of strategic oil reserves. the infrastructure general fund that is Noise charges are used internally. belong to the ports. manager. redistributed according for noise abatement. to operator negotiations held every three years.

Norway Charges are used by tunnel/bridge Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges concessionaires for maintenance the infrastructure enough for cost coverage identified belong to the ports. manager. and stays with the operators.

46 REVENUE D3 CASE STUDIES SPECIFICATION

Mode Country Road Rail Urban PT Air Inland waterways Maritime

Portugal Charges are used by motorway concessionaires Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges for construction and maintenance. Bridge tolls the infrastructure enough for cost coverage identified belong to the ports. were used for the construction of a new bridge. manager. and stays with the operators. In some cities PT is partly financed by other types of transport charging (e.g. parking).

Spain Charges are used by motorway concessionaires Charges belong to No allocation scheme Airports receive charges. No allocation scheme Port dues and charges for construction and maintenance. the infrastructure identified identified belong to the ports. manager.

Switzerland Two thirds of the revenues from the HVF go to Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Not applicable. an intermodal fund (railway construction fund the infrastructure enough for cost coverage Noise charges are identified “Finöv”). One third goes to the regions, which manager. and stays with the allocated to an aviation use it, among other things, for road operators. noise fund, which uses construction and maintenance. Vehicle taxes most of them for noise levied by the cantons are also partly earmarked abatement purposes. for road construction and maintenance. Half of the revenues from the fuel tax belong to the treasury, the rest is used for construction and maintenance of the national motorway network as well as the construction of the new transalpine railway tunnels.

Sweden No allocation scheme. Charges belong to Ticket revenue is not Airports receive charges. No allocation scheme Port dues and charges the infrastructure enough for cost coverage identified belong to the ports. manager. and stays with the Fairway charges are operators. fully earmarked.

UK Any fuel tax increase above inflation level must Charges belong to Ticket revenue is not 7.5% of charges go to No allocation scheme Port dues and charges be used for transport investments. Other pricing the infrastructure enough for cost coverage BAA. identified belong to the ports. schemes must normally be used for the manager. and stays with the transport sector in the first ten years of the operators. scheme.

47 REVENUE D3 CASE STUDIES SPECIFICATION

2.4. Public-Private-Partnerships

Public-Private-Partnerships (PPP) exist in a number of countries. These can have various purposes and consequently, the contractual arrangements are also different. Several projects of the Trans-European Networks (TEN) are currently under preparation or construction include some sort of public-private partnership. Examples are the high-speed railway lines Brussels-Amsterdam and Figueras-Perpignan.

The most common form of a PPP is a company that operates and maintains a motorway under a concession. In many cases, this company was also responsible for the construction of the motorway under a DBFM scheme (Design, Build, Finance and Maintain) or BOT (Build, Operate and Transfer). Concession periods normally vary between 15 and 35 years. Some examples: France has 10 concessionaire companies that deal with roads, Portugal has 9 concessionaires that operate motorways; in Austria, all modes have some examples of PPP; in the same country, a public company is responsible for financing, building and maintaining all national motorways.

One of the most important distinctions from the point of view of the revenue use, is the cost coverage of the road. If it is less than 100%, the deficit will have to be covered by government subsidies. Another relevant aspect is the ownership. Sometimes the infrastructure is owned by the authorities, sometimes by the company or consortium that operates the infrastructure. A combination of the two is also possible. Table 2-5 provides an overview of PPP in the transport sector (the list is limited to the projects that were deemed most relevant and is therefore not comprehensive. An extensive list of PPP projects in the United Kingdom is included at the end of the UK fact sheet in Annex A).

Table 2-5: Public-Private-Partnerships in the transport sector

Public sector-owned Mixed ownership Private sector-owned

Subsidy E18 motorway (FI+NO) Madrid M30 Ring Road Wijkertunnel, A59 and only E39 motorway (NO) (ES) N31 roads (NL) SCUT motorways (PT) Many English motorways Charges High-speed railway Brussels- High-speed railway 10 Greek ports and Amsterdam (NL+BE) Figueras-Perpignan subsidy Seville metro (ES) (ES+FR) Some Austrian motorways Warnow tunnel (DE) Lisbon light rail (PT) Charges Oresund link (DK+SE) One French motorway Eurotunnel (UK+FR) only Vasco da Gama bridge (PT) Athens airport (GR) Don Quijote airport (ES) Most English bus and light- Arlanda Express (SE) rail services outside London

48 REVENUE D3 CASE STUDIES SPECIFICATION

2.5. Combinations of pricing, revenue use, scope and institutional arrangements.

After the assessment of the various pricing and revenue allocation schemes in Europe, one interesting question is whether there are any combinations of the two that occur more often than others, or are more successful.

Transport pricing schemes have already been described and analysed in numerous research projects. The same is true for revenue use and investment schemes. Therefore we focus especially on combinations which are either typical or especially interesting from a theoretical point of view.

2.5.1. Pricing and revenue use

According to which principle are funds used in pricing regimes that come close to social marginal cost pricing? Can we identify certain patterns? SMCP is a concept of neo-classical economics. However, neo-classical economics does not provide a justification for earmarking of revenues. Rather, it suggests that funds be used for those projects/investments that show the highest cost- benefit-ratio. Do we find this pattern in practice?

In road pricing, internalisation of externalities happens, but is still rare. One country that has some elements of SMCP pricing is Switzerland (i.e. transport-system external costs are taken into account in the pricing regime). This pricing scheme has a very detailed earmarking scheme connected to it, 100% of the charges are earmarked. Earmarking can also be found in those cases where congestion costs have been an argument for introducing road pricing. Thus, although SMCP is a neo-classical concept, the neo-classical doctrine does not apply in practice to the extent of not allowing earmarking.

Another observation is that revenue in rail, the only mode where a significant number of countries use elements of SMCP in their pricing scheme (e.g. time-varying congestion charges), is fully earmarked internally (except Finland). As mentioned before though, none of the railway pricing schemes results in a surplus. So although the railway schemes seem to suggest conformity with neo- classical theory at first, railway infrastructure often does not have a high benefit-cost ratio from a purely economic perspective and should therefore not be invested in, so the observation in railways seems to support the theory only to a limited extent.

2.5.2. Revenue use and investment

In Germany, the planning of the national infrastructure project is the task of the Ministry of Transport, Building and Housing (BMVBW). New projects are evaluated based on integrated and intermodal traffic forecasts and a cost-benefit analysis. The analysis considers costs, maintenance and renewal costs, security, accessibility, spatial effects, induced traffic, waterway and air transport connections and investment. The newly created transport financing agency VIFG administers the revenues from the HVF and from waterway charges. The agency also develops investment programs and PPP projects.

In Switzerland, the intermodal FinöV fund manages HGV charges. 67% of these are spent on main railway infrastructure, most notably the Gotthard and Lötschberg transalpine railway tunnels, while the remaining 33% goes to regional governments, to be spent mostly on local infrastructure. The Finöv fund is also supported by other forms of taxes and charges, such as fuel taxes and the VAT (0.1 %). The HGV charges make up for two thirds of the total revenue of FinöV. The project planning for railway projects is done both by the regional and the national governments.

49 REVENUE D3 CASE STUDIES SPECIFICATION

In France, the intermodal fund AFITF became operational on January 1st, 2005. Its funding comes from the motorway companies’ dividends (as the State is the main shareholder of motorway companies) and fees on land use paid by these companies. The AFITF board has six members from the government, one parliament member, one senator, two local politicians and two 'qualified persons'.

Generally speaking, the road mode is the mode that generates surplus revenue that is often used for cross-financing; although surpluses are also observed in aviation and maritime ports, these usually remain within the (air)port that creates them, or they are used to finance other facilities in the same mode (e.g. BAA and ADP airport authorities). Other modes have internal earmarking of the revenues that they generate – railway infrastructure charges, noise charges in aviation, fairway charges in maritime/inland waterways. But essentially road is the only mode where intermodal cross-financing is observed.

Furthermore, if a road or motorway has a direct charging scheme and is managed by a concessionaire, then usually there is full earmarking, and all revenue will stay within the concession- naire, to be refinanced in the same road, or used for new infrastructure of the same concessionaire, or to provide an adequate return on investment. After the end of the concession, the charges often stay in place to contribute to government funds.

2.5.3. Regional scope of a pricing-/revenue allocation scheme and role of private actors in implementation

We often observe that strictly defined tasks (e.g. highway construction and maintenance) are provided by private entities. On the other hand, Deliverable 2 of the REVENUE project suggests that large networks are seldom run by private operators.

In the Netherlands, after the liberalisation of the railway market, passenger services of some local branch lines have been taken over by new railway operators, often in close cooperation with local PT companies, while the passenger services on the main network are still handled by NS, a semi- independent company that used to be state monopolist. This formula seems to work well, as NS can concentrate on the main lines that it manages to operate efficiently and with profit (in the sense of a surplus over operating costs), while the local operators achieve a synergy from good connections with local (non-rail) transport, on lines that would otherwise have been loss-making. This example thus confirms the theory in Deliverable 2.

A similar situation exists at the motorways in Portugal, where BRISA, a private (formerly state- owned) company, is operating a significant amount of the motorway network, while smaller concessionaires are operating the remaining sections of motorways. The latter are selected through public tendering.

On the other hand, there is the case of the infrastructure of the British railways. Years of underinvestment, as well as outsourcing to private maintenance companies led to serious maintenance errors and even to accidents with casualties. The former infrastructure manager, Railtrack, was a private company listed on the stock market, which has since been re-integrated into the state administration after bankruptcy. This was a large private company running a large network, and is therefore an example that went against the trend in railways of keeping infrastructure managers state-owned.

The French motorway network sees many concessionaires, that together run most of the French motorway network. Some of these companies are state-owned, some are privately owned, and some have mixed ownership.

50 REVENUE D3 CASE STUDIES SPECIFICATION

Considering these four examples, it is difficult to draw a straightforward conclusion. The number of cases that support the theory of Deliverable 2 and those that contradict it are pretty much in balance.

2.5.4. Government subsidies and their targets

Government subsidies can be given either for investment in new infrastructure and rolling stock, or for operations and maintenance of existing infrastructure. What (allocation) rules exist for transport- related subsidies?

Regarding road transport, most roads that charge their users have little or no additional subsidies for operation. This means that subsidies in this case (if they exist at all) will mostly deal with investment in new infrastructure.

In rail, the maintenance and operation of infrastructure results in a loss in all countries observed except Finland. This despite the infrastructure use charges that are levied in every country considered (except Greece). This means that in the rail mode government subsidies are required for operation as well as for investment in new infrastructure. Freight train operation has been deregulated and is generally not receiving subsidies anymore. The operation of passenger transport is normally co-financed through public service obligations or other subsidies, in nearly every country considered (UK). This also goes for urban public transport, which relies heavily on government subsidies in almost every country.

Inland waterways rely almost completely on government subsidies (with the exception of the tax on hydro power in France), and are normally for operations only, as investment in new waterways is rare – most inland waterways in Europe have excess capacity.

Finally, air and maritime transport receive government subsidies for operations in some cases (small ports and airfields), but the larger ports and airports usually are financially self-supporting or even profitable, and therefore normally do not need subsidies for operations. In case of infrastructure investment, the state will normally subsidise a significant part of the projects. Further- more, navigational aid (radar, air traffic control etc.) normally covers operational costs through charges. (See the Annex A for a closer examination of navigational charges).

2.5.5. Geographically defined earmarking and allocation schemes

Some revenue is earmarked for use in particular geographical regions, either for investment or operations. What are the institutional arrangements in these cases?

In Switzerland, the HGV charges are 33% earmarked for the cantons which must use it primarily to pay uncovered costs in connection with road transport. The national “Autobahnvignette” scheme, the revenues from the circulation tax and the registration tax are collected nationally and then passed on to the regions. In some cantons, the revenues from cantonal vehicle taxes must be spent on road construction or maintenance.

Interestingly, in Belgium, the country with the largest cleft between national and federal governments, no such scheme exists. However, any division of funds between Flanders and Walloon is intensively scrutinised in the political arena.

2.5.6. Other revenue allocation schemes

Are there any significant alternative financing schemes, and if yes, how does the organisational and institutional framework look like (investment agency, project appraisal method, etc.)? 51 REVENUE D3 CASE STUDIES SPECIFICATION

Although the vast majority of revenue allocation schemes uses road pricing as a primary source of funding, there are some interesting other schemes. One example is Austria, where 2,5% of the electricity tax is used to finance urban public transport - tax revenue that is not generated in the transport sector at all.

Something similar happens in France (the “versement transport” scheme), where all companies that have more than 9 employees must pay a special tax that is earmarked entirely for urban public transport. This tax is levied over the salaries paid to employees. And in inland waterways in France there is a scheme, where some tax on electricity generated through hydro-power is earmarked for the maintenance of inland waterways.

2.6. First comparison of practice and theory

This chapter will make a very brief preliminary comparison between the theory of Deliverable 2 and the practice. A more detailed analysis will be given in chapter 3. The numbers of the theoretical issues and operational questions correspond to those in Chapter 3 – those issues where a preliminary assessment could already be made are listed here.

Theoretical issue 2: Funding investments and optimal transport pricing by a benevolent government

In most European countries, transport infrastructure is predominantly in public ownership. Therefore, transport investment appraisal is concerned with achieving a wide range of social objectives such as economic efficiency, minimising environmental damage, or regional development. The most common forms of project appraisal in the EU member states are cost-benefit analysis (CBA) and multi-criteria analyses. On-going work in the HEATCO project indicates that in the road sector, only CBA is used for project appraisal. For rail projects, CBA is the dominant approach, whereas in air and water transport, qualitative assessments are more common.14

Direct impacts such as construction costs, vehicle operating costs, times savings and safety are usually considered in the framework of a CBA. These values are usually easy to measure, as they have a market price or a nationally agreed value. The value of time used in project appraisal in EU member states varies considerably. An hour of time saved (during work) is valued between 6 and 23 EUR.15 Some countries use different values for different types of trips (e.g. commuting travel by rail vs. leisure travel by car), while other countries (Austria, Belgium, France and Greece) do not distinguish between working and non-working time. Accidents are given a monetary value in project appraisal in most European countries. Direct costs (e.g. property damage) and production lost are quite easy to determine. Pain and suffering as a result of accidents, however, is much harder to estimate. The value of safety benefits show a much greater variation across Europe than the values of time.16 The most controversial impact of transport investments are output and employment effects. The theoretical and practical problems associated with such an endeavour are numerous. Germany and Greece are the only countries to express these effects in monetary terms.

The most common decision criteria are the benefit-cost ratio, the net present value, and the internal rate of return. In some countries, the first year rate of return, the pay-back period, or the ratios of net

14 Odgaard et al. (2004), Current practice in project appraisal in Europe, p. 11. 15 Bristow and Nellthrop (2000), Transport appraisal in the European Union, p. 55. 16 Bristow and Nellthrop (2000), Transport appraisal in the European Union, p. 56. 52 REVENUE D3 CASE STUDIES SPECIFICATION present value to public support are (also) taken into account. Discount rates for calculating benefit- cost ratios and net present values ranges from 3% (Germany) to 8% (France), which reflects the still high level of inconsistency between national appraisal methods.

From a theoretical point of view, the (opportunity) cost of public funds should be included in the appraisal of transport policies. Not only direct and indirect costs and benefits should be compared, as it is done in CBA, for example. Instead, the net cost imposed on the economy by raising the taxes to fund the project or policy in question should be included in the assessment as well. Standard appraisal techniques for transport projects usually neglect such effects.

Theoretical issue 5: Earmarking in a dynamic political model

Earmarking of transport pricing revenues is common despite its inherent inefficiency. The analysis of current practice in Europe has shown that non-internal earmarking is predominantly found in road transport. It is not clear, though, whether this is due to the high level of road transport revenues or any low perceived efficiency loss associated with earmarking of revenues from the road sector.

As mentioned in Deliverable 2, many ‘good politicians’ use earmarking as a way of committing to earmark the revenues to a useful cause. Earmarking will preclude the possibility that a bad politician uses the revenues in a bad way, and that the electorate is given decision power over revenue use, and be sure that the increased financial burden actually serves an obvious purpose.

Theoretical issue 6: Procurement of infrastructure services and the role of investment agencies

One of the statements in Deliverable 2 was that as long as externalities and market power are limited in importance, private management should in general be preferred, and public management if these conditions are not met.

As mentioned earlier, this theory seems to be strongly supported by observations in the real world, especially in railways. In railways, where infrastructure management and train operations have been separated in nearly every EU country now, there is a tendency for large (formerly state-owned) railway operators to get rid of small regional operations and to let those be run (through a public tender) by small, often regional enterprises (as for example in the Netherlands, Italy and Germany). In one case, Spain, there is even a complete separation between the main railway operator and the regional networks (FEVE and Euskotren), while the latter are (and will remain) vertically integrated.

In the case of motorway management, often there is some large (formerly) state-owned company in charge of a large part of the motorway network, whereas smaller concessionaires operate smaller branches. Regarding investment agencies, the intermodal funds that exist in France and Switzerland give an important role to the government in taking investment decisions (and externalities are important here as rail is the – environment-friendly – mode that receives most of these funds).

In aviation, some of the larger countries (with a higher number of international airports) have a large public company taking care of the main airports, while smaller airports are normally managed regionally. Examples of such large authorities are the BAA in the UK, AENA in Spain and ANA in Portugal. In the latter case though, new alliances are forming. Some of the main airports (Amsterdam and Frankfurt) are managing other airports, taking minority stakes in them. With further deregulation, it is to be expected that these new alliances, in parallel to globalisation of 53 REVENUE D3 CASE STUDIES SPECIFICATION airlines, will be more frequent in the future. This would not automatically reject the above- mentioned theory, however.

2.7. Conclusions

This chapter assessed the current practice of transport pricing and revenue allocation schemes in Europe. The general picture that arises from our analysis is that second-best pricing is in place in many countries, usually multi-part tariffs for motorway use, railway infrastructure charging and airport fees, and fully distributed cost schemes used for heavy goods vehicles and aircraft navigational charges. Some countries use elements of social marginal cost pricing. Target-oriented pricing schemes (particularly average cost pricing) is mostly used in bridge and tunnel tolls, public transportation, and inland waterways and maritime transport.

Regarding the allocation schemes, it was observed that internal earmarking is common in all modes, but intermodal earmarking occurs almost entirely in the road mode, where some of the revenue is earmarked for use in e.g. railway infrastructure construction or re-allocated geographically. Fuel tax earmarking takes place in some countries but mostly fuel tax goes to the general budget. Urban public transport often receives funding through road traffic revenue earmarking schemes, but sometimes also from non-transport activity. Most of these intermodal earmarking schemes are combined with second-best pricing schemes (multipart-tariffs and, to a lesser extent, fully distributed costs).

Management of large networks is often done by public companies, whereas smaller networks and more specific tasks are more and more carried out by private enterprises, often using performance contracts. Public-private partnerships are gaining popularity as governments want more control over budgets.

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3. Theoretical Guidance

3.1. Introduction

Deliverable 2 – Theoretical Framework provides a theoretical background to various issues related to pricing, revenue use and investments. The main aspects covered are the following: Is it possible to determine ex-ante the degree to which user charges will cover the capital and maintenance costs of a given facility? What funding method(s) are most efficient and equitable if capacity is to be expanded? Where there are multiple levels of government that compete for taxes what are the consequences for the efficiency of regulation schemes? Under what conditions can a central government provide local authorities with the right incentives to invest? How can lobbying activities influence a regulation scheme? How can the support given by politicians to earmarking be explained from a theoretical point of view? What are the theoretical arguments for and against earmarking of revenues? What roles do agencies and politicians play in raising and allocating revenues? What institutional arrangements for procurement of infrastructure services ensure the highest welfare?

The aim of chapter 3 is to “operationalise” theory, drawing from it both positive and normative insights. This means both understanding the current state of things and highlighting directions of possible changes to achieve alternative regulation schemes (superior/optimal in terms of efficiency and equity impacts).

The chapter progresses gradually from theory to practice, starting with a summary of the theoretical issues). Some guidelines are then provided as to how the positive and normative insights from theory can be put into practice. In addition, the relevance of the theoretical issues for each case study is judged.

3.2. Key theoretical issues, research questions and practical guidance to application of the theory

The components of the theoretical framework described in Deliverable 2 are analysed here in turn.

3.2.1. Theoretical issue 1: The Cost Recovery Theorem

Description The Cost Recovery Theorem (CRT) indicates to what degree the capital costs (building and maintenance) of an investment in a given infrastructure will be recovered with user fees. If the fees are set equal to the short run social marginal cost of usage (i.e. optimal or social marginal cost pricing (SMCP) is implemented), and capacity is determined optimally at the point where the marginal benefit and marginal cost of the investment are equal, then the cost recovery ratio is equal to the local elasticity of capacity cost ε (i.e. the percentage change in capital costs induced by a percentage change in capacity). Figure 3-1 indicates that the CRT applies under a specific (SMCP) pricing rule, and a specific (first-best optimal) investment rule. The CRT does not apply if there is a deviation from either rule.

55 REVENUE D3 CASE STUDIES SPECIFICATION

Lessons learned from theory The CRT describes the consequences of first-best pricing and investment for cost recovery, and therefore holds irrespective of the regulatory framework and procurement mechanism that is implemented. The CRT can be used to estimate the size of the surplus or deficit that will result under SMCP. If a deficit is indicated, and this is unacceptable for political or other reasons, then the need for remedial actions (e.g. Ramsey pricing or co-financing) will be apparent.

Figure 3-1: Main relevance of theoretical issue 1 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Prices? Tax cuts? Which pricing WhichNew road invest- or Rules Special tariffs? Public transport rule? railment capacity? rule? Exceptions? subsidies?

Regulatory framework

Procurement Tenders? & implementation Contracts?

Practical guidance to application of the theory The CRT holds only if a number of conditions on demand, costs and the pricing/investment policy are satisfied. The eight main conditions are identified in Box 1. If any of these conditions is violated the strict version of the CRT fails. However, generalized versions of the CRT have been shown to hold if Conditions 5-8 are relaxed.17 Provided a version of the CRT is applicable the degree of cost recovery can be assessed using information on the degree of returns to scale in capacity investment; see Box 2. Each case study will need to check briefly whether the various conditions are satisfied in the particular case-study context, and hence which variant of the CRT, if any, is applicable. To accomplish this it is necessary to have adequate information about the costs of capacity and maintenance, degree of divisibility of investments, the composition and characteristics of actual or potential users of the infrastructure, etc. If no variant of the CRT is applicable the theorem should not be invoked to compute the degree of cost recovery. However, it may be of at least theoretical interest to discuss how closely the CRT “predicts” the actual degree of cost recovery, i.e. whether a deficit or a surplus can be expected. For example, does the fact that runways are indivisible materially affect the degree of cost recovery at a given airport?

In addition to first-best pricing and investment, it is important for the case studies to assess the degree of cost recovery that results (or will result) from current, planned and/or prospective regu-

17 Details are found in Deliverable 2, Section 2. 56 REVENUE D3 CASE STUDIES SPECIFICATION lation schemes. Unless a particular scheme happens to be first-best, the CRT will not apply and it will be necessary to compute cost recovery using some other means18. In fact if an optimal investment policy is followed, the capacity level will be determined by the rule. If, contrarily, a target cost recovery ratio is set, then capacity will deviate from what is prescribed by the optimal investment. In other words, cost recovery targets are generally incompatible with (first-best) optimal investment policy.

18 Section 2 of Deliverable 2 derives some rules of thumb on how cost recovery will be affected by deviations from first-best pricing and investment decisions. 57 REVENUE D3 CASE STUDIES SPECIFICATION

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BOX 1: The CRT assumptions and deviations

The conditions under which the theorem holds are very strict, the basic ones being: 1. user cost function homogeneous of degree zero; 2. perfect divisibility of capacity; 3. atomistic users; 4. optimal pricing and investment decisions. 5. homogeneity of users except for their willingness to pay; 6. demand does not vary over time; 7. competitive factor markets; 8. stationary environment (constant demand, no capacity depreciation and maintenance, no adjustment costs and no investment irreversibility).

Relaxation of conditions 5 to 8 can be accommodated by theory, and more generalised versions of CRT have been derived (see D2). On the contrary, CRT fails if conditions 1 to 4 are relaxed. In this case the degree of cost recovery depends on such factors as the price elasticity of demand and the elasticity of congestion costs with respect to the capacity utilisation rate. Table 3-1 summarises how cost recovery is affected by some of these factors.

Table 3-1: Empirical evidence of CRT-assumptions and relevance for case studies

CRT holds CRT does not hold – CRT does not hold – recovery lower than ε recovery higher than ε Non-constant returns to x x scale in user costs (if economies in usage) (if diseconomies in usage) Capacity indivisibilities If capacity can be expanded at constant incremental costs it is possible to expect: - a surplus if the long run average cost curve is upward sloping at the point of optimal use; - a deficit if the long run average cost curve is downward sloping at the point of optimal use. Non-atomistic users x Non-optimal pricing Deviations from ε depend on the ratio toll/optimal toll, capacity cost and the demand curve Non-optimal Deviations from ε depend on capacity cost and the demand investment decisions curve Time-varying demand If prices can be varied freely by time of usage User heterogeneity If marginal cost pricing can be implemented separately for each user type (see also section 2.1.3) Non-competitive factor If changing factors costs are markets accounted for when computing the elasticity of capital cost ε Transport networks If CRT holds for each link, it holds on the whole network Non-stationary CRT holds in terms of present environment discounted value (PDV) Monopoly Only if demand is perfectly elastic x (if demand is not perfectly elastic) Oligopoly (oligopolists Recovery below ε if no strategic interaction between operators are price-setting) exists. In case of strategic interactions, results are equivocal.

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BOX 2: The capacity cost function

Empirical evidence on the functional form of capacity cost functions is reviewed in D2 and summarised in Table 3-2.

Table 3-2: Empirical evidence on cost functions and relevance for case studies

Mode Empirical evidence Implications for cost recovery Relevance to case studies

Road Moderate/increasing returns The impact on cost recovery is 4.1 Finland unclear: although some 4.2 Germany observations indicate that pricing 4.3 Switzerland roads would result in a deficit, others indicate that charging 4.4 France congestion and infrastructure 5.1 Oslo damage would lead to a recovery of 5.2 Warsaw at least 80% of long run capital and 5.3 Edinburgh maintenance costs. Rail Economies of traffic density; Economies of traffic density imply 4.1 Finland U-shaped cost curve less than full cost recovery under 4.3 Switzerland SMCP. 4.4 France Air Economies of scale at airports for 4.5 Zurich Airport traffic up to 3-4 M passengers/year; capacity expansion raises average operating costs Maritime and No evidence 4.3 Switzerland inland waterways 4.6 Rotterdam Port Public transport No clear results from the research on The most common situation is that 5.1 Oslo cost functions in public transport. cost recovery is not achieved in 5.2 Warsaw Economies of scale appear to be practice. 5.3 Edinburgh small. There are some economies of traffic density except possibly on severely congested systems. Stringent public service requirements often lead to excess capacity.

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3.2.2. Theoretical issue 2: Funding investments and optimal transport pricing by a benevolent government

Description Deficits that arise from infrastructure construction and operation can be covered in various ways, ranging from general or specific taxation to private funding19. The aspect of public funding is explored here, where the different impacts on efficiency and equity generated by alternative funding solutions (general taxation – head tax, labour tax, transport taxes) are described (Figure 3-2). On the basis of this analysis, a cost-benefit rule has been derived in D2 (abstracting from procurement problems, and taking the cost structure as given)

Lessons learned from theory The analysis of investment funding addresses the issue of pricing and financing. Without entering into the details of the institutional and regulatory framework for financing issues, it assumes that the government which decides about the pooling of funds is benevolent and therefore will adopt the socially-optimal solution. Cost-benefit rules are defined to support the government in the decision. The rules take into account the distortionary effects of non-optimal pricing regimes, the costs of inflexible earmarking schemes and the opportunity costs of infrastructure investments. Furthermore, equity implications can considered by using social weights when the individual benefits are summed (e.g. an increase of the income of low income groups receives a higher weight than an increase of income of high income groups).

Figure 3-2: Main relevance of theoretical issue 2 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Who is What use of What pricing Which invest- Rules covered? revenues? Fin- rule? ment rules? What sectors? ancing?

Regulatory framework

Procurement & implementation

Practical guidance to application of the theory All case studies should contain a description of the financing scheme according to the following format:

19 Some insights into the role of public-private partnership are obtained from the theory of incentives (Theoretical issue 7 considered below). 60 REVENUE D3 CASE STUDIES SPECIFICATION

Description of the pricing and financing solution of the status quo and - if there is one - of the proposed regulation scheme: type of funds (self-financing through tolls, head taxes, transport taxes, labour taxes) and level; justification of the current financing rules; Description of improved pricing, financing and investment schemes within the frame of the optimal/superior regulation scheme - and of further (e.g. second-best) regulation schemes, if such are defined in the case study). As mentioned in section 1.1, an iterative procedure may required to design the optimal/superior regulation schemes. Guidelines for the description of an initial proposal of the optimal/superior regulation scheme, i.e. of the first input in the iterative procedure:

- Pricing: Starting point for the optimal/superior regulation scheme is a pricing scheme oriented at social marginal cost pricing. The case study will have to make clear to what extent the existing taxation of transport is replaced by the new pricing regime. In a "puristic" interpretation of SMCP, the existing taxation is abolished. Politically more realistic approaches, where the new pricing regime only partly replaces the existing taxation of transport (e.g. leaving fuel taxation fully/partly unchanged) should be analysed as variants. The requirement to clearly define the pricing regime does only refer to the design of the optimal/superior regulation scheme but to the description of all regulation schemes. Average cost pricing, for example, can be defined in many ways (e.g. full cost recovery at the mode level, or for freight and passengers transport separately). Therefore, clear and transparent definitions are a basic requirement to be met by the case studies.

- No inflexible earmarking scheme that prevents a welfare optimising allocation of the funds: The case study will have to specify what the consequences of earmarking solutions are, i.e. what sources of funds (transport charges/taxes, general taxation) are affected in what way. It should be noticed that there are only very limited effects if earmarking simply replaces existing subsidies.

- Investment decisions based on the application of a cost-benefit rule that trades off the benefits of the investment with its opportunity costs: In the status quo and - if there is one - in the proposed regulation scheme, the investment profiles assumed may be the result of political investment decisions that are not optimal from a welfare point of view. For the optimal/superior regulation scheme, an improved investment profile will have to be determined (incl. changes in investment volumes and in investment timing). Existing proposals based on sound investment appraisals should be the initial input in the iterative procedure identifying the optimal/superior regulation scheme.

- Handling of deficits and surpluses in the transport sector: Deficits are financed from taxes with the lowest marginal cost of public funds, surpluses are used to reduce taxes with the highest distortionary effects (i.e. with the highest marginal cost of public funds).

- The handling of both surpluses and deficits depends on the equity weights used by the government.

3.2.3. Theoretical issue 3: Tax and investment rules in an economy with several government levels

Description This section investigates the effect on pricing, investments and use of revenues of tax competition between governments, when a congestible facility is used by both local and transit traffic. Tax competition may assume various shapes, namely:

61 REVENUE D3 CASE STUDIES SPECIFICATION

horizontal parallel competition: when transit has a choice between different jurisdictions’ networks; horizontal serial competition: when transit uses a route which runs sequentially through several jurisdictions’ networks (this may be the case for Trans-European Network (TEN) corridors); vertical competition: if the tax revenues derived by different levels of government are mutually interdependent, due e.g. to overlap of tax bases, differences in objectives, or spill-over of externalities.

Competition can lead to distortions in pricing and investment if decisions on pricing and infrastructure capacity are taken at the local level. The consequence is that demand and supply mismatch and the desired level of traffic is not attained. Consequently, there may be room for intervention by a central - or "higher-level" - government through funding or incentives to invest (or possibly disincentives to prevent investment in excess capacity) and/or through adjustments in pricing.

Lessons learned from theory The conceptual framework above described can help to clarify the effects of tax competition on the design of a regulation scheme. In fact the design of a regulatory framework is influenced by the allocation of responsibilities for pricing and investment decisions between different governments and by the coordination of their decisions; moreover coordination of investment decisions between level of governments allows the possibility of joint financing of investment from the central and local government (see Figure 3-3).

Figure 3-3: Main relevance of theoretical issue 3 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Who is What use of Which invest- Rules covered? revenues? Fin- ment rules? What sectors? ancing?

What actors are Who sets Who makes Regulatory involved, what prices or investment framework functions? charges? decision?

Procurement & implementation

Practical guidance to application of the theory The case studies should at first investigate whether the multilevel government conceptual framework can support the understanding of the regulation scheme in place (status quo and proposed regulation scheme). The following questions can be used as a guidance: 62 REVENUE D3 CASE STUDIES SPECIFICATION

Does tax competition between authorities exist? If so, what type of competition (horizontal, vertical, etc.) is manifest? Can it help to explain existing levels of charges, infrastructure use and investments? As a second step, it should be investigated whether the alternative regulation schemes (optimal/superior and further schemes) could/should include funds from central government in addition to local government ones to cover the costs of existing facilities or the costs of a capacity expansion. The two questions below together with Table 3-3 (a systematic overview of the theory on multilevel government and its normative content as presented in D2, chapter 3.2) provide some guidance to draw from theory normative insights. Can the costs of existing facilities or investments be financed from local authorities, or is central government funding needed to cover the deficit? If capacity expansion is warranted, will sufficient local financing be forthcoming or is there a need for central government funding or incentives to invest?

The following table provides a systematic overview of the theory on multilevel government presented in D2, chapter 3.2.

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Table 3-3: Overview of theory on multilevel government

Type of government Infrastructure pricing Use of infrastructure Level of investments Need for government intervention competition

Horizontal competition a. parallel competition Infrastructure use charged – Expected to be more or less Expected to be sub-optimal if Need for cooperation between the two tolls expected to be higher efficient (see Bertrand type the two competing authorities authorities than marginal external costs competition) are both allowed to invest

Infrastructure use not charged Over-use Underinvestment possibly There is a rationale for the federal government to due to i) no prices and ii) provide investment incentives (free use of benefits of transit traffic are infrastructure, high share of transit traffic, not captured by local marginal cost of public funds higher at the local governments and this leads to level than at the federal one) a lack of incentives b. serial competition Infrastructure use charged – Under-use Probably optimal for the sub- Need for federal government intervention (need sum of charges by the two optimal level of traffic. for cooperation between the two authorities on local authorities even higher the pricing side, adjustment of investment level than monopoly charges because of change in traffic level)

Infrastructure use not charged Overuse Underinvestment possibly There is a rationale for the federal government to due to i) no prices and ii) provide investment incentives (free use of benefits of transit traffic are infrastructure, high share of transit traffic, not captured by local marginal cost of public funds higher at the local governments and this leads to level than at the federal one) a lack of incentives

Vertical tax competition

Possible overcharging (resp. Possible under-use undercharging) if both local and central governments tax (resp. subsidise) the same traffic.

64 REVENUE D3 CASE STUDIES SPECIFICATION

3.2.4. Theoretical issue 4: The common agency model

The common agency model highlights the fact that lobbies can influence the design of a regulation scheme (Figure 3-4). The model identifies factors that affect the behaviour of a lobby and how their pressure can influence the design of a regulation scheme. Lobbies may represent the interests of a region, a transport mode, an environmental group, or some other collection of agents.

The basic features of the model are the following: The attitude of the lobby is influenced by the features of the policy (the level of the toll and the share of the revenues they will enjoy) and by their interest in the infrastructure (their intensity of use); The closer that a proposed policy matches the preferences of a lobby group, the more it will be willing to support the politician (e.g. through campaign contributions); The lobby exerts pressure on the policy maker to modify the level of tolls (higher than Pigouvian taxes if the lobby’s constituents have a low share of use and a high share of revenue, lower on the opposite case, etc.) or to provide a specific public good (in this case the costs will be borne by taxpayers as a whole, while the benefits will be enjoyed disproportionately by the lobby’s constituents).

Lessons learned from theory The common agency model brings out the role that actors external to the institutional policy making environment (administration, politicians) have on the design of a regulation scheme: lobby groups can in fact exert their pressure on the decision making process in order to influence for instance the level of prices and how revenues will be used.

Figure 3-4: Main relevance of theoretical issue 4 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Prices? Tax cuts? New road or Rules Special tariffs? Public transport rail capacity? Exceptions? subsidies?

Regulatory Who sets Who decides on Who makes framework prices or revenue use? investment de- charges? Financing? cisions?

Procurement Tenders? & implementation Contracts?

65 REVENUE D3 CASE STUDIES SPECIFICATION

Practical guidance to application of the theory The role of lobbies in the design of a regulation scheme will be explored in the case studies in a qualitative way, both for present regulation schemes and for the alternatives. The case studies should contain a description of the role of lobbies, taking into account the following aspects: Are there lobbies with strong interests in the infrastructure/service under consideration? How are the lobbies constituted (geographical, modal, industrial lobbies, etc.)? Do the lobbies have an important role in the situation analysed in the case study? How was the lobbying activity rewarded (modification of the level of prices, different allocation of revenues or funding solutions, provision of a specific public good, other investment decisions, etc.)? Did the lobbies help to bring about a more efficient/equitable outcome (e.g. higher/lower level of prices)? If alternative regulation schemes are put in place, is it likely that the lobby groups continue to exert a comparable influence?

- For the optimal/superior regulation scheme it will have to be assumed the influence of lobbies exercising a negative influence (i.e. lobbies that do not stand for broad societal but rather narrow professional objectives) can be suppressed and that the benevolent government can develop a regulation scheme that maximises welfare according to theoretical issue 2.

- For a further regulation scheme it may be assumed that a lobby succeeds in influencing the design of the regulation scheme. The assessment in part 3 of the case study work will show the implications of this success.

The information required to answer these questions can be gathered through interviews with key informants (see chapter 6) if they are not already at hand.

3.2.5. Theoretical issue 5: Earmarking in a dynamic political model

Description The principal question addressed in issue 5 is why politicians sometimes favour earmarking of revenues (Figure 3-5) despite the fact that according to the theory of a benevolent government earmarking will typically result in an inefficient allocation of funds (see D2, Par. 3.3).

Lessons learned from theory Models of earmarking (e.g. Brett and Keen, 2000) have been developed to identify circumstances in which revenues from infrastructure pricing will be earmarked by policy makers (positive analysis). These models do not have a normative content, but can be usefully used in a positive analysis, trying to understand whether objectives and behaviours of policy makers can actually help explaining the existence or not of an earmarking rule in a regulation scheme.

66 REVENUE D3 CASE STUDIES SPECIFICATION

Figure 3-5: Main relevance of theoretical issue 5 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Prices? Tax cuts? What use of New road or Rules Special tariffs? Public transport revenues, what rail capacity? Exceptions? financing?subsidies?

Regulatory framework

Procurement Tenders? & implementation Contracts?

Practical guidance to application of the theory Case studies should address the following questions when describing the existing and/or a proposed regulation scheme: Can the presence or absence of earmarking in the current regulation scheme be explained by the objectives, behaviour and other characteristics of the policy makers involved? Positive dimensions of earmarking such as stability, inter-temporal consistency, and prevention of fraud may at least be rationales for earmarking solutions. Where earmarking has been implemented or proposed, what groups supported or are anticipated to support it? Was earmarking motivated as a mean of compensating potential losers from a regulatory scheme or other change? To constrain politicians in how revenues are spent? To benefit a favoured lobby group beyond the period of incumbency of the government that introduced the earmarking?

For the optimal/superior regulation scheme, narrow earmarking solutions should be avoided (see section 3.2.2 above). If there are differences in earmarking to the existing and/or proposed regulation scheme, the implications of these differences on the various sources of funds (taxes, charges, tolls) must be made clear.

3.2.6. Theoretical issue 6: Procurement of infrastructure services and the role of investment agencies

Description The analysis carried out in D2 chapter 4 completes the theoretical framework by highlighting that alternative institutional arrangements for procuring infrastructure services can have different im-

67 REVENUE D3 CASE STUDIES SPECIFICATION pacts on the efficiency and equity of regulation schemes. The theory of contracts and of incentives is the backbone of this insight. Questions of particular interest to be investigated are (Figure 3-6): Should investment, operation and maintenance of infrastructure be carried out by a public authority, a dedicated autonomous agency, or a public-private partnership? How should motorways and railway infrastructure be procured?

Regarding the first question, the case for an investment agency should not be assessed on the limited scale of one investment project but rather a set of projects. Moreover, the case should be investigated jointly with related theoretical issues; in particular the interaction between different government levels (theoretical issue 3), the influence of actors external to the institutional setting (theoretical issue 4), and the role of agencies and politicians.

Operational questions Decisions about the procurement of infrastructure services and the role of agencies have a primary impact on procurement and implementation issues related to the scope of the regulation scheme. (These issues include whether investment, operation and maintenance of the infrastructure are in the hand of a public authority, an independent authority - agency, or a private or public-private partnership. Also germane are technological issues such as standardization of telematics on a multimodal or local level, etc.). In addition to that, an investment agency may have a wider role in the design of a regulation scheme. For instance, it may have a role in the setting of the regulatory framework by determining who decides how revenues are allocated between projects and modes within the agency’s scope, who chooses financial participation rates according to type of project, who sets prices according to what principle/objective, etc.

Figure 3-6: Main relevance of theoretical issue 6 for regulation schemes

Scope Pricing Revenue Invest- use & ment financing

WhatWho sectors is / Rules covered?sub-sectors Whatare sectors?covered?

What actors are Who sets Who decides on Who makes Regulatory involved, what prices or revenue use investment framework functions? charges? and financing? decision?

Private or Payment? Revenue Procurement Tenders? public Enforcement? collection and & implementation Contracts? provision? Exceptions? management?

Practical guidance to application of the theory The theory of incentives can be used in the case studies for both a positive analysis and a normative one. The positive analysis can be carried out on the basis of the scheme suggested by par 4.7 of D2,

68 REVENUE D3 CASE STUDIES SPECIFICATION which facilitates the description and the analysis of the organisational setting of the status quo and a proposed regulation scheme. According to this scheme, the following aspects should be described: Main actors and their missions/ strategies; Relations between actors (delegation, contracts, co-ordination, collusion, etc.); General frame of contracts (selection process, risk sharing, contract duration, conditions for termination of contracts etc.); Resources and constraints (constraints on level and use of revenues, uncertainty on level, nature, evolution of resources and on constraints, powers given vs. constraints imposed); System used for assessment (transport demand and supply, agent’s performance (technical, financial,...), principal’s utility, does the principal obtain new information (through the procurement process or during the course of the contract)?, are information asymmetries reduced?); Incentive schemes and regulation (indicators used for incentive rules such as performance measures: individual items, benchmarking, external factors. Nature of incentives and adjustment rule of incentives: rules defining how the level of incentive is set according to observed indicators. Enforcement of minimum quality levels or other constraints. Possible rules to cope with incompleteness of contracts – unforeseen contingencies, transaction costs, long-term issues); Description of the organisational setting, including its incentive component (potential benefits of incentive schemes, consistency between the principal’s missions and the regulation implemented, relevance of indicators used, actual implementation of the contract’s rules, incentive power in the contract (i.e. degree of variation in reward with the outcome), and performance of the system).

After having described the main features of the organisational setting, the recommendations developed in D2 can be a useful background to the normative analysis. For the design of the optimal/superior regulation scheme, the case studies will have to check whether there are elements and circumstances that would favour other organisational solutions than the ones existing in the status quo regulation scheme. In what follows, the suggestions made in D2 for better solutions are analysed with respect to i) the institutional arrangement for investment, operation and maintenance of the infrastructure, and ii) specifically for procurement of motorways and railways infrastructure. A stronger involvement of the private sector and - where feasible - an increase or an establishment of competition between actors (e.g. operators) are the key issues in this context. It will be up to the case studies to provide plausible and transparent estimates of possible efficiency gains connected with alternative institutional arrangements (e.g. lower maintenance costs if maintenance is carried out by private and not by a public agency).

A. Choice of institutional arrangement for investment, operation and maintenance of the infrastructure

The case studies should provide information about the nature of the current arrangement (based on the information provided above), and then assess whether an investment agency or a public-private partnership would be suitable in an alternative regulation scheme. Table 3-4 lists the elements that favour each choice.

69 REVENUE D3 CASE STUDIES SPECIFICATION

Table 3-4: Elements favouring the establishment of an investment agency or a PPP

Investment agency Public-private partnership

Willingness of the public authorities to increase Comparing the two extreme cases of public against continuity, thereby reducing the impact of political private infrastructure building and operation (BOT uncertainty; concession), no recommendations can be made. In willingness to counterbalance the pressure of lobby general terms, it can be said that: groups; the quality of regulation (influenced by asymmetry public authority has a good vision of infrastructure of information), uncertainty, degree of competition, needs; etc.) is a key factor in choosing the degree of significant informational asymmetries (at the public-private partnership; expense of the public authority); if externalities and market power have a limited the public authority formalises objectives and importance, private management should be mission of the agency, as well as controls and how preferred (in fact in this case public and private they will be enforced; objectives are not so dissimilar). transactions costs engendered by the creation and Potentially lower costs with private-sector operation of the agency are low; involvement identification and control of potential problems due to existence of multiple principals (multiple authorities with conflicting objectives), existence of reasonable external regulation (democratic control, public evaluation); in some countries the investment agency can borrow at favourable rates.

B. Mode-specific recommendations

Some recommendations about design of contracts are provided below, specifically for motorways and railways.

Motorways Features of the motorway sector to be taken into account when deciding about concessions are: uncertainty in demand forecasts; high external costs both outside (environment) and inside the system (congestion); information asymmetry on real time operations for the regulator; competitiveness of downstream market (users); multiplicity of principals and interest groups due to multiplicity of demand segments (freight vs. passengers, long vs. short distance, etc.); difficulty to manage demand in order to optimise real time operation at a network level.

70 REVENUE D3 CASE STUDIES SPECIFICATION

Table 3-5: Features and preferable options for concessions/contracts: Motorways

Intensity of the Preferable option Suggestions on contract features High Preferable option is public sector construction and operation Possible subcontracting of Compensation to the private operator not on the basis of traffic operations to private revenues but rather achievement of quality goals – e.g. travel time operator Low Possible to envisage a The concession contract could include the following provisions: concession contract 1. provisions on the endogenous duration of franchise in order to reduce high risk premium; 2. bonus on the concessionaire’s fee on the basis of technical quality of service; 3. if a price-cap is used, it should be defined in terms of average yearly tariffs, allowing for time modulation according to a daily or hourly basis and a minimal quality of service (speed) level should be imposed in order to provide adequate incentives for investment 4. the extra tariff (above the average price-cap) necessary to achieve a predetermined level of service should be put into an escrow fund that is managed by the public authority and not by the concessionaire.

Railways Features of the railways sector to be taken into account when deciding about concessions are: uncertainty on demand forecasts (lower for the incumbent than for entrants); environmental externalities are lower than in the case of motorways, as well as congestion externalities, but they extend over a larger area due to the length of trips and haul; the costs of the incumbent operator are higher than the costs of the possible entrant, and it is difficult to extract information about costs from the incumbent; the downstream market is a monopoly or at best an oligopoly, with an incumbent which was in the past merged with the infrastructure manager; high degree of freedom in demand management (product and price differentiation); the screening of the operators is achieved not only through tariffs but also through a hierarchical process of path allocation: each operator applies to the regulator or to the infrastructure manager for the timetable of its services, and the regulator makes these timetables compatible through priority rules that may dictate either minor changes in the timetables or cancellation of some services.

Table 3-6: Features and preferable options for concessions/contracts: Railways

Network Preferable option

Large Building and operation directly through public authorities or public firms Short and simple Private concession

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3.3. Key features of optimal regulation schemes The theoretical issues illustrated in the preceding paragraph each highlight an aspect of the regulation scheme illustrated below. The results are helpful not only for interpreting the status quo and the probable outcome of proposed changes (positive theory), but also for making recommendations as to how changes can be implemented to enhance efficiency and equity.

Table 3-7 provides a guide to the elements of theory that are most relevant to the regulation scheme. Each cell identifies the theory and the corresponding section in D2.

The relevance of the theoretical issues to the case studies is assessed on the basis of the available case study descriptions and is detailed in Table 3-8.

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Table 3-7: Regulation scheme and theoretical background

Scope Pricing Revenue use & financing Investment

Cost recovery theorem (par 2.1) Funding investment and optimal Cost recovery theorem (par 2.1) Procurement of infrastructure transport pricing by a benevolent Tax and investment rules in a services and the role of investment government (par 3.1) multilevel government economy agencies (Ch. 4) Tax and investment rules in a (par. 3.2) Rules multilevel government economy (par. 3.2) Earmarking in a dynamic political model (par. 3.3) Tax and investment rules in a The common agency model (par. Tax and investment rules in a multilevel government economy 3.3) multilevel government economy Regulatory (par. 3.2) (par. 3.2) framework Procurement of infrastructure The common agency model (par. services and the role of investment The common agency model (par. 3.3) agencies (Ch. 4) 3.3) Procurement of infrastructure Procurement of infrastructure Procurement of infrastructure Procurement and services and the role of services and the role of investment services and the role of investment implementation investment agencies (Ch. 4) agencies (Ch. 4) agencies (Ch. 4)

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Table 3-8: Assessment of relevance to case studies

4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 5.3 5.4 Comments Finland Germany Switzer- France Zurich Rotterdam Accept Oslo Warsaw Edin- Accept- land airport Port -ability burgh ability

Cost recovery CRT is relevant to all those case studies theorem where a quantitative analysis of proposed • • • • • • • • • and hypothetical regulation schemes is carried out. Optimal The positive and normative analysis of pooling of infrastructure funding alternatives is funds relevant for all case studies. As far as data are available, each case study should • • • • • • • • contain at least a description of the current financing scheme and a proposal of a financing scheme for the alternative regulation scheme. Taxation and The analysis of the regulatory framework multilevel in terms of institutional actors involved • • • • • • • • • government and their coordination is relevant to all case studies (except 4.7 and 5.4). Common The analysis of the regulatory framework agency model in terms of weight of the lobbies in the • • • • • • • • • decision making process is relevant to all case studies (except 4.7 and 5.4). Earmarking in Where earmarking is part of the current a dynamic regulation scheme the case studies could • • • • • • • • • • • political model assess it by applying one (or more) of the dynamic political models. Procurement This analysis is relevant to all case studies of infrastruc- (except 4.7 and 5.4) • • • • • • • • • ture services

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4. The MOLINO model

4.1. Introduction

This section provides an introduction to the practical use of the MOLINO model.20 A simple numerical example is provided and discussed in detail. Moreover, the theory needed to understand the example as well as the required input and output data are described.

4.2. Scope of the assessment with MOLINO

The MOLINO model is an applied tool to evaluate investment and pricing policies. It can be summarized as follows: Demand model: Given the level of generalized cost, the model computes the number of users selecting the different modes, for different time periods. The demand model can deal with passenger as well as freight demand for any combination of modes. Supply model: Given the number of users selecting the different modes, the model computes the level of congestion on the different modes and for different time periods. Equilibrium model: Given the demand and supply functions, the model computes the corresponding fixed point solution in terms of prices and congestion levels. Evaluation criteria. The direct outputs of the model are: flows, travel times, tolls levied. In- direct output can be computed using the direct output: a social welfare function, toll revenues, etc. Control. There are a variety of control variables: pricing, access control, maintenance policies and investment policies. There are different potential objectives: first or second best welfare maximization, revenue maximization, cost minimization, etc. These objectives can be computed for the whole system or for a part of the system. The system can be managed by one or several competing (or cooperating) agents. The objectives of the agents can be: social welfare maximization, cost minimization, constrained optimization (financial or equity constraints). Accounting model. For each setting, this model computes the accounts for some of the agents.

4.3. Data requirements

The regulation schemes to be assessed with MOLINO (current, alternative and optimal regulation scheme) involve competition between two alternative transport supplies (2 competing infrastructures or 2 modes or 2 operators); the categories of actors included in the analysis are the infrastructure manager, the infrastructure operator and the users (passengers and freight). For each type of activity on infrastructure (infrastructure management or infrastructure operation), it is necessary to define: 1. How is the deficit financed? a. Labour tax b. General taxation – head tax c. …

20 For a brief description of the MOLINO model, see Proost et al. (2004), Chapter 6. The general structure of the model is described in the background document “MOLINO model development for REVENUE, TASK 2.5”. 75 REVENUE D3 CASE STUDIES SPECIFICATION

2. Who receives surpluses? 3. Who decides on investments? a. Central government b. Local government c. Private supplier d. … 4. Who builds the infrastructure and which is the contract they use? a. Public company b. Private company – tender c. Private company – no tender 5. Which is the pricing rule (infrastructure manager to operators and operators to users)? a. Marginal social cost pricing b. Other… 6. Which is the objective? a. Welfare maximisation b. Profit maximisation c. …

Then the combination of the various options allows to define a set of alternative regulation schemes. Some regulation schemes are already modelled into MOLINO and are ready for use with data provided by the case studies. The table below drawn from a background document to D2 highlights the main features of these schemes.

Table 4-1: Main features of the regulation schemes modelled in MOLINO

Type Investments Operation Objective Residual Invest- Who Type of Residual Price Service Finance ment builds Pricing Finance setting provider decision M11 Labour CG Public Simple Labour CG Public Welfare tax company tax company max M12 Labour CG Tender MSC or Labour CG Tender MSC tax optimi- tax zation? M13 Head tax LG Public Simple Head tax LG Public Simple company company M14 Head tax LG Tender MSC Head tax LG Tender MSC M15 PS Tender Profit PS Tender Profit max. max.

CG: Central Government; LG: Local Government; PS: Private Supplier; MSC: Marginal Social Cost Pricing

Referring to the representation of regulation schemes adopted in D3, the aspects of the scheme which have to be described in order to make MOLINO run in a given case study are the following:

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Table 4-2: Relevant aspects of regulation schemes for the application of MOLINO Revenue use & Scope Pricing Investment financing Rules How are the deficits of the infrastructure manager financed? How are surpluses distributed? How are the deficits for operation financed? Regulatory Who decides on Who decides on framework the prices to be the level of invest- paid by the ope- ments and main- rators for the use tenance of the of infrastructure? infrastructure? Who decides on Who executes the prices to be investment deci- paid by the final sions? users? Procurement How is the ope- Who operates or and imple- rator/s that uses builds under what mentation the infrastructure type of contract? organised?

4.4. A simple illustrative example: Two routes in parallel

4.4.1. Demand and generalized price

We first describe the setting of the model and specify the modes, the network, the congestion laws, the agents and their decision tree.

The network consists of two routes in parallel (1 and 2 connecting an origin O to a destination D), one class of users (private cars) and two types of individuals (low-income and high-income), who differ in their incomes, values of time and preferences. Each individual has a choice between transport and consumption of a composite other good, a choice of time use, and a choice of route. The model enables the study of different market equilibria: no toll equilibrium, tolled roads, marginal social cost equilibrium, Nash equilibrium, and mixed oligopoly.

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The decision tree for each individual type is represented in Figure 4-1.

Figure 4-1: Decision tree for two routes in parallel

Level 3 Utility

Level 2 Transport Other consumption

Level 1 Peak Off-Peak

Level 0 Route 1 Route 2 Route 1 Route 2

At level 3, the individual decides how much to purchase of the other good ("Other Consumption") and of the transport good ("Transport") (he has not yet decided the precise allocation between the routes, but his subsequent decision process will be consistent). At level 2, the individual chooses between transport consumption during the peak (“Peak”) and transport during off-peak (“Off-Peak") period. At level 1, the individual chooses which route to select, "Route 1" or "Route 2". The corresponding utility levels are represented on level 0. Note that the utility at level 0 corresponds to the consumption of transport good at level 0. The utility of level 1 is a combination of consumption of this transport good at level 0, and therefore plays the role of a quantity index; the same reasoning can be applied at higher levels.

To calibrate the model, we need the transport consumption on route 1 and 2 at level 0. Together with the generalized prices, the elasticities of substitution and the percentage of income spent on transport; these data are sufficient to calibrate the utility functions and the demand functions. Specifically, we denote the transport consumptions by:

llhh qqqq0,10,20,10,2pppp,(,) which represent the travel consumption on route 1 and 2 for low income llhh users (high income users) during peak period (p), and qqqq0,10,20,10,2op,(,) op op op which represent the travel consumption on the two routes during off-peak period (op).

The subsequent indices (at level 1 and 2) are denoted by:

lh qq1,pp() 1, represents the consumption index (computed at level 1) of peak travel of low income lh users (high income users) and qq1,op() 1, op represents the consumption index for off-peak travel.

lh qq2,tr() 2, tr represents the consumption index (computed at level 2) of the transport good of low income users (high income users).

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These consumption indices are only used as intermediate variables and are computed from the input variables in a recursive manner, from a lower level (starting with level 1, based on level 0) to a higher level (in this example, 3 is the highest level).

In order to illustrate how such indices can be computed, we provide below the formula for the consumption index of transport consumption of low-income users (these expressions are given by a CES-type of function):

1 l llllσ −1 ll11−−ρρ2,tr l 2, tr l ρ 2, tr l ρρ 2, tr 2, tr l2,tr qq2,tr=+[()()()()],αα 1, p 1, p 1, op q 1, op ρ 2, tr =l , σ 2,tr where:

l + σ 2,tr ∈ R denotes the elasticity of substitution at level 2 between peak and off-peak travel

l + α1,m ∈ R are called distribution parameters and are automatically calibrated by MOLINO once the input data are known.

At level 0 the generalized prices are given by:

rrrrrr p0,mj=+++(rc tc mjττˆˆ ce loc ) l j + τ mj , r = l , h , j = 1,2 and m = p , op , where: rcr are the unit resource costs: fuel (tax excluded), insurance, maintenance, etc. for individual with income r (low or high).

r tcmj are the unit time costs on route j during period m for income r

l j the length of route j

r τ mj are the tolls levied on route j during period m for income r

r τˆce represents the tax paid by user of income r to the central government

r τˆloc represents the tax paid by user of income r to the local government.

The travel time cost is assumed to be linear in the traffic flow and is given by the following speed- flow relation:

⎛⎞lqqh()/lh+ tcrr=+ vot ⎜⎟jmjmjm0, 0, , mj m ⎜⎟max ⎝⎠vsjj

where:

hm is the duration (in hours) of the time period with constant traffic flow

r votm represents the value of time for user of income r (r = l or r = h) during period m (m=p or m=op)

max v j represents the maximal speed on route j

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lh Given the observed number of users on route j during peak period ( ()/qqh0,pj+ 0, pj p ) and the peak average travel speed on route j during the peak period (v j ) the model computes, with the help of ⎛⎞llqqh()/lh+ this formula, s . ⎜⎟jj=+0, mjmjm 0, . j ⎜⎟peak max ⎝⎠vvjj s j

hhh The total amount that high-income users spend on transport is given by: ypq2,tr= 2, tr 2, tr (the same expression holds for low income users). In order to compute the generalized income of the lh representative consumer with low (high) income ( yy33,( )) and fully specify the model, we need a supplementary input, namely:

r χ3 , the percentage of income that a user of income r devotes to transportation.

r with the knowledge of this parameter and the computation of y2,tr the model derives the generalized r income y3 , r r y3 y2,tr = r . 100 χ3

4.4.2. Input and output data: Summary

To summarize we give the list of input data needed in Table 1. Once these inputs are evaluated, an automatic calibration procedure allows computation of the necessary variables and parameters; these are then used in the MOLINO simulations.

The input data required in this example are listed below:

Table 4-3: Input variables

qqqqllhh,(,) Quantity of trips by low (high) income users during 0,10,20,10,2pppp peak on routes 1 and 2

qqqqllhh,(,) Quantity of trips by low (high) income users during off- 0,10,20,10,2op op op op peak on routes 1 and 2 Unit resource costs: fuel (tax excluded), insurance, rcr maintenance, etc. for individual with income r (low or high) r Tax paid to local government by income r τˆloc r Tax paid to central government by income r τˆce r Tolls levied on route j during period m for income r τ mj

l j Length of route j

hm Duration (in hours) of the time period m r Value of time for user of income r during period m votm

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max The maximal speed on route j v j peak The average speed during peak period v j

σ r Elasticities of substitution at level k, at branch l (= tr, p, kl, op) for user of income r

r Percentage of income that user of income r devotes to χ 3 transportation

Using this information, the system automatically calibrates the parameters represented in Table 4-4.

Table 4-4: Calibrated variables

r + αkj, ∈ R Distribution parameters, for income r, at level k

s j Capacity of route j

4.4.3. Other costs

There are two types of agents involved in each infrastructure: the manager of the infrastructure (one for each route) and the operator of the transport services (one for each route). The manager of the infrastructure decides upon (and pays for) the capacity maintenance and investments. He receives a fixed fee (or infrastructure-use charge) from the transport services operator (or a fraction of the net revenue of the operator). The operator sets the level of tolls, receives the toll revenue and pays for the operation cost and a fixed or variable amount of the toll revenue to the infrastructure manager. This is schematically given in the diagram below, where arrows stand for payments.

Figure 4-2: Flow of funds

Infrastructure manager

Infrastrucure Subsidies Infrastucture use charge Fund Operator of transport services

Tolls, tickets, charges

Final user

The inputs needed to compute profits and costs of the different operators and of the infrastructure managers are:

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Infrastructure-use charge for both routes (or modes) (paid to the infrastructure manager by the operator) Maintenance costs of infrastructure: this is the sum of a fixed maintenance cost per unit capacity and a variable cost per vehicle (paid by the infrastructure manager) Operation costs: there is a fixed operational cost and a variable one depending on the number of travellers (paid by the operator) Investment in infrastructure costs (paid by the infrastructure manager). Possible subsidies received by operators or infrastructure managers (subk(j), where k can be or for operator or inf for infrastructure manager and j is 1 or 2)

Once these costs are known, the profit of operator j: or (j) can be computed. We have:

or or (j) = Toll revenue(j) – Infrastructure charge(j) – ϑop, j Operation costs(j) + sub (j)

The profit of infrastructure manager j, denoted by πinf(j) is given by:

inf inf π (j) = Infrastructure charge(j) – ϑinv, j Investment costs(j) – ϑmc, j Maintenance costs(j) + sub (j),

where ϑop, j , ϑinv, j , ϑmc, j are (exogenous) parameters which capture the efficiency of the agents as a function of the market organisation. These parameters will depend on the type of contract between the principal (e.g. the infrastructure manager, operator or government) and the agent (e.g. the firm responsible for maintenance). With tendering the parameters will be close to 1 (we assume that operating, maintenance and investment costs are the minimum technologically feasible costs) while without tendering they will be higher since efficiency will then decrease.

4.4.4. Social Welfare

The welfare function SWF is an equity-weighted sum of nine different terms:

SWF=+ wll U w hh U lh lh +Γ+ΓfwwC(, ) Cτˆˆ centr fww L (, ) Lτ local or l h or or l h or ++www1122(, )ππ www (, ) inflh inf inf lh inf ++www1122(, )ππ www (, )

+wExtCEC

The first two terms Ul and Uh are the utility of an individual of transport. They are computed by the 1 model using the nested CES utility functions. The utility functions are given by Uqrr= , where λ r 3 r λr is the marginal utility of income and q3 the quantity index at the highest level of the utility tree and have the dimension of real income. The weights wl and wh represent the social weight the decision maker gives to the different income groups. The third to the eighth term compute the effect of the policy via the redistribution of tax revenues and profits. Finally, the last term captures the effect of other external costs. The terms in the above expressions are presented and explained in Table 4-5.

82 REVENUE D3 CASE STUDIES SPECIFICATION

Table 4-5: Utility variables

Variable 1 to 9 Notation Weight

Utility of low income user of transport Ul wl Utility of high income user of transport Uh wh

Tax revenue collected by the central government τˆ lh centr fwwCC(, )Γ

Tax revenue collected by local government τˆ lh local fwwLL(, )Γ

Profit of operator of route j π or or l h j wwwj (, )

Profit of infrastructure manager j π inf inf lh j wwwj (, )

External costs (other than congestion) ExtC wEC

In this table, we introduce some new notation: ΓL (ГC) is the marginal cost of public funds of the local (central) government, which depends on the way the revenues are used (e.g. to lower labor l h taxes or decrease other taxes). Further, fC/L(w , w ) tells us how tax reductions are allocated over different population groups (here low and high income groups). We then have for the Central (C) or local (L) government (denoted C/L):

lh l h fCL///(,ww )=+−ββ CL w(1 CL ) w.

The weights of the profit terms (profit of operators and infrastructure managers) depend on whether the routes are privately or publicly operated or managed. If for example route 1 is privately or operated, the government (central or local) collects the profit tax (τˆprofitπ1 ) and the shareholders get or or the remainder of the profits ( (1−τˆprofit )π1 ). The weight of π1 then becomes:

orlh lh l h www1,()=Γ++−− fC /, L () ww C / L τβˆˆ profit( op 1 w (1)) β op 1 w (1) τ profit ,

where ГC/L summarizes how the profit taxes will be used by the central or the local government and l h fC/L (w , w ), represents how the profit taxes will be allocated between different users types (low and high incomes). The parameter βop1 tells us how the remaining profits are allocated.

If the route is, instead, publicly operated by central/local government, then

or l h l h www1/,/(, )= fCL ( ww )Γ CL

To summarize: In order to fully specify the social welfare function, we need following exogenous parameters (see Table 4-6):

83 REVENUE D3 CASE STUDIES SPECIFICATION

Table 4-6: Parameters of the welfare function wl Social weight given to low income users wh Social weight given to high income users

wEC Social weight given to external costs other than congestion Allocation parameter indicating the redistribution of central government tax revenues β C between high and low income users Allocation parameter indicating the allocation of local government tax revenues β L between high and low income users Allocation parameter indicating the redistribution of the profits of the operator of β opj route j between high and low income users (in case route j is privately operated) Allocation parameter indicating the redistribution of the profits of the infrastructure βinfj manager of route j between high and low income users (in case route j is privately owned)

ГC marginal cost of public funds of the central government

ГL marginal cost of public funds of the local government

τˆprofit Profit tax (% of profit)

Besides these parameters, we need some additional information in order to determine or l h and inf lhWe need to know wwwj (, ) wwwj (, ).

1. Whether route j is privately or publicly managed and:

if a) it is privately managed, whether profit taxes go to local or central government, or

if b) it is publicly managed, whether it is managed by local or central government.

2. Whether route j is privately or publicly operated and:

if a) it is privately operated, whether profit taxes go to local or central government, or

if b) it is publicly operated, whether it is operated by local or central government.

4.4.5. The decision process and the market structure

The user can select the regime that will be simulated. In total there are five different regimes: no toll equilibrium (free market with no pricing and no state intervention); tolled roads (tolls are exogenously set); marginal social cost (MSC) (in this case, the tolls are set equal to the marginal social cost including the marginal congestion costs, the environmental costs and the maintenance costs); the Nash equilibrium: in this case the two roads are privately operated and maximize their profits;

84 REVENUE D3 CASE STUDIES SPECIFICATION

the mixed oligopoly, where one road is privately operated and maximizes its profits while the other sets the toll equal to the MSC.

4.4.6. The flow of funds

In the next scheme, we give a possible flow of funds for the two infrastructure managers, the two operators, the central and the local government and one infrastructure fund. This is but one possible configuration.

Figure 4-3: Flow of funds

InfrastructureInfrastructure manager OperatorTolls

-InvestmentExpenditure charge-Infrastructure -Infra charge -Tolls subsidy from

subsidycharge from infrastr fund -Maintenance -Operation -subsidy from infrastr-subsidy fund from infrastr. fund -profit taxes infrastr fund -profit taxes

Infrastructure Fund subsidies to subsidies from -central govt -infra manager -local govt -to operator -other revenues -endowment

Central Government Local Government subsidies to local tax -subsidies to -transport tax -subsidiesinfrastr fund to -transportrevenues tax infrastr fund revenues infrastr fund revenues profit taxes -profit taxes -profit taxes

4.4.7. Numerical example: Input parameters

This section illustrates the example using hypothetical numerical values. We use the following input parameters:

85 REVENUE D3 CASE STUDIES SPECIFICATION

Table 4-7: Users selecting route 1 and 2 (vehicles/day, in 100’000 vehicles)

peak off-peak option 1 option 2 option 1 option 2 low-income [veh./day] 0,109 0,167 0,218 0,333 high-income [veh./day] 0,151 0,267 0,302 0,533

For example, we know from the input data that 0,109 low-income individuals are selecting option 1 (that is route 1) every day during the peak hours. (We assume here one passenger per vehicle)

Table 4-8: Length of time periods

peak off-peak hours [h] 6 18

The duration of the peak is 6 hours, while the traffic for remainder of the day is off peak and lasts 18 hours.

Table 4-9: Monetary costs route 1 route 2 low inc high inc low inc high inc resource cost [EUR/km]0.167 0.167 0.167 0.167 local tax [EUR/km] 0 0 0 0 central tax [EUR/km] 0 0 0 0

We assume that all taxes are zero. The resource cost is 0,167 EUR/km for low and high income individuals for each mode.

Table 4-10: Tolls

peak off-peak option 1 option 2 option 1 option 2 low-income [EUR] 0 0 0 0 high-income [EUR] 0 0 0 0

We assume (for the moment) that no tolls are charged (tolls are given in EUR).

86 REVENUE D3 CASE STUDIES SPECIFICATION

Table 4-11: Other supply parameters

route 1 route 2 length [km] 60 60 max. speed [km/h] 120 120 speed during peak [km/h] 67 52

With the help of these inputs we are able to determine the variable s of the two routes and to calibrate the speed-flow relation.

Table 4-12: Values of time

peak off-peak low-income [EUR/h] 7,34 7,34 high-income [EUR/h] 14,69 14,69

High income users have by assumption a value of time twice as large as low income users.

Table 4-13: Percentages of total income devoted to transportation share low income users [%] 28,6 high income users [%] 30,3

These data are necessary to construct the generalized income.

Eight elasticities of substitution are required, 4 for each category of users:

Table 4-14: Elasticities of substitution

transp/oc peak/off-peak peak 1/2 off-peak 1/2 low-income 0,7 0,9 5 5 high-income 0,7 0,9 3 3

The elasticity of substitution between transport consumption and consumption of other goods (oc) is 0,7. The elasticity of substitution between peak and off-peak travel is 0,9, while the one between route 1 and route 2 is for both peak and off-peak period equal to 5 for low-income users and 3 for high-income users. This means that the low-income users will change their behaviour and opt for

87 REVENUE D3 CASE STUDIES SPECIFICATION the other itinerary more easily than high-income users. The high elasticities chosen for the route choice means that the routes are good substitutes.

For the two routes we use the following cost data (we opted for the simplest example and this implies setting all cost data equal to 0):

Table 4-15: Other costs

route 1 route 2 variable operation cost [EUR/veh] 0 0 fixed operation cost [EUR] 0 0 infrastructure charge [EUR] 0 0 variable maintenance cost [EUR/veh] 0 0 fixed maintenance cost [EUR/cap] 0 0

Table 4-16: Subsidies subsidies central govt to infrastructure fund [EUR] 0 subsidies local govt to infrastructure fund [EUR] 0 other revenues [EUR] 0 initial endowment [EUR] 0 subsidy to infrastructure 1 from infrastructure fund [EUR] 0 subsidy to infrastructure 2 from infrastructure fund [EUR] 0 subsidy to operator 1 from infrastructure fund [EUR] 0 subsidy to operator 2 from infrastructure fund [EUR] 0

We assume all other costs such as maintenance, infrastructure charge and operation costs to be zero. Since we only consider one period we do not consider investments or subsidies to investments.

Tendering parameters: Operation, maintenance and investment expenditures are a function of the contractual form that is used to solve the principal-agent problem. We make only a distinction between tendering and no tendering.

Table 4-17: Tendering parameters

route 1 route 2

maintenance (ϑmc, j ) 1 1

operation (ϑop, j ) 1 1

investment (ϑinv, j ) 1 1

88 REVENUE D3 CASE STUDIES SPECIFICATION

Since all costs are zero we can assume, without loss of generality, that there is tendering and takeϑop, j ,ϑmc, j ,ϑinv, j to be equal to one in this example.

Table 4-18: External costs route 1 route 2 external costs [EUR/km] 0 0

We assume that congestion is the only external cost, so there are no other costs to be included.

In order to compute the level of welfare, we need some information on the operators and managers of the routes. This information is summarised in the following table:

Table 4-19: Regulatory regimes

public/private central/local (1=public; 0=private) (1=central; 0=local) operator 1 1 1 operator 2 1 1 infrastructure manager 1 1 1 infrastructure manager 2 1 1

The first column corresponds to the first question of whether managers/operators are private or public. The second column corresponds to the second question of whether the local or central government collects the profit taxes (in case of private manager or operator) or profits (in case of public manager or operator).

Here the two routes are operated and managed by a central government.

Table 4-20: Welfare parameters

low passengers weight (wp) 1

high passengers weight (wr) 1

external costs weight (wec) 0

ΓC 1,1

ΓL 1,1

beta central (βc) 0,2

beta local (βL) 0,2 profit tax [%] 0,35

beta operator 1 (βOP1) 0,05

89 REVENUE D3 CASE STUDIES SPECIFICATION

beta operator 2 (βOP2) 0,05

beta infrastructure 1 (βIN1) 0,05

beta infrastructure 2 (βIN2) 0,05

In this example we do not differentiate between high and low income users. If we do have equity concerns, a different weight should be given to the different population groups. The marginal cost of public funds is 1,1 which is the estimated value for a country such as Belgium when money is 21 used to reduce other taxes than labour taxes. The values of the parameters βc and βL are 0,2 meaning that one fifth of the tax revenues of the local or central government are allocated to the low income users and four fifths to the high income users. Finally, if the two routes are privately operated nearly all the profits go to high-income users (βOPj small).

4.4.8. Numerical example: Output results

The system automatically calibrates a certain number of parameters such as the share parameters α .

Table 4-21: Calibrated share parameters of the utility functions

α0,p 1 α0,p 2 α0,op 1 α0,op 2 α1,p 1 α1,op 1 α2,tr α2,oc low income users 0,275 0,725 0,308 0,692 0,350 0,650 0,146 0,854 high income users 0,264 0,736 0,288 0,712 0,357 0,643 0,144 0,856

Note that the model user does not need to check the values of these parameters. For the analysis of the problem they can be viewed as internal parameters.

The direct outputs are represented below for five different regimes:

Table 4-22: MOLINO output

Regimes Reference Simulation MSC Nash Mixed

toll [EUR] route 1 0.000 5.000 4.209 12.424 9.707 peak low route 2 0.000 0.000 6.507 20.099 6.990 income route 1 0.000 5.000 2.897 11.831 9.073 off-peak route 2 0.000 0.000 4.453 17.991 4.941 route 1 0.000 5.000 4.209 12.424 9.707 peak high route 2 0.000 0.000 6.507 20.099 6.990 income route 1 0.000 5.000 2.897 11.831 9.073 off-peak route 2 0.000 0.000 4.453 17.991 4.941

21 See Proost et al. (2004), p. 18. 90 REVENUE D3 CASE STUDIES SPECIFICATION

demand [veh] route 1 0.109 0.052 0.104 0.099 0.056 LOW peak INC route 2 0.167 0.206 0.124 0.075 0.153 OM route 1 0.218 0.094 0.215 0.193 0.095 E off-peak route 2 0.333 0.423 0.262 0.151 0.340 route 1 0.151 0.120 0.136 0.120 0.107 HIGH peak INC route 2 0.267 0.275 0.232 0.176 0.240 OM route 1 0.302 0.224 0.281 0.239 0.200 E off-peak route 2 0.533 0.561 0.473 0.339 0.500 total demand 2.080 1.954 1.828 1.392 1.690

Time costs [EUR] route 1 6.573 5.607 6.356 6.116 5.456 LOW peak INC route 2 8.469 8.994 7.607 6.448 7.907 OM route 1 5.605 4.870 5.519 5.276 4.736 E off-peak route 2 6.862 7.302 6.378 5.478 6.683 route 1 13.155 11.221 12.721 12.240 10.919 peak high route 2 16.950 18.000 15.225 12.905 16.074 income route 1 11.218 9.747 11.045 10.560 9.479 off-peak route 2 13.734 14.614 12.765 10.964 13.555

welfare [EUR] 146.955 146.385 148.693 147.569 148.176 welfare low income [EUR] 48.687 48.038 47.531 42.605 46.412 welfare high income [EUR] 98.268 98.348 101.162 104.964 101.764 toll revenues route 1 [EUR] 0.000 2.449 2.451 7.829 4.253 toll revenues route 2 [EUR] 0.000 0.000 5.588 13.875 6.896 0.000 0.000 0.000 0.000 0.000 local tax revenues[EUR] 0.000 0.000 0.000 0.000 0.000 central tax revenues [EUR] 0.000 0.000 0.000 0.000 0.000 profit operator 1 [EUR] 0.000 2.449 2.451 7.829 4.253 profit operator 2 [EUR] 0.000 0.000 5.588 13.875 6.896 profit infrastructure 1 [EUR] 0.000 0.000 0.000 0.000 0.000 profit infrastructure 2 [EUR] 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 local govt net revenues [EUR] 0.000 0.000 0.000 0.000 0.000 central govt net revenues [EUR] 0.000 2.449 8.039 7.596 8.385 0.000 0.000 0.000 0.000 0.000 Subsidies from cent govt [EUR] 0.000 0.000 0.000 0.000 0.000 subsidies from local govt [EUR] 0.000 0.000 0.000 0.000 0.000

91 REVENUE D3 CASE STUDIES SPECIFICATION

other revenues [EUR] 0.000 0.000 0.000 0.000 0.000 financial revenues from net 0.000 0.000 0.000 0.000 0.000 endowment [EUR] transfer to infra 1 [EUR] 0.000 0.000 0.000 0.000 0.000 transfer to infra 2 [EUR] 0.000 0.000 0.000 0.000 0.000 transfer to operator 1 [EUR] 0.000 0.000 0.000 0.000 0.000 transfer to operator 2 [EUR] 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 net addition [EUR] 0.000 0.000 0.000 0.000 0.000

The first column corresponds to the reference case, the road occupancy is the same as when no policy has yet been implemented. In the second column we consider the impact of a toll of 5 EUR on route 1 without any other policy changes (it is still the central government that manages and operates both routes). We assume that high and low income people pay the same toll. Note that since the number of users on route 1 decreases, as expected, the travel times of route 1 have decreased.

Three other regimes are considered: MSC-regime (column 3): both routes are publicly operated and both routes apply MSC pricing. Note that since there is less congestion in the off-peak period, tolls levied during this period are lower. We see that the overall welfare increases but the welfare for the low-income users decreases. This is mainly due to the fact that βcent is so low, if instead we take it to be equal to 0.8 we get the following results for the welfare:

Table 4-23: Results for βcent = 0.8 Welfare 146.955 146.385 148.693 147.569 148.176 welfare low income 48.687 49.654 52.837 47.619 51.946 welfare high income 98.268 96.731 95.856 99.950 96.229

The use of revenues can also be important as illustrated below where inputs are the same as those in section 3.7.1 but now revenues are used to reduce labour taxes. This results, for a country such as Belgium, in a increased coefficient of marginal cost of public funds (ГC) of 2.25. When we change ГC from 1.1 as previous to 2.25 we get the following results:

Table 4-24: Results for ГC = 2.25

WELFARE 146.955 149.202 157.938 156.305 157.818 Welfare low income 48.687 48.601 49.380 44.353 48.341 Welfare high income 98.268 100.601 108.558 111.952 109.478

92 REVENUE D3 CASE STUDIES SPECIFICATION

Nash-regime (column 4): both routes are privately operated and both levy tolls such that their profits are maximized. In this case we assume, for computational reasons that the operator does not discriminate between high- and low-income users. Although the welfare increases with respect to the no toll regime, the welfare for the low income users decreases while the welfare for the high income users increases. The reason are the low beta's meaning that nearly all the net profits of the operators go to the high income users and as such are compensated. Mixed-regime (column 5): one route is publicly operated and sets toll equal to MSC, while the other route maximizes its profits (here again the private operator does not discriminate). We see that, as expected, the welfare lies in-between the welfare when both routes are publicly or privately managed.

One can easily make sensitivity studies on behavioural parameters (elasticities of substitution), regulation parameters (who sets what tolls, tendering or not) and welfare assessment parameters (welfare weights per income group).

93 REVENUE D3 CASE STUDIES SPECIFICATION

5. Assessment of the Regulation Schemes

5.1. Introduction

The aim of this chapter is to provide guidance and a common framework, i.e. an evaluation scheme, for the assessment of the different regulation schemes in the case studies. Given the heterogeneity of the case studies, a generic, yet consistent, evaluation scheme has to be developed. Its application ensures a certain degree of harmonisation in the procedures and the contents of the case studies without compromising the value of the specific case study approaches. The assessment of the regulation schemes in the case studies will have to start from the general framework developed in sections 5.2 to 5.5, and will have to adjust it to the specific situation of each case study.

The evaluation scheme consists of four assessment criteria which are discussed in more detail in the following four sections: efficiency (section 5.2); equity (section 5.3); technical and organisational feasibility (section 5.4); acceptability (section 5.5).

The four sections follow the same structure: The first sub-section briefly summarises the conceptual approach upon which the description of the assessment criteria is based and contains relevant definitions. The second sub-section deals with the elements of a regulation scheme (see Figure 1-2) that are especially relevant for the assessment criteria (e.g. which elements strongly influence the efficiency of a regulation scheme). A third sub-section contains proposals for the methods and tools that could be used in the case studies to carry out the assessment. The discussion does not go into methodological details but rather gives an overview of possible approaches - we call them options - which differ with regard to comprehensiveness and complexity. One of the tasks of the case studies is to describe in detail the methodological procedure, and to demonstrate its validity. As already mentioned in section 1.2, it will not be possible for each case study to carry out a comprehensive analysis for each of the four assessment criteria. For some of the case studies, the assessment of acceptability is a key issue, whereas others focus on efficiency aspects. The idea is for less important assessment criteria to be treated with qualitative approaches to ensure that resources are targeted, for each case study, at the topics from which greatest value can be gained. Nevertheless, each case study will address each criterion.

5.2. Efficiency

5.2.1. Approach and definitions

Within the REVENUE project, the assessment of the regulation scheme is based on the static neo- classical concept of efficiency. Efficient markets are characterized by market equilibrium, open competition and low transaction costs. Prices (in the transport market) reflect the marginal cost of the (transport) activities. If private costs deviate from social costs, they need to be corrected via

94 REVENUE D3 CASE STUDIES SPECIFICATION taxes or other instruments to reach the social optimum. Efficient transport regulation schemes minimize the welfare losses due to taxation, user charges, cross-subsidies, and political control.

5.2.2. Major efficiency issues and sources of inefficiencies

Almost all elements of transport regulation schemes involve efficiency issues. The most important questions relate to the pricing, revenue use and investment rules (see Figure 5-1). The scope of the regulation scheme (such as system boundaries), the regulatory framework as well as procurement and implementation issues are also relevant for the overall efficiency of a regulation scheme. However, efficiency implications of pricing, revenue use and investment rules are the key focus of the REVENUE project.

Typical causes of inefficiencies in our context are: pricing schemes which deviate from the first-best solutions; inappropriate earmarking of funds to specific transport sectors or modes; lack of well-founded investment decisions; lack of competition; poorly designed contracts;

Figure 5-1: Major efficiency issues of transport regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Who is What use of What pricing What investment Rules covered? revenues? Fin- rule? rule? What sectors? 1 ancing? 2 3

Regulatory framework

Procurement Tenders? & implementation Contracts? 4

The regulatory framework also influences the efficiency of a regulation scheme. It has been shown in section 3.2.3 that an inappropriate allocation of responsibilities in decision making can result in non-optimal pricing and investment because non-optimal rules are applied.

95 REVENUE D3 CASE STUDIES SPECIFICATION

1 Pricing rules are at the heart of every regulation scheme. According to the static neo-classical concept chosen here, social marginal cost pricing (SMCP) is the most efficient solution (first-best). However, for a number of reasons, other pricing rules are widely applied in the transport sector. These pricing rules can be classified as follows:22 average cost pricing; long-run incremental cost pricing; Ramsey pricing; multi-part tariffs.

Under average cost pricing (sometimes called fully allocated cost pricing), prices are set such as to cover total costs.23 The crucial issue here is the distribution of common fixed costs. As Baumol (2001) notes, the results of average cost pricing are totally dependent on how these costs are allocated to different activities. Moreover, this pricing principle may cause problems of overinvest- ment or underinvestment in certain services. For these reasons, there are “no grounds for utilization of the fully allocated cost standard”.24 If the purely efficiency-oriented point of view is abandoned and fairness issues are considered as well, the distribution of common costs becomes highly relevant for price-setting.

Long-run incremental cost is the increase in costs that results if one more customer is served by a company. These costs can be identified in a clear and non-arbitrary way. However, if a company may only charge its customers prices equal to long-run incremental cost, it will not be able to cover common fixed costs. Therefore, long-run incremental cost pricing may not be feasible in the long run.

Ramsey pricing is an elegant solution to the problem of how to allocate common fixed costs. Prices should be raised above marginal costs, but not by an equal percentage. The mark-up should be low for products with high elasticities of demand, and high for products with low elasticities of demand. This represents the “least damaging way to collect the needed revenues” to cover the fixed costs.25 The problem with Ramsey pricing is that the mark-up rule may be impossible to implement in practice for lack of information about demand elasticities.26

Recently, regulators in many countries have been confronted with the problem of setting or regulating prices of formerly monopolistic companies that now face competition from new entrants. Typically, the incumbent company owns a bottleneck facility which requires large investments to set up (for example an electricity transmission network), and should not be duplicated for a number of reasons. Parity pricing, also called efficient component-pricing, is able to achieve a number of desired outcomes, including competition-neutral access to the facility, prevention of cream- skimming (the concentration on the most profitable market segments), and the preservation of socially desirable cross-subsidies. The pricing rule is as follows: bottleneck access prices must equal the owner’s mark-up, i.e. the difference between the final price of the product and the marginal cost of that product. Parity pricing is a special class of multi-part tariffs. These tariffs are advantageous with respect to efficiency and incentives for users. However, they are relatively complex and require a lot of information about transport demand.27

22 See e.g. Laird et al. (2004), p. 26, or Baumol (2001), p. 151. 23 Average cost pricing is a special case of target-oriented pricing (see Laird et al. (2004), p. 36). 24 See Baumol (2001), p. 151. 25 See Baumol (2001), p. 153. 26 The difficulties are compounded if demands for the different products are interrelated so that information on cross-price elasticities is also needed. 27 For a summary of the discussion on the merits of multi-part tariffs, see Laird et al. (2004), p. 17. 96 REVENUE D3 CASE STUDIES SPECIFICATION

2 Revenues from transport pricing may be lower, equal to or higher than the total cost of providing the necessary facilities. As discussed in Deliverable 2, the degree of cost recovery depends on the assumptions regarding the cost function, users, demand and market structure.28

If revenues are not sufficient to cover the costs of a certain infrastructure, additional resources are needed. These funds can be raised in more or less efficient ways. The deficit of a transport sector or facility may be financed from the budget of the federal government. In that case, the efficiency of the regulation scheme depends on the efficiency of the overall tax system. The efficiency loss resulting from funds raised through the tax system is the cost of public funds. There are estimates of the magnitude of the cost of public funds for a number of countries.29

Funds to cover the deficit in one part (or one mode) of the transport sector may also come from another part (or mode). In Switzerland, for example, the revenues from the HGV toll are used to finance the construction of the New Alpine Rail Tunnels. In such cases, welfare losses can result if this toll is not based on efficient pricing principles.

If revenues from transport pricing exceed total costs, policy makers must decide how to use the funds that are not needed to finance infrastructure. The money could be returned to transport users (e.g. via tax reductions) or transferred to the government budget. Alternatively, the revenues could be used to finance additional transport capacity or to subsidise public transportation (expanding services or reducing tariffs).30 The latter option is particularly important for road pricing schemes, where equity issues are highly relevant for acceptance. Parry and Bento (2001) show that, in the presence of pre-existing distortionary labour taxes, road pricing schemes can cause significant welfare losses by raising the cost of commuting to work and discouraging labour force participation. Returning revenues by lump-sum transfers represent the least efficient solution. If revenues are used to subsidise public transportation, the welfare loss is much smaller. The most efficient way to use revenues from road pricing is to cut labour taxes. In fact, using revenues to cut labour tax rates almost doubles the overall welfare gains from the congestion tax. However, because of acceptability reasons (see section 5.5), the transparent hypothecation of urban pricing revenues to public transport investment is viewed as a prerequisite for such schemes in many areas, and thus represents some kind of a "second-best solution".

3 In many countries, the revenues from transport pricing and taxation schemes are used to finance transport infrastructure. The methods of selecting investment projects vary across countries and sectors. The most common methods are: cost-Benefit analysis; cost-Effectiveness analysis; multi-Criteria analysis; long-term planning;

Cost-benefit analysis aims to express all advantages and disadvantages of a project or policy in one common term, usually monetary values.31 This method gives high importance to consumer preferences. Environmental effects can be included, to the extent that they can be monetized. Equity

28 See Proost et al. (2004), p. 6. 29 See Proost et al. (2004), p. 18. 30 See Proost et al. (2004, p. 13) for a detailed discussion. 31 European Commission (1996), p. 6. An overview of the most recent methodological developments in cost-benefit analysis is given in section 2 of this report. 97 REVENUE D3 CASE STUDIES SPECIFICATION issues can be addressed by analysing the net-benefits for different groups affected by a project. If a regulation scheme requires standardized and comprehensive cost-benefit analyses for all investments, it is very likely that the revenues from transport pricing are allocated to the most efficient projects.

Cost-effectiveness analysis allows decision makers to find the most efficient option to achieve a given objective. The output is held constant, so there is only one variable, the cost of inputs.32 This method is helpful to evaluate alternative options for the same purpose. However, it cannot be applied to compare different projects. The application of cost-effectiveness analysis thus assures that each project is undertaken in the most efficient form. Yet, the method offers no guidance on whether a specific project should be carried out or not from an economic point of view.

Multi-criteria analysis gives first importance to the views of decision makers. Projects are rated according to the degree to which they meet certain criteria. In recent years, sustainability checks using certain indicators to assess the implications for the economy, society and the environment have gained certain importance. In contrast to cost-benefit analysis, most multi-criteria analyses do not deliver a single, aggregated value which would allow direct comparison of different projects. In many cases, multi-criteria analyses contain some socio-economic values measures on consumer preferences. Equity often represents an assessment criterion of itself. Multi-criteria analysis does not necessarily imply that most efficient projects are undertaken. Environmental impacts, regional development or equity issues may outweigh efficiency arguments.

Many investment decisions are not the result of a comprehensive analysis of costs and benefits. Rather, they are based on a long-term plan for an entire sector (e.g. linking all major cities to the railway network). Whether investments based on such a plan are efficient or not depends on the plan itself and on how the plan was adopted. If the planning procedure includes one of the above methods, the results are likely to be (more or less) efficient. If the plan is the outcome of a political process, the result may not be economically efficient for a multitude of reasons. Due to a number of problems (issue linking, agenda setting, myopic behaviour), political processes often produce results which are not efficient from an economic point of view.33 Many economists believe that direct-democratic procedures, such as public votes, render better results than systems of representative democracy. If regulation schemes in the case studies include investments based on long-term planning, the process that lead to the adoption of the plan should therefore be examined closely.

4 Another important element of regulation schemes with regard to potential inefficiencies is contracting. Increasingly, private investors are involved in the construction and operation of transport infrastructure. In public-private-partnerships (PPP), investors from the public and private sectors build roads, tunnels or bridges. In a typical PPP, the investor is given a long-term concession combined with the right to levy charges (subject to approval by the authorities). Such arrangements offer several advantages: Firstly, large scale financing of infrastructure is possible even if the government lacks financial resources. Secondly, the construction and operation of the infrastructure is theoretically performed more cost-efficiently under private ownership. But PPP contracts are very complex and context-specific. Whilst the private sector may have better access to capital markets, these funds are available only at a commercial rate of return, which allows both for profit margins, and a high degree of protection from risk. Although it has been believed that, depending on the design and risk allocation rules, substantial efficiency gains may be obtained from PPP, experience in the UK suggests that this cannot be taken for granted.

32 Victoria Transport Policy Institute (2001), p. 3-1. 33 For a discussion of the political economy of transport pricing and revenue use, see Proost et al. (2004), p. 22. 98 REVENUE D3 CASE STUDIES SPECIFICATION

Contracts and procurement procedures also play an important role if the state retains control and ownership of the infrastructure. There is a large body of evidence showing that competitive procurement and private provision of maintenance services or construction work produces large efficiency gains. Blom-Hansen (2003), for example, shows private sector involvement lowers the cost of road maintenance in Denmark substantially without loss of quality. Hence, procurement and contracting policies must be considered in the efficiency assessment of regulation schemes.

5.2.3. Assessment methods and tools

Before we can say anything about the efficiency or incidence of a scheme, we need to know how it affects the number of trips, modal split, overall and transport-specific tax burden, etc. Therefore, the efficiency assessment begins with the determination of the effects of a regulation scheme. Natur- ally, the depth and scope of the examination of the effects of regulation schemes depends on the focus of the assessment. In case studies where efficiency is a major issue, a detailed analysis of the effects is required.

The same is true for the case studies which apply the MOLINO model, as the model requires the collection of substantial amounts of data (see chapter 4). In contrast, in case studies which focus on another issue, e.g. acceptability, there is no need to gather extensive information on all the likely effects of regulation schemes.

There are four options to assess the efficiency implications of different regulation schemes in the case studies:

1) the MOLINO model; 2) other models; 3) specific/selected quantitative analysis; 4) qualitative analysis.

Option 1: The application of the MOLINO model (see chapter 4) is the first option to analyse the efficiency implications of different regulation schemes. It has a relatively simple representation of the transport sector, but includes several pricing variants, different operators, endogenous investment, financial costs, etc. The model captures second-order effects such as increased use of public transport as a result of higher road charges, and has an inter-temporal representation of infrastructure investments. It reports as a result the discounted and weighted sum of benefits (travel time savings, redistribution of tax revenues, profits) and the costs associated with the implementation of different regulation schemes, i.e. the welfare gains. MOLINO is primarily an option for those case studies which put the focus of the analysis on efficiency and equity (see next section) issues.

Efficiency implications of investments can be examined with MOLINO. In the MOLINO model, investments are either determined endogenously or specified as exogenous inputs. In the former case, investment takes place if user costs saved exceed marginal investment costs in the present period. This way, it is possible to compare, for example, the investment plan of the proposed regulation scheme to the investment path of the optimal scheme.

The MOLINO model requires the choice of a specific cost efficiency parameter for contracting and procurement in each regulation scheme. The problem is that there is very little statistical data available in this area.34 Thus, the challenge here is to find information upon which to build a justifiable value for the efficiency of contracting and procurement procedures. If public tenders or

34 See Proost et al. (2004), p. 32. 99 REVENUE D3 CASE STUDIES SPECIFICATION procurement of services from the private sector have occurred in the transport sector, these experiences should be analysed. For example, the operating costs of bus services before and after tendering or outsourcing could be examined. If no such data is available, studies or experiences from other sectors as well as interviews with members of the administration could provide valuable information.

If PPP are part of a case study, the incentive structure of contracts should be examined. Does the compensation of the concessionaire depend on the level and quality of services? How are these factors measured (e.g. by total factor productivity or benchmarking)? Who bears operational and political risks? How has the return on investment for the private party been determined? Can contracts be renegotiated?

Option 2: The second option, the use of other modelling approaches, is probably only feasible when a comprehensive multi-modal modelling system has already been developed and validated, and is readily available for use. For the German HGV toll case study, the MART model – which is based on the system dynamics approach – has been developed. It allows a detailed representation of the transport sector and links to external models.35 For two reasons the MART model itself cannot deliver welfare measures: first because it is not possible to compute an equilibrium in a dynamic context, and second because the rest of the economy is not included in the model. The second problem can be overcome if the MART model is combined with the ASTRA-T model.36 ASTRA-T is a system dynamics model which can be used to analyse the effects of different regulation schemes on the economy, including employment effects of investments, income effects of the net contribution of the transport sector to the budget, productivity effects of different network speeds, etc. ASTRA-T produces a number of output variables, but no single measure of efficiency. The ratio “GDP per ton-kilometre” or “total factor productivity” could be used as indicators of the efficiency of different regulation schemes. In both Oslo and Edinburgh, existing models allow the representation of urban transport systems with a complexity that the MOLINO cannot replicate, and specifically enable the spatial disagregation needed to reflect urban areas.

- For the Edinburgh case study, the existing MARS model will be used to undertake the required policy tests.37 The principal strength of this model, aside from the fact that it has already been developed, is that Edinburgh and the neighbouring local authorities are spatially disaggregated within it. This means that it is possible to analyse regulation policies that have a spatial component (e.g. a cordon charge) and for a particular forecast year to analyse the impacts of policy tests at a spatial level (e.g. by local authority area). MARS produces output that gives welfare impacts in a manner that is broadly consistent with the MOLINO. Some differences exist between MARS and the MOLINO regarding the reporting of equity impacts, in that the MOLINO reports the impact upon two income groups, whilst MARS can be used to consider spatial equity impacts. MARS can give information regarding income equity impacts insofar as different areas have different mean average household incomes. As MARS has its own internal welfare functions and optimisation routine the development of an optimum package is possible in a manner similar to the MOLINO.

35 See Proost et al. (2004), p. 34. 36 See Proost et al. (2004), p. 38. 37 Despite having the same name, the MARS model of Edinburgh is in a different modelling package from the MARS model developed as part of WP2. 100 REVENUE D3 CASE STUDIES SPECIFICATION

- For the Oslo case study, the city is represented both by a multi-modal network model and a strategic model. These models will be augmented by development of a “welfare layer” which will ensure that output data is processed to provide compatibility with the MOLINO output. The “welfare layer” will be an Excel spreadsheet model, which incorporates the welfare functions of the Molino and presents data in a compatible format. Because the “welfare layer” is not integral to the model, internal optimisation will not be possible, but iterative sensitivity testing will enable a degree of optimisation to be completed.

Option 3: In case studies where MOLINO or other rather comprehensive models are not applied, the efficiency of pricing and revenue use rules could be examined using quantitative approaches to assess specific/selected efficiency implications (i.e. the most relevant ones without claiming to be comprehensive).

The efficiency effects of a new pricing rule, for example, could be approximated by a calculation of the change in consumers’ surplus for the users of the transport system. This approach requires knowledge of the price elasticity of demand, current transport volumes and prices. Additionally, environmental damages of transport associated with a specific regulation scheme should be determined using existing cost ratios for the external costs of transport. An estimate of the implementation costs (see section 5.4 below) of a regulation scheme could provide valuable additional information. In the case of investment, a rough estimation and comparison of the benefits (primarily time savings and utility from additional trips) and costs should be made.

Making a statement about the efficiency of earmarking is difficult without a comprehensive model. In the case of cross-sectoral earmarking, revenues from increased prices in one sector (e.g. road) are used to lower prices in the other sector (e.g. rail). To see whether such a cross-subsidy scheme is efficient, one can compute the changes of consumers’ and producers’ surplus in both markets. If revenues are earmarked for use within the same sector, an investment rule can again be applied: If investment costs exceed time savings and utility from additional trips, the revenues should not be spent in this sector.

Location effects are often neglected in transport pricing studies.38 Depending on the scope of transport pricing schemes, some regions or neighbourhoods may become more or less attractive for living or working. Consequently, real estate values or rents in some areas may change. Even though such changes are mostly small, it could be worth while looking at such effects if a regulation scheme exhibits an extraordinary spatial design. However, the current state of knowledge of land- use transport interactions is generally viewed to be insufficient to determine the magnitude of land- use effects.39 In light of these difficulties, the possibility of looking at land-use effects should probably be considered only for Option 4 (see below).

Option 4: If no quantitative analysis is undertaken, the case studies should at least contain a qualitative analysis of the efficiency implications of the different regulation schemes. The schemes should be categorized using the above classification: Is, for example, the current transport pricing a target-oriented scheme? Does the proposed scheme involve elements of social marginal cost pricing, are investment rules in force that ensure investment decisions taking into account efficiency aspects, etc.? Moreover, it is important to know whether revenues are earmarked for investments in the transport sector or not. Strict hypothecation of revenues is likely to produce inefficient results, since the most profitable investment projects are not necessarily found in the transport sector. If revenues are used to lower taxes, it should be examined which kind of taxes will be reduced and

38 See Proost (2001), p. 8. 39 See Banister (2002), The integration of road pricing with land use planning; Martinez (2000), Towards a land-use and transport interaction framework; or Wegener (1998), Applied models of urban land use, transport and environment: State of the art and future developments. 101 REVENUE D3 CASE STUDIES SPECIFICATION how distortionary they are. To this end, existing studies on the efficiency of the tax system or the effects of tax reforms in a specific country may offer interesting insights.

In principle, all issues described above could be addressed in a qualitative instead of a quantitative manner.

Table 5-1: Overview table: Efficiency (example)

Proposed Optimal Additional Efficiency issues Base case scheme scheme scheme Pricing – + + + + Revenue use + + + + + + Investment + + 0 Contracting and procurement – 0 + Overall 0 + ++ +

+ + very efficient + efficient 0 medium – inefficient – – very inefficient

The efficiency assessment shall be concluded by an overview table using the classification and structure of Table 5-1 above. The table should compare the efficiency of all regulation schemes although, depending on the case study and the assessment methods chosen, it may not be feasible to insert a value into each cell.

5.3. Equity

5.3.1. Approach and definitions

In modern societies, transportation influences people’s opportunities to access goods, services and work or leisure activities. Transport regulation thus has a major equity dimension. In the present context, three notions of equity should be distinguished:40 horizontal equity; vertical equity; spatial equity;

Horizontal equity – sometimes called “fairness” – is concerned with the effects (costs and benefits) of transport regulation schemes on individuals who are comparable in wealth and ability.41 Horizontal equity thus implies that, for example, all high-income households living in the centre of a city should pay similar transport prices or taxes. Horizontal equity is sometimes interpreted to

40 This categorization is used by Raux and Souche (2004). Litman (1999) and PATS (2000) distinguish the same concepts, but use different terms for “spatial equity” (“vertical equity with regard to mobility need and ability” and “territorial equity”, respectively). 41 See Litman (2002), p. 50. 102 REVENUE D3 CASE STUDIES SPECIFICATION mean that consumers should ‘get what they pay for and pay for what they get’.42 This could mean that rich people who drive very polluting cars should pay more than rich people driving clean vehicles. Note that abilities are also taken into account. Thus, horizontal equity provides arguments to subsidise transport for people with special needs or make public transport more easily accessible for them.

Vertical equity focuses on the distribution of costs and benefits between individuals of different income classes.43 How are rich or poor people affected by a specific regulation scheme? How are accessibility gains, the additional financial and non-monetary costs, and revenues distributed among different groups of society? Whether a specific measure or (re)distribution is justified or fair, is not a scientific judgement. Nevertheless, vertical equity should be addressed in all case studies.

Spatial equity deals with the regional distribution of the costs and benefits of transport regulation schemes. Location is an important determinant of people’s transport needs and possibilities. Inhabitants of large cities usually have access to a broad variety of transport facilities (bus, metro, taxi, car, etc.). In contrast, for people living in rural areas, private vehicles often are the only means of transport. Higher transport prices (e.g. due to an increase in gasoline taxes) thus affect people in rural areas much more, as they cannot switch to other transport facilities. Spatial equity is often meant to guarantee a basic level of access to all people, regardless of their location or abilities. As Litman (1999) notes, applying this concept can be difficult because of the lack of universally accepted standards for transport needs.

Equity effects of transport policies can be considered separately or together with the overall distribution of income. In the first case, the question is: How are different groups or households affected by a specific regulation scheme? In the second case, we are interested in the effect of the regulation scheme on the overall distribution of welfare or income. To describe distributional effects apart from the overall distribution of wealth, it is sufficient to measure all effects and show which social groups obtain net benefits or gains. For a judgement about the resulting change of the overall distribution of wealth or income, measures of distribution are needed. A well-known measure of equality is the Gini coefficient. The coefficient measures the deviation of the actual distribution of income or wealth from a hypothetical equal distribution. An alternative, welfare-based approach is the measure proposed by Atkinson (1970). This measure is based on a utility function, where different ‘degrees of equality’ (weights of the utility of low vs. high income classes) can be chosen.44 It is included in the MOLINO model.

5.3.2. Major equity issues

In the analysis of equity implications of transport policies, the scope, pricing and revenue recycling rules are more important than organisational or technical aspects (see Figure 5-2). Case studies should describe the horizontal, vertical and spatial equity effects in each of these areas. Further explanations and potential assessment methods are given below.

Transport regulation affects income and opportunities of the population in three different ways: On the one hand, regulation schemes have an effect on the capacity of transport infrastructure. Congestion and access charges as well as HGV tolls reduce traffic. This, in turn, decreases congestion and improves traffic flows. We refer to this effect as the accessibility gains.

42 See Litman (2002), p. 50. 43 See Litman (2002), p. 50. 44 For an application of these concepts to a specific transport pricing scheme, see Teubel (2001). 103 REVENUE D3 CASE STUDIES SPECIFICATION

On the other hand, regulation involves additional costs for transport users. Commuters, leisure 1 2 travellers and road haulers have to pay congestion charges, HGV tolls, etc. Besides the financial burden, users bear other, non-monetary costs such as foregone trips or time costs for using non-priced roads. Like the accessibility gains, the additional costs of transport pricing are unlikely to affect all members of society equally. Revenues from transport pricing can be substantial. Hence, the use of transport pricing revenues is of crucial importance for equity.45 The HGV toll in Switzerland, for example, generates annual net revenues of approximately 450 million EUR.46 Revenue recycling can take many forms. The funds can be used to

- increase government spending;

- cut taxes;

- finance new transport infrastructure, or

- subsidise public transport.

Depending on the type of revenue recycling, different groups will profit from these funds.

Figure 5-2: Major equity issues of transport regulation schemes

Scope Pricing Revenue Invest- use & ment financing

Who is Prices? Special Tax cuts? Pub- New road Rules covered? tariffs? Excep- lic transport or rail capa- Sectors? 1 tions? 2 subsidies? 3 city? 4

Regulatory framework

Procurement Tenders? & implementation Contracts?

The main determinants of the magnitude of the accessibility gains and the additional costs of a transport regulation scheme are the scope, pricing and revenue recycling rules.

A scheme covering only freight traffic will not have a large effect on congestion in the peak hours. Consequently, accessibility gains are low. Comprehensive urban road pricing schemes, on the other

45 Proost (2001, p. 7) asserts that “no equity judgment is possible without discussing the use of the revenues.” This is due to the fact that toll revenues are much larger than time savings. 46 Annual revenues from the HGV fee in 2003. Source: Federal Office for Spatial Development. 104 REVENUE D3 CASE STUDIES SPECIFICATION hand, are likely to improve accessibility for many people. At the same time, they will have major distributional effects, particularly if there are no alternatives to paying charges. Uniform prices are likely to have stronger effects than prices which are differentiated by time, location, or vehicle type, since the latter allow users to (partly) avoid transport charges by adapting their travel behaviour.

The effects of revenue recycling are as diverse as the options to return these funds. If 3 4 the revenues are used to expand road capacity or increase public spending in other areas, the distribution of the benefits of the new funding should be examined. If the revenues for transport pricing are used to cut taxes, the distributional effect depends on the type of tax to be reduced. If regressive taxes such as gasoline or sales taxes are reduced, low-income households benefit. Reductions of progressive taxes (e.g. income taxes), on the other hand, benefit high-income households. In the United States, for example, the majority of taxes which are used to finance highway services are regressive (see Table 5-2). Hence, revenue recycling via cuts in regressive taxes would favour low-income households. Moreover, a reduction in the more regressive taxes directly associated with transport would go some way towards satisfying those who expect revenues from transport pricing to be earmarked for transport purposes. A reduction in flat fees such as vehicle taxation would also help to reduce the cost of driving in isolated, non-congested, rural areas where existing motoring costs may exceed the marginal social costs.

Table 5-2: Incidence of taxes used to support highway services

Tax Incidence Federal, state fuel gasoline tax Regressive State use fees Regressive State sales tax Regressive Local sales tax Regressive Federal, state income tax Progressive Property tax Regressive

Source: Giuliano (1994), Table 4, cited in Litman (1999), p. 4.

5.3.3. Assessment methods and tools

Prior to the analysis of the distributional consequences of transport regulation schemes, the effects of these schemes on transport systems have to be specified. As in the efficiency assessment, the content and the scope of the analysis of these effects will vary across the case studies. The more important equity implications are, the more detailed data are required. For some questions, the effects identified in the assessment of efficiency will be sufficient. In general, however, more research will be needed, because the analysis of the distributional impacts of regulation schemes requires disaggregated data (travel time gains by population group, income classes, trips by income groups, etc.).

Again, four methodological options are available: 1) the MOLINO model; 2) other models;

105 REVENUE D3 CASE STUDIES SPECIFICATION

3) specific/selected quantitative analysis; 4) qualitative analysis.

Option 1: The MOLINO model can be used to examine the welfare effects of different regulation schemes on affected groups. The model distinguishes between low and rich income users. The weights on the utilities of high- and low-income groups in the social welfare function are an exogenous model input parameter. Improvements in public transport accessibility for low-income users, for example, can be given a higher social weight by choosing a higher parameter for the utility of low-income users. MOLINO thus allows the assessment of vertical equity. If the model is specified for different regions (e.g. rural and urban households), spatial equity can be addressed as well. The MOLINO model does not show the effects of the regulation schemes (accessibility gains, additional costs, investment and revenue recycling) separately. Rather, it provides a measure of all welfare effects together, albeit at a highly aggregated level.

Since the MOLINO model includes only two types of users, the Gini coefficient is not a suitable measure for assessing equity. However, by choosing appropriate values for the welfare weights, wL and wH , it is possible to use a social welfare function approach. To illustrate, consider the frequently-used social welfare function

1−ε ⎧ 111−−≠εε−1 NUii⎡⎤ for ⎪()∑ilh= , ⎢⎥() W = ⎨ ⎣⎦ , ⎪ NUiiln for ε = 1 ⎩ ∑ilh= , where N i denotes the number of individuals in group i, i=l, h, U i is the utility of type i, and ε is an index of inequality aversion.47 The marginal social weight assigned to type i, wi , is proportional −ε to ()U i , which is a decreasing function of U i for ε > 0 . The actual (effective) value of ε will vary across regions and countries, and any relevant empirical information on local attitudes towards inequality would be useful to draw on if this approach is used. For sensitivity purposes it is wise to use a range of values of the inequality parameter.48

This method is only approximate because the marginal social weights depend on the U i , which in turn vary with the regulation scheme. However, unless radical regulatory reforms are entertained, the weights should not change by more than a few percent. Consequently, the weights used in the MOLINO can be assigned using the computed values of the U i for the base case, and the assigned value(s) of ε .

Option 2: Estimating accessibility gains ex-ante requires sophisticated transport models. Safirova et al. (2003), for example, use the START (Strategic and Regional Transport) model to examine the effects of different road pricing schemes on welfare and income distribution in Washington D.C. To analyse the effects of regulation schemes or their equity implications, any other models may be applied in the case studies. The MART and ASTRA-T models are not suitable for equity analyses, since they do not differentiate between different transport users. Models based upon a disaggregate zoning system provide an improved representation of the spatial equity issues which may be particularly significant in the political context.

47 The Benthamite social welfare function obtains with ε = 0 , and the Rawlsian social welfare function in the limit ε →∞. 48 See, for example, Mayeres and Proost (2001). 106 REVENUE D3 CASE STUDIES SPECIFICATION

Option 3: In the case studies where MOLINO is not applied, quantitative analyses of selected distributional effects should be conducted by developing an accounting module which summarises the most important changes in benefits and costs for the different actors (e.g. low/high income transport users, government bodies at different levels, transport infrastructure managers, transport service operators). The configuration of this module will be case-study-specific.

To calculate accessibility gains, for example, estimates of time savings on major routes could be used. This can yield insights regarding the spatial equity of transport regulation schemes. Alter- natively, user profiles could be used to assess the distributional effects of regulation schemes. After a specific regulation scheme has been introduced, accessibility gains can be identified much more easily. The number of trips or hours of travel under congested conditions, for example, can serve as indicators of improved accessibility.

Option 4: Proost (2001) highlights a particular problem associated with road pricing schemes: A region could design its transport pricing scheme in such a way that non-inhabitants pay more than marginal cost, thereby increasing the net benefit of the scheme for its own inhabitants. This phenomenon known as ‘tax exporting’ typically occurs in urban road pricing schemes. However, it may also be an issue for HGV tolls which could impose a heavy burden on transit freight transport.49 A qualitative analysis of the pricing rules could unveil obvious cases of tax exporting (e.g. discriminatory pricing). Any pricing and revenue use scheme with a strong differentiation between users or beneficiaries of subsidies should be examined closely in the case studies.

As equity is a major concern for transport pricing schemes, some schemes may include design features to mitigate negative effects on specific social groups. For road pricing schemes, there are five main design parameters:50 the basis of charging; the area covered by the charge; time period covered by the charge; discounts and exemptions; linkages to other transport charges.

Both the basis of charging and the area covered by the scheme have important implications for spatial equity. Depending on the charging approach (point charging, cordon ring, area charges, etc.), some people have to pay high charges, whereas others (e.g. inhabitants of the inner city in the case of a cordon ring) almost never pay any charges. Time-varying charges may have an impact on the vertical equity of a scheme. Peak-hour charges, for example, affect people with inflexible working hours more than others. Discounts and exemptions are the most obvious means of alleviating equity concerns.51 To mitigate the impacts of road pricing, certain social groups could be partially or entirely exempted from paying the charges. Other options include discounts or limits on the charges paid (‘caps’). In order to increase the acceptability or alleviate the social impacts of a scheme, road charges may be linked to charges on other transport modes. Examples are reduced public transportation fees or free parking allowances on parking spaces outside the urban centres (‘park & ride’). Qualitative analyses of the equity implications of regulation schemes should cover such measures and design features.

49 Such an approach would probably breach Article 72 of the EC Treaty and constitute a violation of state aid regulations, and is, therefore, unlikely. It is more probable that the imposition of HGV tolls would be associated with other tax breaks, such as reductions in operating licenses, which would compensate domestic operators through legitimate channels with a similar objective. 50 See Jones (2001), p. 5. 51 See Jones (2001), p. 6. 107 REVENUE D3 CASE STUDIES SPECIFICATION

If revenue recycling takes place via reduction of taxes, the case studies should address the question whether the tax (to be) reduced is progressive or regressive. In case revenues are recycled through investment in additional transport infrastructure, the regional distribution of investments could provide insights regarding spatial equity. Alternatively, the users of new infrastructure could be identified (through surveys, transport statistics, etc.) in order to assess vertical equity implications. This approach may also be used for other types of recycling, e.g. subsidies for public transport.

Again, an overview of the results of the equity assessment should be provided. Table 5-3 contains an example of such an overview table. For each regulation scheme within a case study, a brief summary of vertical, horizontal, and spatial equity effects as well as an overall judgement shall be given.

Table 5-3: Overview table: Equity (example)

Elements of regulation Base case Proposed scheme Optimal scheme schemes

Spatial equity: Rural area benefits Urban areas benefit Scope and investments Vertical equity: Regressive pricing Regressive pricing, Regressive pricing, Pricing, investment, scheme progressive recycling progressive recycling revenue use Horizontal equity: Exceptions for Exceptions for Pricing, investment, disabled persons disabled persons revenue use Overall impact Disadvantages for Neutral with regard Neutral with regard urban and low- to vertical equity, to vertical equity income households urban areas benefit

5.4. Technical and organisational feasibility

5.4.1. Approach and definitions

The third assessment criterion refers to the implementation of the regulation schemes analysed in the case studies. The question is whether relevant differences in technical and organisational requirements can be identified between the different regulation schemes. Implementation of the optimal regulation scheme, for example, may not be currently practical. If so, the case study work should provide an account of the constraints which prevent implementation, and actions which might be needed to overcome them. The assessment of the technical and organisational feasibility within the case studies following the approach described below will provide information about such actions.

The technical feasibility will first of all depend on the design of the pricing part of a regulation scheme. It is well known that rather complex and differentiated pricing schemes demand more sophisticated and therefore more expensive technologies and procedures for implementation than rather simple pricing schemes. It would be beyond the scope of the case studies to carry out detailed analyses of these technologies and procedures, but lessons can be learnt from the literature and from

108 REVENUE D3 CASE STUDIES SPECIFICATION a variety of demonstration projects, such as the PRoGRESS demonstrations in the urban sector52. The basic aim is to complete the picture of the efficiency implications of a regulation scheme because implementation costs are one aspect of the overall efficiency of a solution.

The question of the organisational feasibility addresses the interplay of the different actors and institutions involved in the decision-making process and in the implementation of a regulation scheme. Of course, the implementation is easier if it can be handled within the existing distribution of tasks and responsibilities, i.e. if this distribution is not a relevant implementation barrier.

The EU-research project AFFORD53 and especially deliverable 2B (Milne et al., 2001) carried out an in-depth analysis of the legal and institutional barriers for the implementation of new pricing regimes within multi-modal, spatial and geographic and inter-sectoral settings. Though the analysis is restricted to pricing, the conceptual approach can be transferred to regulation schemes as discussed in this project.

In the following sections we describe how the question of technical and organisational feasibility should be addressed in the case study work. The general framework developed below will have to be transferred and adjusted to the specific case-study situation.

5.4.2. Major technical and organisational/institutional issues

As mentioned above technical and organisational matters are first of all related to the regulatory framework and to procurement and implementation processes (illustrated in Figure 5-3).

Figure 5-3: Major technical and organisational issues

Scope Pricing Revenue Invest- use & ment financing

Prices? Tax cuts? Who is New road or Rules Special tariffs? Public transport covered? rail capacity? Sectors? 1 Exceptions? subsidies?

Regulatory What actors, Who sets Who decides on Who makes framework functions? prices or revenue use? investment de- 2 charges? 2 Financing? 2 cisions? 2

Private Payment? Revenue col- Procurement Tenders?Tenders? or public pro- Enforcement? lection mana- & implementation Contracts? vision? 3 Exceptions?4 gement? 4 5

52 See http://www.progress-project.org. 53 AFFORD - Acceptability of Fiscal and Financial Measures and Organizational Requirements for Demand Management, Final Report and Deliverables 1, 2A, 2B and 2C, Project funded by the European Commission under the Transport RTD Programme of the 4th Framework Programme, see http://data.vatt.fi/afford/. 109 REVENUE D3 CASE STUDIES SPECIFICATION

The latter of course depend on the rules that have to be implemented. Moreover, a broad variety of public and private institutions are involved in the process of setting tariffs, collecting revenues, assessing investment projects, etc. a) Technical feasibility

4 The technical requirements to implement the regulation schemes will be described in the second part of case study work (see Figure 1-3). The assessment of the technological feasibility in the third part of the case study work should address three blocks of questions. The judgement of the technical feasibility will rely on the answers given to these questions: Availability and reliability of technology

- Is it possible to implement the pricing system using existing technology?

- Has the reliability of the technology been proven in practice?

- Does it take into account the real-world conditions in the case study area? Is it adapted to these conditions? Interoperability and compatibility of technology

- Is the system compatible with existing other (national, international) pricing systems?

- Are there relevant interoperability issues (e.g. compatibility with ongoing developments at the international level)?

- Do specific standards or norms exist for the technology in question? Are such standards or norms being prepared currently? Costs of the pricing system for the infrastructure owners and the users

- What is the level of the initial investment costs?

- What is the level of the operation costs (influenced, for example, by simple/complex solutions for non-frequent users of the priced infrastructure)?

- etc.

As mentioned above, the case studies will not have to carry out in-depth cost analysis. The objective is to arrive at plausible estimates supported by evidence.

The description of the theoretically optimal schemes may not be specific enough to allow an assessment of their technological needs. However, it should at least be examined to what extent it is technically feasible to measure and record the data needed to implement a theoretically optimal scheme (emissions, noise, traffic density, etc.) with existing technology and at reasonable cost.

The feasibility of investments is not a technological matter. However, the investment decision- making process is often burdened by organisational problems such as complicated multi-level government decision processes, insufficient delineation of competences, lack of transparency, etc. An important part of the case studies is the identification of critical organisational issues both on the pricing and on the investment side (see next paragraph). b) Organisational feasibility

If a regulation scheme under discussion should be implemented, what changes and/or 1 2 5 adjustments in functions, responsibilities and co-operation of the actors involved in transport policy-making and implementation would be necessary? The assessment of these changes is the key issue of the evaluation criterion "organisational feasibility".

110 REVENUE D3 CASE STUDIES SPECIFICATION

In more concrete terms, the following points will have to be addressed in the case studies: Implementation within the existing organisational and institutional framework or need for a comprehensive reform: The implementation of a regulation scheme is easier, if it is possible within the existing organisational and institutional framework, if it can build on well- known co-operation patterns, on well-established procedures, etc. The case studies will have to judge whether this is the case or not for a specific regulation scheme. However, if the case study work shows a need for a comprehensive reform of the distribution of tasks and of the co-operation between the different authorities, this should not only be considered as an implementation barrier. Rather, the prospects that such a reform can be brought about should be weighted too. Number of institutional and administrative levels involved in implementation and operation: How many institutional and administrative levels must be involved in the implementation of a specific regulation scheme? The AFFORD project made it clear that this number matters: "The significance of this issue to transport pricing policy is, quite simple, that the number of administrative levels which need to be involved in formulating and implementing policy will affect the logistical complexity of achieving policy goals. It might be reasonable to expect that the greater the number of administrative levels the greater the legal and institutional complexity (and associated barriers) will prove to be".54 Thus, the case studies will have to check for the different regulation schemes in which sphere of responsibility the formulation and implementation would fall. Number of public authorities and private actors involved in implementation and operation: A similar point to the preceding one is the question of the number of institutions and actors that need to be involved to ensure a proper implementation of a regulation scheme. Especially regulation schemes covering several modes will face the problem that different authorities are responsible for the different modes. A higher number of public and private actors involved does not only increase the need for co-ordination, but it also increases the pro- bability of disparate interests - and reduces by this the chance of a successful implementation. The case studies will have to check for the different regulation schemes how many and which public authorities have to co-operate to implement the schemes properly. And they will have to judge whether or not this is an organisational implementation barrier or not. Major changes in financial flows between different government levels and different public actors: Changes of monetary flows between different public actors are a very sensitive issue because they are connected with changes in political power. The AFFORD project concluded that any major changes in existing revenue streams and money flows between government levels would almost inevitably result in conflicts based on the perceived changes in the balance of power they implied. In particular, national governments might be expected to oppose vigorously any significant reduction in revenues from existing transport taxation, or any attempts to constrain how it might be spent and/or redistributed, on both political and budgetary grounds.55 As will be shown in section 5.5, a conflict may arise with acceptability issues because a strong involvement of the regional and local level can be crucial for the acceptability of a regulation scheme.

In Deliverable 2 of the REVENUE project, conditions have been identified under which 3 5 an involvement of the private sector in the implementation and operation of a regulation

54 VATT (2001); p. 56. 55 VATT (2001); p. 67. 111 REVENUE D3 CASE STUDIES SPECIFICATION scheme is favourable.56 Arguments in favour of such an involvement can also be found in transport policy documents at the international and at the national level. Beside favourable conditions from the point of view of the public, private sector involvement of course also requires that there is a corresponding interest within the private sector.

The case studies will have to identify the incentives for the private sector to take over tasks and responsibilities within the different regulation schemes.

Under the assessment criterion "organisational feasibility" we also include a brief judgment of 2 the legal situation. The feasibility of a scheme is questionable if the legislation contradicts the objectives of the regulation scheme. Of course, the legislation can be adjusted. The feasibility of the scheme is particularly critical if its objectives and design are contradictory to general legal settings (e.g. principles of taxation); legal settings at higher government levels.

5.4.3. Assessment methods and tools

Qualitative analysis approaches will dominate the case study work. Option 1 is relevant for case studies in which questions about the organisational and institutional requirements to implement a new regulation scheme are a research focus. In this case, new empirical work is possible – most probably in the form of expert interviews. Chapter 6 of this deliverable contains guidelines and methodological support for carrying out these types of empirical analysis. Option 2 is relevant if the organisational and institutional feasibility is not a key issue of the case study work (most case studies). The assessment will then be based on the exploitation of existing studies and on expert judgment by the case-study teams.

As in the case of the assessment criteria "efficiency" and "equity", the findings of the assessment should be presented in a synthesis table. Table 5-4 is an example of such a table.

Table 5-4: Overview table: Technical and organisational feasibility (example)

Technical and organisational / Proposed Optimal Additional Base case institutional issues scheme scheme scheme Availability of technology – + – – + Interoperability and compatibility + + – + + Costs of the technology + + – – + + etc. + + + + 0

+ + very positive + positive 0 medium – negative – – very negative

56 Proost et al. (2004), p. 27 ff. 112 REVENUE D3 CASE STUDIES SPECIFICATION

5.5. Acceptability

5.5.1. Approach and definitions

The fourth evaluation criterion refers to the question whether we can find relevant differences in acceptability between the regulation schemes developed within the case studies. The aim is to come to a well-founded judgment of the acceptability of the regulation schemes and explanation of the differences.

Acceptability is understood as a quality of a regulation scheme, namely the quality that the scheme is perceived as being acceptable. In a democratic system, the chance of a regulation scheme to be implemented only exists if the scheme is not opposed by a majority of those actors who make decisions in the relevant policy field.

Clearly, this becomes most critical in the road sector where the imposition of new charges on motorists can be anticipated. In the public transport, air and sea sectors, pricing and regulation regime changes are less likely to be publicly visible, and acceptability will be less significant. An example is the road haulage sector: Although HGV tolling nominally impacts upon industry rather than individuals, recent events have demonstrated that the response of road haulers to new taxation can be highly vocal.

The approach and the conceptual procedure chosen is based on the outcome of the EU-research project Pricing Acceptability in the Transport Sector PATS.57 Accordingly, a similar stepwise procedure is considered for the case study work to assess the acceptability of the regulation schemes under discussion: Step 1: Identification of the key acceptability issues of the regulation schemes (section 5.5.2); Step 2: Identification of the stakeholders and examination of the influence and degree of organisation of the stakeholder groups (section 5.5.3); Step 3: Assessment of the impacts of the regulation schemes as perceived by the different stakeholder groups and of the resulting positions towards the regulation schemes (section 5.5.4); Step 4: Estimation of overall acceptability, based on the findings of the steps 2 and 3 (section 5.5.5).

The final section 5.5.6 deals with possible approaches to address these four steps in the case studies.

We don’t address the question of general measures to increase acceptability of regulation schemes. Communication and participation strategies are mostly mentioned in this context. Such strategies would be relevant for each new regulation scheme to be implemented. Of course, regulation schemes with a rather low acceptability would need more support from these measures than schemes that do not have severe acceptability problems.

As in the case of the other three assessment criteria, the procedure described in the following sections should be considered as general framework for the case-study work. It is not expected that each case study conduct each of the four steps in the same level of detail. The case study 7, for example, deals with the road haulers' acceptability of HGV charges. In this case, the overall

57 PATS - Pricing Acceptability in the Transport Sector, Final Report and Deliverables 1 - 4, Project funded by the European Commission under the Transport RTD Programme of the 4th Framework Programme, see http://www.tis.pt/proj/pats/pats.html 113 REVENUE D3 CASE STUDIES SPECIFICATION acceptability of HGV charges will not be judged (step 4) and the relevant stakeholder group is immediately given (step 2).

5.5.2. Step 1: Identification of the key acceptability issues of a regulation scheme

Starting from the work in different European research projects58 one can identify eight key issues which determine the acceptability of a specific regulation scheme and which are either directly influenced by the specific design of the elements of a regulation scheme or by the impacts of the scheme as a whole.

Not all of these key issues will be of the same relevance within the different case studies. It will be a task of the case-study work to define which of the issues briefly summarised in the following paragraphs must be addressed, i.e. which of the issues are relevant for the acceptability of the regulation schemes under discussion. a) Problem perception and main public concern

A basic requirement to achieve public acceptance for a new regulation scheme is that the scheme addresses issues that are considered serious and urgent problems. Each change in policy consumes resources and causes adjustment costs. The need for action at all must be justified.

In general, traffic problems are considered by a large fraction of the public as serious and urgent, but there are of course differences between the case-study contexts; e.g. between urban and rural areas. Whereas negative effects of transport, such as air pollution and congestion, may dominate in urban areas, problems of insufficient accessibility may be the key concerns in rural areas. b) Principles, approaches and data sources used to design the regulation scheme

As far as possible, the stakeholder groups and the public should understand the reasons for the proposed design of a regulation scheme. The scheme should be considered as suitable to address the major concerns and problems identified in paragraph a) above.

In this context, the following points are important: purpose/objective of the proposed design; theoretical and scientific foundation; transparency in methodologies, calculations, etc.; reliability of input data.

In general, it seems to be difficult for theoretical argumentation and concepts to achieve a strong position in acceptability discussions in comparison to practical arguments and real impacts.59 This difficulty is increased by the fact that there is no universally accepted concept for transport pricing and revenue allocation among the relevant expert groups (including economists).

58 PATS – Pricing Acceptability in the Transport Sector, CUPID – Co-ordinating Urban Pricing Integrated Demonstrations, PRIMA – Pricing Measures Acceptance, AFFORD - Acceptability of Fiscal and Financial Measures and Organizational Requirements for Demand Management. 59 See VATT (2001). 114 REVENUE D3 CASE STUDIES SPECIFICATION c) Perceived effectiveness and efficiency of the regulation scheme

The acceptability of a regulation scheme increases if it can be shown that the scheme effectively mitigates the perceived traffic problems and concerns; and the scheme should do this in an efficient way, i.e. the efficiency as discussed in section 5.2 should be high and should be achieved with low implementation costs. With regard to the latter, the well-known trade-off between the need of sophisticated solutions (e.g. to implement social marginal cost pricing which requires rather highly differentiated prices) to ensure efficiency and the comparatively high implementation costs of such solutions has been mentioned in section 5.4.

Points similar to those mentioned under paragraph b) are key success factors (e.g. reliability of methods used to assess the problem-solving contribution of a regulation scheme). d) Allocation of tasks and responsibilities for designing and implementing a regulation scheme

In the theoretical work of the REVENUE project (see chapter 3), the distribution of tasks and the allocation of responsibilities are discussed as considerations that influence the efficiency of a regulation scheme. The allocation is also relevant for the acceptability of a regulation scheme.

It is impossible to define in a general way a distribution of tasks and of responsibilities that is likely to be acceptable. It can only be done in the context of a concrete case. However, from the acceptability analysis in the literature and in projects such as PATS, certain guidelines can be derived: The international level seems suitable for the decisions concerning basic principles and rules (e.g. pricing principles, rules for cost and benefit calculation) as well as standards for technologies and procedures in revenue collection. In the case of regulation schemes with a limited geographical scope, an involvement of local bodies and authorities in implementation can increase acceptability. Arguments are:

- better knowledge of regional/local conditions;

- better control of local authorities by those who are affected by the scheme;

- correspondence with the subsidiarity principle.

These arguments in favour of an involvement of local authorities may be inconsistent in cases where vertical or horizontal tax competition militates against this involvement because of efficiency reasons (see chapter 3).

The distribution of tasks and allocation of responsibilities should be chosen in a way that limits the emergence of new difficult interfaces and co-ordination needs between the actors involved in transport policy. It is obvious that each substantial change in responsibilities and in financial flows (e.g. between bodies of different government levels) poses this danger. The acceptability of private sector involvement in the implementation of a regulation scheme will depend on the status and on the experiences with liberalisation and privatisation in the relevant part of the transport sector. It may be easier in the air transport than in the rail sector. A key requirement to achieve acceptability is that the regulatory framework of the regulation scheme prevents the emergence of monopolistic behaviour of private actors.

The distribution of tasks and responsibilities matters not only from a purely functional point of view. Credibility is crucial too: the trust that stakeholder groups and the public have in the institutions (e.g. an investment agency, governmental authorities) and persons who are responsible for the development and/or implementation of a regulation scheme. Governance structures and

115 REVENUE D3 CASE STUDIES SPECIFICATION measures (e.g. the existence of a process of public and open debate about the opportunity of the regulation scheme) are crucial to establish this credibility. e) Technologies needed to implement the regulation scheme

The main issue here is the technology needed to implement the pricing part of a regulation scheme as described in part 2 of the case study work (see Figure 1-3) and assessed in section 5.4 above).

In the PATS project a matrix has been developed showing the potential of each functional element to influence different acceptability requirements (1 = very low potential to influence and 5 = very high potential to influence acceptability requirements). The assessment is based on expert judgment.

Table 5-5: Matrix of functional elements and acceptability requirements

Acceptability Fairness Reliability User Transparency Privacy Operating Com- requirements friend- costs pliance liness Functional Price set- Collection Ex-ante Ex-post dimensions of ting informa- informa- pricing sys- tion on tion on tems price price paid Object of 4 2 1 4 3 2 1 4 2 transaction Price structure 5 5 2 4 5 2 1 5 2 Moment of 1 4 5 5 4 1 4 5 4 payment Payment in- 4 1 4 5 3 3 4 5 3 strument Point of con- 4 4 1 3 1 3 1 5 5 trol Identification 2 1 1 4 1 1 5 3 5 of client Registration of 2 3 3 3 1 5 4 3 4 transaction

Source: TIS.PT et al. (2001), p. 28, explanation of notions: - Object of transaction = Transport-related services for which the payment is made - Price structure = Components (variable/fixed), flat rate, bonus etc. - Moment of payment = Before, during or after consumption of service - Payment instruments = Means for payment, such as cash, smart-cards, pre-payment etc. - Point of control = Point or moment when payment is controlled - Identification of client = Identification (Y/N) of client during control of payment - Registration of transaction = The way the payment and client are registered (simple receipt, storage within database, etc.)

The case studies will have to define which of the functional elements mentioned in Table 5-5 (and further case-study-specific functional elements) are relevant in the concrete case, i.e. which of them differ between the regulation schemes discussed in the case studies. The expert judgment contained in the table can help to set priorities. From the acceptability point of view the analysis should begin by referring to those elements that have a high / very high influence on acceptability requirements (i.e. concentration on cells with a score of 5 in Table 5-5 in order to reduce the comprehensiveness of the analysis).

116 REVENUE D3 CASE STUDIES SPECIFICATION f) Use of revenues

The use of revenues is decisive for the perception of fairness (paragraph h) below) and for the distributional effects (paragraph g) below) resulting from a regulation scheme and therefore a key acceptability issue. We see three points that should be addressed in the case-study work when the use of revenues is discussed from an acceptability point of view: Earmarking: A number of studies on acceptability of transport pricing have concluded that earmarking of revenues for transport-sector-related purposes is a key requirement to achieve public acceptance. The theoretical work within the REVENUE project has used political economy models to derive arguments in favour of earmarking. Voters can consider earmarking as an instrument to prevent politicians from using revenues from transport pricing as another element of general taxation. Though it seems to be clear that earmarking matters, the case studies will have to analyse which type of earmarking is more or less acceptable to the different stakeholder groups. It is, for example, clear that the acceptability of a regulation scheme proposing that revenues from road transport pricing flow back into the road transport sector will strongly differ between the different stakeholder groups. It may be more acceptable if the revenues are used to offer real alternatives to those transport services that are most affected by the change in pricing. The spatial scope seems to be crucial: Revenues collected in a certain area should not be used elsewhere. Acceptability of a regulation scheme may increase if the revenues from transport pricing are used to reduce specific impacts and outcomes of the pricing part of the scheme (e.g. correction of the regressive effect of the charges). The perceived fairness will change. Use of revenues to increase overall efficiency: The theoretical work of the REVENUE project has shown60 that welfare gains can result if revenues from transport pricing are used to reduce distortionary taxes such as the labour tax. Here, a “fundamental” trade-off between efficiency (no earmarking) and acceptability (earmarking) can arise which may also exist in the case studies. The case of the Dennis Agreement (introduction of urban road pricing in Stockholm) illustrates this trade-off:61 When people have been asked what type of revenue uses they favour, the use for public transport achieved a much higher response than the use for lowering income taxes. In the UK, the use of road pricing revenues to eliminate the regressive vehicle tax and perhaps to reduce fuel taxation, would appear to provide a valid compromise. g) Distributional effects and equity issues

Potential distributional effects and equity impacts of regulation schemes have been discussed in section 5.3 above. The resulting impacts on people and institutions, as well as on other actors (e.g. social groups, competing firms, competing regions etc.), strongly influence to what extent the scheme is accepted by the different stakeholder groups.

Equity-related arguments are very often used to argue against the implementation of new regulation schemes in the transport sector. h) Fairness of the design of the regulation scheme

The chance for a regulation scheme to achieve public acceptance increases if the distribution of the costs and benefits of the scheme is perceived as fair. It is clear that the perception of fairness strongly depends on the use of revenues and distributional effects as discussed above.

60 See Proost et al. (2004), chapter 3. 61 Swedish Society for Nature Conservation (1998), quoted in TIS.PT et al. (1999), p. 53. 117 REVENUE D3 CASE STUDIES SPECIFICATION

The perception will differ between different actors and stakeholder groups and will depend on ethical aspects as well as on their specific interests. The argument of a rather equivalent distribution of costs and benefits seems to be relevant for large parts of the public ("those who bear the costs should also benefit"). Lobby groups will typically have other objectives.

In this context, exemptions are another key aspect of fairness. Does the regulation scheme incorporate (or can it integrate) special treatment of social groups (elderly/young people, residents/non-residents, frequent/non-frequent users etc.); special transport services (e.g. taxis); certain regions (e.g. regions with a low economic performance).

Here, conflicts between efficiency and acceptability arguments can be expected.

Finally, national and international harmonisation and co-ordination of implementation become relevant issues.

5.5.3. Step 2: Stakeholder analysis

The stakeholder analysis consists of two elements: Identification of the stakeholder groups and assessment of their influence in the relevant political decision-making process.

A sound analysis would require that each phase of the decision-making process be considered separately. According to Deliverable 1 of the REVENUE project the following five phases would have to be distinguished:62 agenda setting; conceptual and preparatory phase; decision-making phase; implementation phase; operating and controlling phase.

From Deliverable 1 and the literature, a general list of stakeholder groups can be derived. It will be up to the case-study work to adjust the list according to the specific situation of the case study. The five phases listed above will help to structure the process of stakeholder identification. Actors within the transport sector (public transport operators, haulage companies, shippers, airlines, operators of transport infrastructure etc.); Industry and services (retail, vehicle manufacturing, financial sector etc.); Organisations (organisations of the actors in the transport sector, transport safety agencies, environmental organisations, chambers of commerce and further organisations of the manufacturing and service industry, trade unions, specific interest groups, leisure/tourist organisations, etc.); Public institutions (departments/offices at the different government levels); Public (car users, residents, voters, employees, tourists, etc.).

62 See Laird et al. (2004), section 4.2.4. 118 REVENUE D3 CASE STUDIES SPECIFICATION

The influence of the different stakeholder groups depends on their power and degree of organisation. The number of active members, the commitment of the members, financial resources and the reputation of the organisation or group are key characteristics of powerful stakeholder groups. The case studies will have to assess the influence of the different groups identified for the specific case.

5.5.4. Step 3: Assessment of impacts as perceived by the stakeholder groups

Step 3 constitutes the core part of the acceptability analysis. The case studies must determine the attitudes or positions of the stakeholder groups (step 2) towards the key acceptability issues (step 1) for the different regulation schemes.

These attitudes or positions will depend on the impacts and consequences as assessed in Sections 5.2 (efficiency), 5.3 (equity) and 5.4 (technical and organisational feasibility), and especially on the perception of these impacts and consequences by the different stakeholder groups.

5.5.5. Step 4: Assessment of the overall acceptability of the regulation schemes ("conclusion")

Together, the results of step 2 (stakeholder groups and their influence) and step 3 (impacts on and especially attitudes of stakeholder groups) will yield the information or "input" to assess the overall acceptability of the regulation schemes on the agenda. The aim is to assess the prospects that the various regulation schemes will be implemented, i.e. to be successful in the case-study specific political decision-making process.

Regulation schemes which are perceived to have significant negative impacts on well-organized, influential stakeholder groups will have a low chance for success in the political process. In contrast, schemes whose negative effects are felt only marginally or by small interest groups are likely to face smaller acceptability problems.

5.5.6. Assessment methods and tools

Each case study will carry out the four steps mentioned in the preceding sections. However, assessment methods and the tools applied will differ depending on the focus of the case study.

Differences in the methodological approaches adopted will arise in step 3 (assessment of impacts as perceived by the stakeholder groups): Option 1 (acceptability questions are a focus of the case study): In these cases, new empirical work would be possible such as:

- company surveys;

- key informant surveys;

- interview programmes;

- expert workshops. Chapter 6 of this deliverable contains guidelines and methodological support for carrying out these types of empirical analysis. Option 2 (acceptability questions are not a focus of the case study): The assessment of acceptability is based on the evaluation of existing acceptability studies and on expert judgment by the case-study teams:

119 REVENUE D3 CASE STUDIES SPECIFICATION

- Evaluation of existing acceptability studies covering the relevant elements of the regulation schemes under discussion: As mentioned above, some case studies can profit from existing studies discussing the acceptability of important elements of the regulation schemes under discussion.

- Expert judgment of the case study teams: The inputs for this judgment are the assessment of the efficiency and equity implications according to Sections 5.2 and 5.3 as well as the assessment of the technical and organisational feasibility (Section 5.4). Based on this information, the case-study team will derive the attitudes and positions that can be expected for the different stakeholder groups.

Again, the results of the analysis should be presented in an overview table. Based on the work on acceptability in the DESIRE project, Table 5-6 is a proposal for such a table. It contains an additional dimension in comparison to the overview tables in the preceding chapters, namely the information about the influence on acceptability.

The case studies should produce for each regulation scheme one final summary table like Table 5-6 containing those key acceptability issues that are affected differently by the alternative regulation schemes.63 Of course, the content of the columns (relevant stakeholder groups) and the rows (key acceptability issues) will have to be adjusted to the specific case-study situation.

Table 5-6: Positions and influence of stakeholder groups: Result presentation table

Institutions Citizens

Key acceptability issue Promoters Haulage companies Shipping industry Business (esp. industry) manufacturing pressure Environmental groups Others Directly exposed citizens Consumers taxpayers and Voters Others

a) Problem perception and main public concern Perception of environmental problem +/- + + + + + + + Perception of congestion problems + + + + - + + + Perception of transport financing problems + + + + - - + +

b) Principles, approaches and data sources used Efficiency-oriented pricing (SMCP) +/- - +/- +/- + +/- +/- +/- Cost recovery-oriented pricing + +/- +/- +/- + + + + Target-oriented pricing +/- - +/- - + + + +

c) Perceived effectiveness and efficiency ...

Influence on acceptability high medium low

Basic source: COWI et al. (2003), p. 205

63 Some of the acceptability issues do not differ (e.g. the problem perception). These can be summarised in a separate table. 120 REVENUE D3 CASE STUDIES SPECIFICATION

6. Data collection

6.1. Introduction

This chapter aims at providing guidance for the data collection carried out in the case studies of Work Packages 4 and 5, particularly where the MOLINO model will not be exclusively applied. A first distinction shall be made between primary and secondary research. Primary research aims at collecting original data with the direct purpose of solving the research problem in hand. Secondary research, also known as desk research, is already available since it has been collected for other purposes. In this chapter, some data collection techniques will be described, highlighting the associated pros and cons.

6.2. Scope The case studies to be carried out in Work Packages 4 and 5 use several models to address equity and efficiency issues, of which the previously mentioned MOLINO will be the most commonly used model. The objective of the MOLINO model is to assure a uniform methodological approach for assessing revenue use from transport pricing, therefore allowing for the comparability of the results. The main objective of this chapter is to provide guidance on data collection for assessing acceptability and technical feasibility of transport pricing and revenue allocation schemes, as it is assumed from the outset that the analysis of equity and efficiency aspects will be dealt by the MOLINO or another model.

The choice of the appropriate method for the analysis of acceptability and technical feasibility mainly depends on the following factors: Specific objective of the case study. For instance, if one aims at getting a very detailed insight on the complexity underlying the attitude of the different user groups it might be recommended to follow a full qualitative approach, using techniques like personal interviews or focus groups. On the other hand, a thorough analysis of specific variables, aiming at providing direct input to decision making generally requires the use of quantitative methods. Prior knowledge of the issue to be investigated. When the researcher possesses little prior knowledge of the issue to be investigated, qualitative techniques are strongly recommended, not only for the reasons pointed out above, but also to help in the formulation of further quantitative research work. Research resources available. As different methods imply different resources, this factor also plays an important role in researcher’s method choice.

6.3. Data collection techniques Well-known techniques used in the collection of primary data include interviews, surveys, focus groups, projective techniques and observation. Secondary (or desk) research uses data that has been collected for other objectives than the ones at stake. At the same time, we can also distinguish between qualitative and quantitative data. The following figure contains a classification of methods as well as reference to the section where each method is described.

121 REVENUE D3 CASE STUDIES SPECIFICATION

Figure 6-1: Classification of methods for data collection

Given the various data collection methods available, which one is the one to choose for a given case study?

For acceptability analysis purposes, quantitative techniques are not always usable. Furthermore, there are several reasons to use qualitative research: 1. Sensitive information. Policy-makers and stakeholders may refuse to provide sensitive information or even provide incorrect information for strategic reasons. 2. Complex phenomena. Structured questions might sometimes be inappropriate to capture complex phenomena such as road pricing schemes – often there is considerable political trading involved, or pricing schemes have been linked with other non-transport related issues. 3. A wider perspective. The objective of qualitative research is to gain a comprehensive and complete picture of the whole context in which the pricing schemes occur.

Therefore, qualitative data can play an important role in supporting decision-making not only in cases where the researcher already has a good insight of the research problem, but also when there

122 REVENUE D3 CASE STUDIES SPECIFICATION is a need to have an exploratory overview. However, researchers may wish to include quantitative data to supplement their findings.

Another aspect to be considered before starting out is validity. Validity stands for the extent to which a study accurately reflects or assesses the specific concept that the researcher is attempting to measure. While reliability is concerned with the accuracy of the actual measuring instrument or procedure, validity is concerned with the study's success at measuring what the researchers set out to measure.64

Researchers should be concerned with both external and internal validity. External validity refers to the extent to which the results are generally valid or transferable (most discussions of external validity focus solely on general validity).65 Reference to transferability is made because many qualitative research studies are not designed to be generalized.

Internal validity refers to (1) the rigour with which the study was conducted (e.g. the study's design, the care taken to conduct measurements, and decisions concerning what was measured) and (2) the extent to which the designers of a study have taken into account alternative explanations for any causal relationships they explore. In studies that do not explore causal relationships, only the first of these definitions should be considered when assessing internal validity.

6.3.1. Secondary sources and previous research work

For the purpose of secondary data collection, other research projects could be consulted. A list of other relevant transport research projects is given in Annex B.

6.3.2. Interviews

The personal interview is the most popular technique for primary data collection and aims at using the knowledge and experience of key-informants, familiar with transport pricing and use of revenues. When selecting people to be interviewed, one should include people with differing points of views and personal in-depth interviews should be carried out with these agents of the transport system. In an integrated approach the following potential groups of respondents should be considered: Decision-makers and Politicians, such as: - Transport ministries; - Ministries of economic affairs and finance ministries; - Land-use planning authorities; - Environmental authorities; - Local authorities. Infrastructure providers (motorway operators, airports, port authorities, railway infrastructure managers); Transport operators (national railways, private or semi-private rail companies, airlines, urban transport operators, road haulers, shipping companies); Interest associations (touring clubs, associations of road haulers, consumer associations, organisations of opponents to transport pricing and of supporters such as environmentalists).

64 See Russ-Eft (1980). 65 See Campbell and Stanley (1966). 123 REVENUE D3 CASE STUDIES SPECIFICATION

The main people/institutions to be interviewed are those that can provide a good insight into how transport pricing policy is developed, planned and implemented. Additionally, user groups and operators can provide an overview of how pricing schemes are perceived and appreciated by the public at large, as well as the relevant industry branches.

When selecting people for individual interviews, one must take care to avoid overlaps within one case study. First, the key informants should represent a heterogeneous sample. Second, additional information on country-specific pricing issues and on the legal and institutional frameworks are to be collected from those who are more knowledgeable. The distinction between policy makers and transport providers & users should make it possible to collect this information from respondents with different levels and extents of responsibility, experience and competence.

Secondary information sources, such as previous study results, should be analysed in order to allow cross-checking of information.

Interviews can be closed or semi-structured. Both are described in the following sub-sections.

6.3.3. Closed-question interviews

On face-to-face interviews data is usually collected using a very rigid or 'structured' questionnaire, mainly composed by closed questions, allowing for an easy comparison of the data. Main advantages of this method are a high degree of objectivity and a strong focus; and easy processing of results; this type of interview can be considered a quantitative data collection method.

Closed-question interviews are mainly used in surveys with large data samples.

6.3.4. Semi-structured interviews

When the objective is to collect qualitative data exclusively, semi-structured interviews are most often the technique to be applied. In those cases, REVENUE researchers will focus on in-depth interviews and depend upon more open forms of questioning (such as semi-structured interviewing which will be discussed more in detail below).

Unlike the standard questionnaire framework, where detailed questions are formulated in advance, semi-structured interviewing starts with more general questions or topics. These interviews are conducted in an open framework that should allow for focused, conversational, bidirectional communication. The main objectives are as follows: to obtain specific qualitative information from a sample of the stakeholders; to obtain general information relevant to specific issues, i.e. to probe for what is not known.

The major benefits of this method lie in the fact that they enable topics not anticipated by the interviewer, but of particular significance to the interviewee to be addressed. It also confirms what is already known but also provides an opportunity for learning. Often the information obtained from semi-structured interviews will provide not just answers, but also a comprehensive explanation of the reasons behind the answers.

In practice, the following steps ought to be taken when carrying out semi-structured interviews:

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1. Design an interview framework. Include some topics or questions for discussion – the skill is to cover the identified topics whilst allowing some flexibility to cover relevant issues raised by the interviewee. 2. Set a time limit and communicate it to the interviewee when scheduling the meeting. An interview should normally take around 45 minutes to 1,5 hour. 3. Ideally record the interview. Alternatively a second interviewer should take notes. The main interviewer must take only brief notes during the interview. Immediately following the interview elaborate upon the notes. 4. Analyze and record the information at the end of each interview, possibly with the assistance of the recording.

One has to be careful, as a lot of extra information may surface during interviews, so it may take some practice for the interviewer to find the balance between open-ended and focused interviewing. An experienced interviewer is essential for such a task. Also a common mistake should be avoided: to consume too much time in the first general questions, consequently hurrying the final and most important questions due to lack of time.

6.3.5. Focus groups

Focus group interviews are interviews with a group of people that is allowed to interact and discuss, in a natural but semi-structured way. The discussion is led by a moderator and the main purpose of the focus groups is to create a forum where participants are comfortable enough to freely state their wishes and behaviour, and thus to give the moderator/interviewer a good insight in what the focus group participants think and feel. This survey technique’s main objective is to create new ideas. It is fundamentally exploratory and very good for complex and subtle matters in dynamic environments. The main limitation of focus groups consist of providing no quantitative output since the participants state their opinions and behaviour but there is no guarantee for the actual future behaviour of those agents66, therefore allowing strategic answers. They do, however, provide guidance for the issues to be addressed in subsequent quantitative surveys. Participants in these focus groups can be members of the public with no specific expertise in the field of transport pricing, or may target specific groups such as car drivers, HGV drivers etc.

A very important consideration when analysing the findings from focus groups is that respondents in this situation are expressing their feelings towards a subject. At times the respondents may state things that are factually incorrect but these issues are important to understand in the wider context of either further survey work or policy implementation. Misconceptions are as important to understand as correct perceptions. The aim of this method is to create an environment in which a target group can express its opinions about a subject as unbiased as possible. Group influences in real life are simulated during the discussion in order to understand the respondents’ reaction to other people’s attitudes and to evaluate how strong their views are towards a certain subject.

How to set up a focus group session?

A focus group can be homogeneous in nature, as conflict and excessive interaction about side issues must be avoided, but sometimes it is helpful to have a range or participants to encourage debate. Typically a balance by gender, age, etc is useful. People must also have sufficient exposure and experience with the topic covered, but must not be regular participants in other focus groups, as this would lead to non-spontaneous and therefore less useful answers. Typically, a focus group session

66 See Malhotra/Birks (2003). 125 REVENUE D3 CASE STUDIES SPECIFICATION lasts between one and a half to two hours. Such sessions are always recorded. This means that a transcript can be prepared.

The moderator must not ask any suggestive questions, but can probe, and keep the discussion going along the lines set out in a topic guide. The moderator has a strong influence on the discussion and will also have a central role in the analysis and interpretation of the data. The moderator should also have a good understanding of group dynamics. To list some of the qualities that a moderator should have: 1. Empathy with the participants. The moderator must make participants feel comfortable and at ease, so that they will speak more freely. 2. Permissiveness. The moderator must not try to steer the discussion too much, but allow the participants to give their own direction to the discussion. 3. Involvement. The moderator must encourage and stimulate the group discussion, this will include joining the discussion personally, if the focus group members are reluctant to speak themselves. 4. Flexibility. The moderator must be able to probe topics which had not been anticipated. 5. Tact. The moderator must ensure that every participant is able to contribute and that discussion is neither dominated by one attendee, nor by discussion of irrelevant topics. 6. Observation skills. The moderator must be able to observe thoughts, feelings and expressions that the participants show throughout the discussion.

When planning a focus group session, one must first examine the problem to be investigated; usually this will be known beforehand, but a clear definition of the issue is essential for a good preparation of the focus group. Once the objective has been established, a “topic guide” can be developed. This is a list of issues to be discussed in the session, and can have the form of specific questions, but is normally a range of discussion topics. A series of open (why, what, which, how) questions are useful in case the discussion slows down. Next, a profile of the group members is formulated, and the screening can begin, and a suitable location can be selected. This scheme is shown in the following figure.

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Figure 6-2: Steps in preparing a focus group

Clarify research problem and objectives ⇓ Clarify the role of focus groups in fulfilling ⇓ Specify issues to be develop in focus groups ⇓ Specify target participants ⇓ Specify location ⇓ Recruit group members ⇓ Run a test session ⇓ Have focus group session ⇓ Analyse data

Finally, focus group sessions could be held before and after the introduction of a new road pricing scheme, to see whether public acceptance and appreciation of a pricing scheme has changed upon introduction.

6.4. Content analysis

Content analysis is defined as “the objective, systematic and quantitative description of the manifest content of a communication”.67 Or in other words, communication (such as transcribed interviews) is scanned for the frequency in which particular words, phrases or expressions appear. This is a way of quantifying qualitative information, and thus gathering more information from the same sample. This method of data analysis has a very low bias level as assessment criteria must be very strictly defined.

After these rules are established (what word or phrase to scan for), specialised software can analyse the interview. Examples are the software packages SWIFT and WordStat, that can do advanced analyses of qualitative information.

67 See Kolbe/Burnett (1991). 127 REVENUE D3 CASE STUDIES SPECIFICATION

Content analysis could also be done by hand, but this would be a laborious effort, that would be extremely time-consuming. One must be careful for increased error, particularly when relational analysis is used to attain a higher level of interpretation. Content analysis must be more than merely counting words, as that would disregard the context in which the text was produced.

In general, there are two general categories of content analysis: conceptual analysis and relational analysis. Conceptual analysis investigates the existence and frequency of concepts – such as words of phrases. With conceptual analysis you can determine how many times words appear in a test. Relational analysis on the other hand examines the relationships between concepts in a text. With relational analysis, one can identify what words or phrases appear close to a given word or phrase and then determine what conclusion can be drawn from these groupings.

Direct surveys are a good way of collecting information, as they are less time-consuming and can reach a large group of people. Surveys have a very structured and standardised form of questioning, so that it is easy to compare and analyse data gathered in the process. Surveys are often based on a questionnaire. The aim of the survey, namely to tap the knowledge and experience of those familiar with the acceptance/non-acceptance problem in transport pricing, requires that the respondents are carefully selected in order to include those with relevant experience and knowledge.

There are several ways of carrying out a survey: interviews by phone, personal interviews and mail interviews. Face-to-face interviews can be held on the street, on particular locations close to large toll collection points or public transport nodes. Depending on the case study, potential respondents for REVENUE could be contacted in transport operators, car drivers using tolled roads, people affected by (future) cordon schemes, etc. No survey method is the best by definition though, one must always check which situation or target group requires which particular mode of administration.

Internet-based surveys have been in use for several years. Most significant advantages when compared to the traditional paper-and pencil approach, are its efficiency and speed. In synthesis, main advantages are as follows:68 Eliminates mailing costs for questionnaires; Reduces costs for coding respondents’ data; Reduces human error; Effectively reaches respondents in different geographic areas; Reaches respondents in a relatively short amount of time.

Despite of the referred benefits, this technique also entails some potential problems. In fact Internet surveys may generate incorrect results when: Multiple responses from the same participant are present; Blank responses, incomplete responses, invalid responses or biased responses are submitted.

Mail surveys are another wide spread technique used to gather primary data. Lists of respondents are collated or purchased in order to send a questionnaire to a sample of respondents. The main pitfall of this technique is that do not tend to generate a high response rate. However, a second mailing to prompt or remind respondents tends to improve response rates.

The following table provides a comparison of the above-discussed interview types.69

68 Roztocki (2001), Using Internet-Based Surveys for Academic Research: Opportunities and Problems, 290-295. 128 REVENUE D3 CASE STUDIES SPECIFICATION

Table 6-1: Comparison of survey techniques

Response rate Information Information Non-response Interviewer Approach Cost (without quality quantity problem bias incentives)

Personal Highest Can elicit in- Extensive Few problems, as a 70-90% Hard to detect interview cost per depth, result of face-to- and control respondent complex face contact information Phone Second- Complex if Moderate Difficult to ensure 20-85% Hard to detect highest cost prior contact that contact is and control established made with correct respondent Mail Least cost Moderately Moderate Difficult to control 10-85% Can be complex who responds and controlled by how many will rigorous pre- respond testing

6.5. Questionnaires

As previously discussed, questionnaires are a very important tool in data collection, as they allow for a quick assessment of the wishes, preferences and opinions of large groups of people. The main advantage of using a questionnaire is that it is a very structured way of collecting information, and that standardised data can easily be compared. Questionnaires have three objectives:

1. Translate the required information into a set of specific answerable questions; 2. Motivate and encourage respondents; 3. Minimise response error.

The first question is the most challenging one, as questions have to be formulated in such a way that they are not ambiguous or misleading, and at the same time respondents must be stimulated to answer. The second one must consider the respondent’s interest, and bear in mind what the respondent expects from participating. And the third point must cover the problem that questionnaires can generate errors when answers are recorded or analysed in the wrong way70.

The main problem with questionnaire design is the lack of theory – it is a skill, as there are no theoretical principles underlying an ideal questionnaire. But basically, there are four main aspects to consider, that interact with each other in iteration cycles as shown in Figure 6-3.

69 Taken from Barabba (1990), quoted in Hutt/Speh (1998). 70 See Malhotra/Birks (2003). 129 REVENUE D3 CASE STUDIES SPECIFICATION

Figure 6-3: Questionnaire design cycle

Source of idea

Question purpose Question analyses

Actual questions

The source of the idea, in the upper block, is the starting point of the design process, as this is the idea that the researcher wants to test initially. Subsequently, after consulting secondary information sources and analysing the questions, the researcher will formulate the purposes of the questions, i.e. what answers are sought through this questionnaire – also a distinction must be made between the main questions and the less important ones. Once this division has been made, the formulation and writing of the actual questions can begin. This process must be aware of the respondent’s profile, as not every question is necessarily answerable by every respondent. Finally, the data analysis method must already be known before sending out the questionnaire, because it would be senseless to write questions that cannot be properly analysed or when the analysis would not serve the purpose of the questionnaire. To give an example, measuring scales must be chosen in order to match the purpose of the questionnaire; but obviously questions have to be asked in such a way that they can use such measuring scales.

Every question should contribute to the data analysis. Whenever a question is written down, a researcher must ask whether that question is really necessary or whether it cannot be combined with another question.

Some useful examples of a questionnaire are given by the PATS project about transport pricing acceptability.71 The questionnaire included questions on the acceptance of the pricing packages. Each of the pricing packages followed the same structure: Identification and general package description: The main aims and characteristics of the pricing package were described. Part A: Revenue collection: The pricing measure(s) applied and the characteristics such as target groups, price regime, technological basis, harmonisation and implementation as well as eventual compensatory measures were described shortly. In the structured description there were boxes for each element to indicate the opinion on the basis of a scale from 1 (strongly support) to 4 (strongly disagree). Finally there was also a question about the general acceptance for the revenue collection part as a whole. Part B: Revenue allocation: In this part the targets of revenue allocation were identified and, if there were more than one target group, the share of spending for each target group was

71 PATS (2000). 130 REVENUE D3 CASE STUDIES SPECIFICATION

described. Again the respondents had the opportunity to express their opinion for each element as well as for revenue spending as a whole.

When disagreement arose, the respondents were asked to give comments and make suggestions on how to gain increased support for these aspects.

In what respects data collection for the assessment of acceptability related issues, the questionnaires developed within PATS research project could serve as a starting point for the questionnaires to be developed within REVENUE case studies.

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7. Summary of Guidelines for the Case Study Work

Figure 7-1 gives an overview of the basic approach of the work to be carried out in the case studies of the work packages 4 and 5. The key points are: The case study work is structured into four parts. The analysis is carried out on the basis of four types of regulation schemes:

- "Status Quo" = Description of the existing situation along the elements of a regulation scheme;

- Proposed regulation scheme = Description of a proposed solution along the elements of a regulation scheme.;

- Optimal / superior regulation scheme: Description of a theoretically optimal / superior (compared to the status quo) solution along the element of a regulation scheme;

- Additional schemes: The case studies may define additional regulation schemes (e.g. schemes describing a second-best solution). The regulation schemes are assessed using four assessment criteria.

Figure 7-1: Basic approach to case study work

Part 1: Background and objectives of the case study

Part 2: Description of regulation schemes A) Status quo B) Proposed scheme C) Optimal scheme

S P R&F I S P R&F I S P R&F I

Rules Rules Rules

REG REG REG

P&I P&I P&I

Part 3: Assessment of the regulation schemes

Criteria A) Status quo B) Proposed scheme C) Optimal scheme D) Further schemes Efficiency Equity Feasibility Acceptability

Part 4: Summary of findings and policy recommendations

Abbreviations used: S = Scope (e.g. relevant part of the transport system, actors) I = Investment P = Pricing REG = Regulatory framework R&F = Revenue use & financing P&I = Procurement & implementation

132 REVENUE D3 CASE STUDIES SPECIFICATION

The following sections summarise the main contents of each part and the proposed procedure.

Part 1: Background and objectives of the case study One core contents of the first part is a description of the general framework of the case study: a description of the geographical scope (case study area); the architecture of the system and simplified representation of the key features and the key characteristics of the relevant parts of the transport system; a brief description of the historical background and the current situation; the political environment: recent / on-going discussions, decisions made / to be made. The case studies address a variety of issues. It will not be possible to treat all of them in the same depth of analysis. Therefore, the focus and the key questions to be addressed have to be made clear in part 1 of the case study work. Short sentences should be formulated addressing the policy issues that the case study should solve ("research questions"). The research questions are the basis for the formulation of regulation schemes in the second part of the case study work.

Part 2: Description of regulation schemes The description should refer to the different elements of a regulation scheme as developed in section 1.2 (Figure 1-2). Description means that the questions raised in Figure 1-2 are answered using the theoretical guidance of chapter 3. Chapter 3 contains positive and normative insights gained from the theory of work package 2 of the REVENE project. They are summarised in 6 theoretical issues. Both, i.e. the positive and normative insights, are used for the description of the regulation schemes as Figure 7-2 illustrates: The positive insights helps to understand the current state (status quo) or proposals made in the political debate (proposed regulation scheme). The normative guidelines are used to describe directions of possible changes to achieve alternative, from a theoretical point of view improved regulation schemes. Two examples to illustrate the link between the regulation schemes and the theoretical guidelines of chapter 3: Which pricing rule is assumed for a specific regulation scheme (= cell of "P" and "Rules" of Figure 7-1)?

- Use of the positive analysis of chapter 3: Can the pricing rule of the existing solution (status quo) be explained by lobbying activities, did these activities follow the pattern predicted by the common agency model (theoretical issues 4)?

- Use of the normative guidelines of chapter 3: For the optimal/superior regulation scheme, a pricing rule should proposed that is oriented at social marginal cost pricing (theoretical issue 2). Who decides on revenue us and financing (= cell "R&F" and "REG").

- Use of the positive analysis of chapter 3: If there is earmarking of revenues, what arguments have been brought up to justify the solution, do they correspond with the ones stated in theoretical issue 5?

133 REVENUE D3 CASE STUDIES SPECIFICATION

- Use of the normative guidelines of chapter 3: The optimal/superior regulation scheme should propose a scheme for revenue use and financing that contains more flexible and more efficient (i.e. welfare optimising) allocation possibilities.

Figure 7-2 furthermore illustrates (by using smaller fonts) that not each of the seven theoretical issues distinguished in chapter 3 will be of the same importance in the different case studies. Clearly, this depends on the research questions formulated in part 1. The theoretical issue 3 (multi- government level), for examples, only matters if this aspect can be found in the case study reality.

Figure 7-2: Description of regulation schemes using the positive and normative insights gained from theoretical work of the REVENUE project

Status quo (A) and proposed scheme(s) (B) Guidelines of chapter 3 (positive analysis) S P R&F I Theoretical issue 1.... Rules Theoretical issue 2... REG Theoretical issue 3... P&I ...

Optimal/superior (C) and further scheme(s) (D) Guidelines of chapter 3 (normative analysis) S P R&F I Theoretical issue 1.... Rules Theoretical issue 2... REG Theoretical issue 3... P&I ...

Part 3: Assessment of the regulation schemes The regulation schemes are assessed along the four criteria mentioned in Figure 7-1 and Table 7-1. Chapter 5 provides the general framework for this assessment. This framework ensures a certain degree of harmonisation in the procedure and in the content of the case study (e.g. by defining what issues should be looked at when the organisational feasibility of a regulation scheme is evaluated) without compromising the value of the specific case study approaches. The assessment of the regulation schemes in the case studies will start from the general framework and adjust it to the specific case study context. . It will not be possible that each case study carries out a comprehensive analysis for each of the four assessment criteria. For some of the case studies, the assessment of acceptability is a key issue, others put the focus rather on efficiency aspects. The idea is that less important assessment criteria are treated with qualitative approaches to ensure that resources are targeted,

134 REVENUE D3 CASE STUDIES SPECIFICATION

for each case study, at the topics from which greatest value can be gained. Nevertheless, each case study will provide a response on each criteria. Table 7-1 illustrates this approach and summarizes the methods and tools that are available to carry out the analysis in part 3 of the case study work.

Table 7-1: Options for assessment methods and tools applied in the case studies

Option 1 Option 2 Option 3 Option 4 Efficiency MOLINO model Other models (e.g. Specific/selected Qualitative analysis developed in WP2 ASTRA, MART, quant. analysis MARS) Equity MOLINO model Other models (e.g. Specific/selected Qualitative analysis developed in WP2 ASTRA, MART, quant. analysis MARS) Technical / organi- New empirical work Exploitation of sational feasibility (e.g. expert- existing literature, interviews) expert know-how of Chapter 6 provides case study team to methodological answer the questions support on how to of section 5.4 answer the questions of section 5.4 Acceptability New empirical work Exploitation of (e.g. key informant existing literature, surveys, company expert know-how of surveys) case study team to Chapter 6 provides answer the questions methodological of section 5.4 support on how to answer the questions of section 5.4 Shaded area: Possible combination of assessment methods and tools taking into account the limited budgets for the case study work.

Those case studies that will use quantitative models for the assessment of the efficiency and equity implications of the different regulation schemes (options 1 and 2) will have to carry out the following steps in part 3 of the case study work: Studying, how the model can be used to simulate the policies identified, i.e. transforming the regulation schemes into model inputs; Determination of data requirement and collection of the missing data; Calibration and simulation (model runs), export and presentation of aggregate results; Sensitivity analysis and presentation of the detailed results.

Part 4: Summary of findings and recommendations

Policy insights and answer to the policy questions of part 1.

135 REVENUE D3 CASE STUDIES SPECIFICATION

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Schade J., B. Schlag (2000), Acceptability of urban transport pricing. Government institute for economic research, Helsinki.

Staatsblad 457 van het Koninkrijk der Nederlanden, houdende regels voor de vergoeding ter zake van het gebruik van spoorweginfrastructuur.

139 REVENUE D3 CASE STUDIES SPECIFICATION

Statistisches Bundesamt (2004), Strassenpersonenverkehr 2003: Mehr Umsatz mit immer weniger Personal. Pressemitteilung vom 13. Mai 2004.

Suter S., Walter F. (2001), Environmental Pricing - Theory and Practice: The Swiss Policy of Heavy Vehicle Taxation. Journal of Transport Economics and Policy, Vol. 35, p. 381-397.

Teubel, U. (2001), Road Pricing – effizient, aber unsozial? Peter Lang, Frankfurt.

TIS, MU, LET, DESU, DIW, Herry, EU, IC, Infras (1999), State of the art synthesis on price acceptability. PATS Project (Pricing Acceptability in the Transport Sector), Project funded by the European Commission under the Transport RTD Programme of the 4th Framework Programme, Deliverable 1, TIS.PT, Lisbon.

TIS, MU, LET, DESU, DIW, Herry, EU, IC, Infras (2001), State of the art synthesis on price acceptability. PATS Project (Pricing Acceptability in the Transport Sector), Project funded by the European Commission under the Transport RTD Programme of the 4th Framework Programme, Final Report, TIS.PT, Lisbon.

VATT (2001), Acceptability of Fiscal and Financial Measures and Organizational Requirements for Demand Management. AFFORD Project. Final Report for Publication. Project funded by the 4th Framework Programme, VATT, Helsinki.

Victoria Transport Policy Institute (2001), Transportation Cost and Benefit Analysis - Techniques, Estimates and Implications (http://www.vtpi.org/tca).

Wegener, M. (1998). Applied models of urban land use, transport and environment: State of the art and future developments. In: Lundqvist, L., L-G. Mattsson and T.J. Kim (eds.), Network Infrastructure and the Urban Environment, Berlin: Springer-Verlag, pp. 245-267.

Wiener Stadtwerke Holding AG (2003), Geschäftsbericht 2002. Wien.

140 REVENUE D3 CASE STUDIES SPECIFICATION

Annex A: Review of current practice: Fact sheets

7.1. International Eurocontrol sets the framework for navigational charges for aircraft crossing EU member states’ airspace, that are calculated using the following formula:

MTOW

R = 0,01∑diti n 50

In which R represents the total navigational charges, di the great circle distance flown in km through each FIR (Air Traffic Control sector) i ,and ti the FIR unit rate (see below) and MTOW the Maximum Take-Off Weight72. Additionally, it has some correcting factors (such as take-off and departure in a country), these do not affect the outcome much though. The costs are fully distributed. The unit rate is set yearly and in 2005 it varies from EUR 14,98 (the Portugal (Santa Maria) North Atlantic sector) to EUR 86,48 (Switzerland)73.

Table 2: Eurocontrol unit rates for 2005

Country ti (EUR) Country ti (EUR) Switzerland 86.48 Croatia 50.19 Belgium-Luxembourg 83.83 Portugal (Lisboa) 49.02 U.K. 82.76 Albania 47.23 Spain (continental) 71.95 Bosnia 46.71 Germany 71.49 Romania 40.97 Slovenia 69.96 Moldova 40.07 Italy 69.57 Slovakia 39.52 Austria 68.65 Finland 38.25 Spain (Canaries) 66.05 Greece 36.84 FYROM 63.96 Hungary 34.80 France 60.58 Cyprus 34.74 Norway 59.54 Malta 32.03 Denmark 56.96 Ireland 31.09 Netherlands 53.69 Turkey 28.50 Bulgaria 52.83 Czech Republic 26.63 Sweden 50.79 Portugal (Santa Maria) 14.98

72 Source: www.eurocontrol.int/crco/public/standard_page/intro_how_ch 73 Information on conditions of application of the route charges system, conditions of payment and unit rates applicable from 1 January 2005. Eurocontrol , Information Circular N° 2005/01. Annex A 141 REVENUE D3 CASE STUDIES SPECIFICATION

7.2. Austria

7.2.1. Transport pricing

Mode Pricing schemes

Road Road charging consists of three elements: – vignette for vehicles below 3.5 tons – heavy vehicle toll (“Maut”) – special toll on specific roads Motorcycle and vehicles with a weight below 3.5 tons must purchase a vignette to drive on highways and motorways (network length: 2’000 km). The vignette costs 29 EUR for motorcycles and 73 EUR annually for cars. On a number of particularly expensive roads with many bridges and tunnels (including the Brenner pass), motorcycles and cars must pay a special toll. On the Brenner pass, the special toll is twice as high during night-time (47 EUR) than during the day (23.5 EUR).

The heavy vehicle toll (“Maut”) must be paid by vehicles with 4 or more wheels whose maximum laden weight exceeds 3.5 tons.74 These vehicles are exempted from both the vignette and the special tolls. The truck road toll is distance-dependent: vehicles with 2 axles pay EUR 0.13 per km, vehicles with 3 axles pay EUR 0.182/km, and vehicles with 4 or more axles pay EUR 0.273/km. The heavy vehicle toll aims at full cost recovery. As required by the EU route charging Directive, it is determined such as to cover the costs of construction, operation and maintenance of roads. Besides that, there are a number of road-related taxes and charges. The mineral oil tax is levied on gasoline (unleaded: 0.407 EUR/l) and diesel (0.282 EUR/l). Motor vehicle taxes (depending on the size of the engine) have to be paid for the registration and use of motor vehicles.

Rail Austria has a system of linear infrastructure charges which consist of four components:75 – Wear and tear component: 0.001 EUR per gross tkm – Circulation fee: 0.60 to 2.50 EUR per train-km (six line categories) – Discount for single-load freight transport (0.30 EUR per train-km) – Scarcity component for two lines leading to Vienna According to Peter (2003), the wear and tear component has been determined based on a marginal cost study.76 Besides that, the system is a second-best solution mainly aiming at cost coverage.

Urban PT Urban passenger transport is financed by user charges and public subsidies. The public transport company of Vienna (“Wiener Linien”) is the largest provider of transport services in Austria, conveying more than 720 million passengers per year.77 In 2002, the company received subsidies of approximately 360 Mio. EUR annually for transport operation and investments from the City of Vienna (total annual expenditure was approx. 609 Mio. EUR).78

Air Austria has six airports with scheduled flights, the main international gateway airport is Vienna.

Airport charges include: – Landing charge – Passenger service charge – Aircraft parking charge – safety levy The principal charges are based on the maximum authorised take-off weight (MTOW).79 Kerosene is exempted from taxes and levies. Inland There are no user fees for ships on the Donau. Harbour charges are levied by the port authorities. Waterways

Maritime Austria has no access to the sea.

74 ASFINAG (2004), Truck toll – Legal basis. 75 See Peter (2003), Rail Infrastructure Charging in the European Union, p. 16. 76 See Peter (2003), Rail Infrastructure Charging in the European Union, p. 13. 77 http://www.wienerlinien.at 78 Wiener Stadtwerke (2003), Geschäftsbericht 2002, p. 7. 79 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. AUS-9. Annex A 142 REVENUE D3 CASE STUDIES SPECIFICATION

7.2.2. Earmarking of revenues

Mode Solution

Road All revenues levied by the state-owned road infrastructure company ASFINAG – vignette, federal truck toll, and special tolls – are earmarked for the construction and maintenance of roads.

58% of the revenues from taxes on lorries are earmarked for underground constructions.80

Rail No earmarking has been identified.

Urban PT No earmarking has been identified.

Air The safety levy is earmarked entirely for measures to improve aviation safety.

Inland Waterways

7.2.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The central document for transport sector planning is the “Transport master plan Austria 2002”.81 The master plan contains general principles and an infrastructure investment program for road, railway and waterways (Donau). The objectives of transport policy include: – efficient extension of the transport networks according to transport needs – increasing security of transport – ensuring the financing of transport infrastructure (reduction of debts of infrastructure companies) The projects in the investment program were determined jointly with the states (“Länder”) and the major public transport companies.

The funds for road construction and maintenance (mid-term investment budget (2002-2012): 4.7 billion EUR) come from the vignette for light vehicles, the heavy vehicle toll (“Maut”), and the special road toll.82

Rail Railway planning and financing is dealt with in the transport master plan (see above).

Railway construction and maintenance is financed through track access charges and public subsidies. The mid-term investment budget (2002-2012) is 12.4 billion EUR.83

Urban PT According to the financial compensation act, the federal government transfers helps municipalities support public local transport. In the period 2002 to 2004, municipalities receive 15.6 million EUR annually plus 2.5 percent of the revenues from the electricity tax for this purpose. The municipality of Vienna gets 55 percent of these funds, the rest is distributed among municipalities operating or owning a public transport company, according to the number of persons conveyed and length of the transport network.84 The government also contributes to investments in local transport infrastructure. In the period 2002 to 2004, 16.5 million EUR annually plus 2.5 percent of the revenues from the electricity tax are transferred to municipalities for this purpose.85

Air Vienna airport self-funds its capital investment. The only public sector grant was a small TEN-T contribution (in 1997) toward the terminal extension to fulfil Schengen requirements.86

80 OECD (2004), Environmentally Related Taxes database. 81 BMVIT (2002), Gesamtverkehrsplan Österreich 2002. 82 BMVIT (2002), Gesamtverkehrsplan Österreich 2002, Zusammenfassung, p. IX. 83 BMVIT (2002), Gesamtverkehrsplan Österreich 2002, Zusammenfassung, p. IX. 84 Finanzausgleichsgesetz 2001, Paragraph 20, Absatz 2. 85 Finanzausgleichsgesetz 2001, Paragraph 20, Absatz 3. 86 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. AUS-10. Annex A 143 REVENUE D3 CASE STUDIES SPECIFICATION

Inland Waterway planning and financing is dealt with in the transport master plan (see above). Waterways

Forms of co-operation between the public and private sector

Mode Solution

Road The state-owned road infrastructure company ASFINAG has launched the first public-private-partnership (PPP) in the road sector in Austria. ASFINAG is searching for investors from the private sector to finance construction, operation and maintenance of three highways (A5, part of S1 and S2). The concession process shall be completed by 2005.87

Rail There are two PPP in the railway sector in Austria: the combined transport terminal Werndorf in Graz and the railway research center (wind channel) in Vienna. Both projects started operations in the year 2003. The terminal Werndorf can be used for combined transport and the Rolling Highway.88 47 percent of the total costs of 110 Mio. EUR were financed by the government (by non-refundable loans), the rest will be repaid by the concessionary during a 30 years period. The railway research center is owned by the state. A consortium of railway stock companies has rented the center for 30 years. Total investment was 65 Mio. EUR.89

Urban PT Urban passenger transport companies are predominantly publicly owned. In some cities, private companies run the local transport business on behalf of the communities.

Air Austrian airports are in public ownership. Vienna airport is partially privatized (50% of the shares are floating freely).90

Inland Most harbours are owned and operated by the municipalities. An exception is the Donau harbour in Krems, which is Waterways run by a private company (Mierka Donauhafen Krems).91

Role of the institutions in the decision making process

Mode Solution

Road Highways of national importance are financed, built and maintained by ASFINAG. Motorways and smaller roads are under the auspices of the states (“Länder”).

Rail There are four main railway companies in public ownership: – The railway company ÖBB – the infrastructure financing company SCHIG mbH – The high-speed railway company HL-AG – The Brenner railway company (Brenner Eisenbahn GmbH) There are plans to integrate all these institutions into one public railway company.

Urban PT

Air Airport charges are set in a decree. They are determined and reviewed by a price-cap formula.

Inland - Waterways

87 ASFINAG (2004), Projekt PPP Ostregion. 88 http://www.schig.com/PPP_GTW.htm 89 http://www.schig.com/PPP_KWK.htm 90 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. AUS-2. 91 http://www.hafen.co.at/krems Annex A 144 REVENUE D3 CASE STUDIES SPECIFICATION

7.3. Belgium

7.3.1. Transport pricing

Mode Pricing schemes

Road There are several taxes for users of private cars: – Circulation tax – Registration tax Excise duties on fuel are 0.51 EUR/l for unleaded gasoline and 0.29 EUR/l for diesel. Moreover, there is a tax which depends on the weight of the vehicle.92 This tax is also levied for lorries and trucks. Vehicles with a maximal authorised mass above 12 tons must purchase an Eurovignette. The price of the Eurovignette depends on the number of axles, the emission of polluting gases, the country of registration and the period of validity.93 A toll is levied for passing the tunnel connection under the river Scheldt called Liefkenshoektunnel. Prices for vehicles lower than 2.5m are approx. 4 EUR, for vehicles higher than 2.5m, the price is 15 EUR.94 Rail The Belgian railway system uses a linear infrastructure charging system. There is a base charge component for stations and one for lines (4 categories). The base component for the line is multiplied with various coefficients such as train load, train type, congestion (week-day based) and environmental impact. Average charges are in the range of 1.2 to 2.5 EUR per train-km.95 The Belgian charging system with its large number of mark-ups represents a second-best solution with a number of interesting elements (especially peak-load pricing). Urban PT Air There are five civil airports in Belgium. Airport charges are in line with the principles of the International Civil Aviation Organization (ICAO) (full cost recovery). Noise-related charges and track-keeping penalties are imposed in Brussels National Airport and in Charleroi. In Charleroi, environmental levies represent about one third of all charges.96 Kerosene is exempted from taxes and levies. Inland There is a registration tax for vessels. Freight vessels have to pay canal charges.97 Waterways Maritime In the port of Antwerp, there are official rates for – the use of berth and sheds, – towage services, and – the hire of cranes. The port authority also levies a port due. Rates for services offered by private companies (storage, forwarding, etc.) differ from firm to firm, and are not published.98

7.3.2. Earmarking of revenues

There is no earmarking of revenues from transport charges or taxes.99

92 http://www.transport-pricing.net/nationalreport.html. 93 http://www.transport-pricing.net/nationalreport.html. 94 http://www.liefkenshoektunnel.be 95 See Peter (2003), Rail Infrastructure Charging in the European Union, p. 13. 96 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. BEL-11. 97 Henry/Godart (2003), Pilot Accounts for Belgium, p. 44. 98 http://www.portofantwerp.be. 99 OECD (2004), Environmentally Related Taxes database. Annex A 145 REVENUE D3 CASE STUDIES SPECIFICATION

7.3.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The revenues from the circulation tax (1’109 million EUR in 2002), the registration tax (252 million EUR), and the Eurovignette (111 million EUR) are passed on to the regions.100 Rail In 1998, SNCB received revenues of 1’615 million EUR and direct and indirect subsidies of 1’684 million EUR.101 Therefore, all charges remain within the mode as there is not full cost coverage. Urban PT Public transport companies obtained subsidies of 726 million EUR in 1998 and revenues of 377.8 million EUR. Air Charge revenues in 1998 are estimated at 375 mill. EUR, of which 255 mill. EUR are landing fees and 120 mill. EUR are route charges (levied for Eurocontrol). Additionally, airports earned approximately 124 mill. EUR from concessions (tax free shops, etc.).102 Waterways Revenues from the registration tax are estimated to be about 0.6 mill. EUR and revenues from river charges at approximately 3.33 mill. EUR (1998). 103

Forms of co-operation between the public and private sector

Mode Solution

Road

Rail The national railway company SNCB is a state-owned company. It runs virtually all rail traffic on Belgian tracks.104

Urban PT Three public transport companies operate in Belgium: Société des Transports Intercommunaux de Bruxelles (STIB) in Brussels, TEC in Wallonia, and De Lijn in Flanders.

Air Belgian airports are public companies. They are controlled and (partially) owned by the federal government (Brussels National) or the regional governments of Walloon (Liege) and Flanders.105

Waterways

Role of the institutions in the decision making process

Mode Solution

Road

Rail

Urban PT

Air Airports report to different Ministries at the federal or regional level. The Belgian Ministry of Transport is responsible for national aviation policy and external relations. Sources of funding include internally generated funds, debt and equity finance, and – particularly for the regional airports – grants and subsidies from the regional governments.

Waterways Belgian ports are autonomous organisations owned by the State or public authorities. The Antwerp Port Authority, for example, is owned by the City of Antwerp, but operates as an independent company.106

100 Administrations fiscales fédérales (2004), tableau no. 96. 101 Henry/Godart (2003), Pilot Accounts for Belgium, p. 56. 102 Henry/Godart (2003), Pilot Accounts for Belgium, p. 76. 103 Henry/Godart (2003), Pilot Accounts for Belgium, p. 79. 104 Henry/Godart (2003), Pilot Accounts for Belgium, p. 9. 105 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. BEL-1. 106 Henry/Godart (2003), Pilot Accounts for Belgium, p. 11. Annex A 146 REVENUE D3 CASE STUDIES SPECIFICATION

7.4. Finland

7.4.1. Transport pricing

Mode Pricing schemes

Road The transport related taxes are general fiscal taxes that are used to cover all the expenses of the state. They have not been planned as transport policy instruments. The following taxes are collected from road transport: Fuel tax is collected in the prices of petrol and diesel oil. The tax is a fixed excise tax (0,59 €/l). It consists of a basic tax, an additional tax and a maintenance and supply security charge. In addition VAT (22 %) is collected from the fuel tax. Automobile tax is based on the taxable value of the new vehicle. It is paid by the importer. Motor vehicle tax is an annually collected tax from the owners of motor vehicles. The tax depends on the vehicle and the fuel used (fuel fee and surtax). In addition there are some deductions on income taxes for the journeys to work. At the moment this system favours car transport over public transport. Parking fees decided by the municipalities. The revenues are not earmarked for transport infrastructure. Rail Finnish Rail Administration collects a railway infrastructure charge from the operators; although at the moment there is only one operator, the state-owned VR-Group Ltd. Railway infrastructure charge covers the costs of infrastructure use. In addition the state collects a track tax, which is based on the environmental damages. There are different basic charges and track taxes for freight and passenger transport. For freight transport the track tax differs between electric and diesel locomotives. Electric rail transport does not pay electricity tax. Track tax on year 2004 was for passenger transport 0,128 c/btkm and for freight 0,141 c/btkm (electricity) or 0,183 c/btkm (diesel). Basic charges for freight was 0,126 €/tn. The lower VAT of public transport services (8 %) has been justified with environmental and service level arguments. Urban PT Finland has a long tradition in private bus companies offering urban public transport services. Municipal authorities purchase directly or tender the services. Only the three biggest cities (Helsinki, Tampere and Turku) have municipal public transport enterprises. The one in Helsinki nowadays competes equally with the private bus companies in bus transport. The state-owned railway company VR offers commuter traffic services in the Helsinki region (consists of four municipalities) and the metro and tram services are produced by the city of Helsinki. The tariffs of the regional transport (crossing the municipal borders) in Helsinki region are decided by the Metropolitan Area Council with representatives from each of the four municipalities. The tariffs of the services within one municipality are decided by the respective municipality. Almost all urban public transport is subsidised by the municipalities and sometimes also by the state (in small and middle-sized municipalities). The municipalities decide about the tariffs and pay subsidies accordingly. The lower VAT of public transport services (8 %) has been justified with environmental and service level arguments. Air Finnish Civil Aviation Administration covers all its expenses with charges that it collects from the airline companies and air travellers. It decides independently about the magnitude of these charges, within the limits of international agreements. The most important charges are landing charge, navigation charge, passenger charge and airport flight control charge. The air transport does not pay any fuel taxes. Inland Ships travelling in the lake Saimaa do not need to pay fairway charges. A special Saimaa Channel for accessing the Waterways Baltic Sea from there is charged according to the tonnage capacity of the ships. Maritime Finnish Maritime Administration (in practice the Customs) collects fairway charges from merchant shipping. These charges are used in the maintenance and investments of the fairways. The need for icebreaking and the distances travelled do not affect the charge. The minor ships and boats do not need to pay fairway charges. A pilotage fee is collected by the Finnish Pilotage Enterprise. It is based on the size of the ship and the length of the journey. The ports are mainly owned by the municipalities. Some large industrial plants have their own ports. The port charges are decided by the respective owner.

Annex A 147 REVENUE D3 CASE STUDIES SPECIFICATION

7.4.2. Earmarking of revenues

Mode Solution

Road Petrol tax revenues 2756 M€ (2002). None of the taxes and charges are earmarked for road maintenance and financing purposes. Rail Track charge revenues are earmarked to track maintenance. The track tax revenues are not earmarked and neither the VAT. The fare revenues are used to finance the operation (within the accounts of the operator). Urban PT The municipalities might collect the ticket revenues when purchasing and tendering the public transport services but all of them are used in paying the operators for their services. This is not even enough as municipalities pay additional subsidies for the operator in order to keep the tariffs low. The VAT collected from public transport services is not earmarked. Air Finnish Civil Aviation Administration functions as an enterprise and decides about use of its revenues independently. Inland The access charges for Saimaa Channel (the only significant trunk route) is rented from the Russian Federation Waterways (crossing its territory) and the revenues go to fund the rent fees. In addition the revenues are used to cover maintenance costs for Russians. Maritime Fairway charges are earmarked to fairway maintenance. Fairway charges finance especially maintenance of fairways during winter. Piloting charges are earmarked for Finnish Maritime Administration. All the expenses are funded by piloting charges. Port charges decided independently by the ports.

7.4.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The maintenance and investments of the public roads are funded through the state budget annually. The budget is divided into two parts: basic maintenance and investments. Each investment project is mentioned separately in the budget. The allocation of basic maintenance funds is decided by the Road Administration. Local street network maintenance and investments are funded by municipalities through budgets. In addition there are private roads that are cared for by maintenance co-operatives. Municipalities and the private maintenance co-operative can receive state subsidies. On the other hand big cities participate in the financing of the public road investments within urban areas. Rail The track maintenance and investments are financed through the state budget. The track charge revenues are included in the budget. The dividends from the state-owned train company (VR) have traditionally been used in track maintenance but this has been decided separately each year. The state-owned VR finances the services through ticket revenues and state purchases. The Ministry of Transport and Communications purchases unprofitable transport. Urban PT The urban PT services are financed through ticket revenues and subsidies from municipalities. The municipalities can receive also state subsidies for their local public transport from the State Provincial Offices. The money for this is allocated in the state budget. The share of state subsidy of the tickets can be only as much as the share of municipality, and only city or regional tickets are subsidised except in the metropolitan area of Helsinki. The public transport investments are financed by the municipalities, though the participation of the state can be negotiated. Regarding the railway commuter traffic the state naturally has a major share because it owns the infrastructure. Air The Civil Aviation Administration finances its expenses through charges collected from the users of its airports. It does not receive budget financing and it runs its business very independently within the general operational and profit targets set by the national Government. The two municipal airports receive state subsidies through the budget of Ministry of Transport and Communication. Inland The maintenance of fairways is financed through state budget including the fairway charges. The ports operate as Waterways independent enterprises financing their expenses with the port charges. Some ferry connections in the archipelago are subsidised and merchant shipping companies also. Maritime The maintenance of fairways is financed through state budget including the fairway charges. The ports operate as independent enterprises financing their expenses with the port charges. Some ferry connections in the archipelago are subsidised and merchant shipping companies also.

Annex A 148 REVENUE D3 CASE STUDIES SPECIFICATION

Forms of co-operation between the public and private sector

Mode Solution

Road PPP has been applied only once in Finland so far (shadow price –based system). However, it will be used in the construction of the motorway E18 as a so-called life-cycle model. Life-cycle financing means that both the construction and the maintenance are procured for 25 years from a private company through a tendering process. At the end of the contract the state pays the residual value of the asset to the company and tenders the maintenance of the road or railway again. This means that the state commits itself financially to the project for all these years. The state pays an annual service charge to the company according to the contract. The charge is based on the value of investment and maintenance expressed in the offer of the private company. The offer of the company naturally includes the financing costs. This means that the investment costs are spread over a longer period than in the traditional financing model. In the first life-cycle project that was conducted in Finland the criterion of annual charge was the traffic volume. This was not considered reasonable though because the growth of transport is not really wished for. Traditionally the state or the municipalities take the loan and purchase the construction from the private infrastructure companies. Rail There is only one transport operating company (VR), which is state-owned. The municipalities of the Helsinki region have established a rolling stock company that could rent trains for private operating companies in the future. This concerns only commuter traffic in the Helsinki region. The VR has the market power also concerning the track maintenance and construction. In practice the projects are tendered and any company could make offers. PPP has not been applied in track investments. Urban PT Municipalities purchase the bus services mainly from the private operating companies. The metro and train services in Helsinki are produced by the city. The infrastructure is owned and financed by the municipalities, except the commuter train infrastructure, which is owned by the state. PPP has not been applied in urban public transport investments. Air The state-owned Finnish Civil Aviation Administration owns and maintains the airports. There are no private airports. Inland Ports are municipally owned enterprises or private industrial ports. Waterways Maritime Ports are municipally owned enterprises or private industrial ports.

Role of the institutions in the decision making process

Mode Solution

Road The public (i.e. national) roads are owned and administrated by Road Administration in the guidance of the ministry of transport and communications. Decisions about the large investments are made by the Parliament. The local roads are owned and administered by the municipalities. Private maintenance co-operatives manage the private roads (small roads in country side and in forests). Rail The Finnish Rail Administration owns the tracks and decides about the use of them in the guidance of the ministry of transport and communications. Decisions about the large investments are made by the Parliament. At the moment there is only one operator, the state-owned VR Group Ltd. Rail Administration is also responsible of the safety regulation. There are plans to establish an independent authority for this purpose in the future. Urban PT The municipalities and private operating companies are responsible for the local public transport. The larger municipalities have special departments for planning the public transport. In the Helsinki region there is Metropolitan Area Council that is responsible for the planning and the tariff policy of the regional bus services (crossing municipal borders). The participation of the state in the investments can be negotiated. Concerning commuter train traffic the main responsibility lies naturally with the state and VR, even though municipalities also take part in the investments. Local public transport can also receive state subsidies in small and middle-sized municipalities. Air The Finnish Civil Aviation Administration owns almost all the airports, expect two municipal airports (which the administration manages however). The Civil Aviation Administration runs its business very independently within the general operational and profit targets set by the national Government. Inland The Finnish Maritime Administration administrates the water sector with regards to maritime safety, fairway Waterways maintenance, hydrography, icebreaking, pilotage and VTS (Vessel Traffic Service). The ports are mainly owned by municipalities or industry and operate as independent enterprises. There are also numerous small private loading berths. The pilotage and shipping of ice-breakers and ferries has been opened to competition. Maritime The Finnish Maritime Administration administrates the water sector with regards to maritime safety, fairway maintenance, hydrography, icebreaking, pilotage and VTS (Vessel Traffic Service). The ports are mainly owned by municipalities or industry and operate as independent enterprises. There are also numerous small private loading berths. The pilotage and shipping of ice-breakers and ferries has been opened to competition.

Annex A 149 REVENUE D3 CASE STUDIES SPECIFICATION

7.5. France

7.5.1. Transport pricing

Mode Pricing schemes

Road Road transport is priced through many devices: fuel taxes, toll motorways, parking fees, and HGV vignettes (the vignette was suppressed for private cars in 2001). The scheme aims for cost recovery. The motorway charges take into consideration the construction costs, improvement of the network quality costs, maintenance costs and financial charges for the remaining time of the concession. The charges are proposed by the concessionaire operators to the State that controls and afterwards validates the charges. The motorway charges vary according to five user categories that are defined depending on the vehicle dimension and weight: – Class 1 – vehicles or group of vehicles with total height equal or less than 2 m and with total authorised load weight equal or less than 3,5 tonnes; – Class 2 – vehicles or group of vehicles with total height between 2 and 3 m and with total authorised load weight equal or less than 3,5 tonnes; – Class 3 – vehicles with 2 axes, with total height equal or more than 3 m or with total authorised load weight equal or more than 3,5 tonnes; – Class 4 - vehicles or group of vehicles with more than 2 axes, with total height equal or more than 3 m and with total authorised load weight equal or more than 3,5 tonnes; – Class 5 – motorcycles, side-cars, tricycles. The motorway network is exploited by 10 operators107. The bridges of Normandy are tolled by the Chamber of Commerce and Industry of Le Havre. As for the pricing principles, the main stream of ideas shifted recently towards the use of long run marginal cost principle, based on concerns about the manipulability of short run marginal cost and on (inter modal) equity considerations. Rail In 1997 the Réseau Ferré de France (RFF) was established. The RFF is the owner of the national rail network, project leader for investment in the rail network and infrastructure manager. SNCF is the national train operator and pays infrastructure usage charges to RFF. SNCF is also contract supervisor for projects on the existing network and delegated manager (appointed by RFF). The fees collected by the RFF (who has no other commercial revenue than the access charges) take into account the infrastructure cost, the situation on the transport markets, the requirements of the optimal network use and the requirements of the harmonization of the inter modal competition conditions. The charges cover about 25% of RFF’s costs108. SNCF continues to enjoy its monopolistic status and few private operators have entered the market of rail services to date. For the calculation of the fees for the use of infrastructure, “elementary sections” are defined as: Suburban lines, main intercity lines, high speed lines, and other lines. For each section the fees for the use of infrastructure are composed by three parts109: – Lump-sum payment for the access to an elementary section according to the period – this is calculated taking into account the charges of RFF; – Payment for the reservation of an infrastructure capacity, payable regardless of whether infrastructure is actually, calculated based on cost per km according to the section type; – Payment for the actual use of infrastructure calculated based on distance, train-type and weight.

Urban PT In 2000, in the provinces, urban transport was paid by:110 – Employers via the Transport Tax (39%). – Local authorities which provide the additional resources required to balance the operating budgets and which also finance a proportion of the investments (17%). – The passengers via ticket sales (18%). – The government (7%).

107 AREA (Autoroutes Rhône-Alpes), ASF (Autoroutes du Sud de la France), ESCOTA (Société des Autoroutes Estérel Côte d’Azur Provence Alpes), SANEF (Société des Autoroutes du Nord et de l'Est de la France), SAPN (Société des Autoroutes Paris Normandie), SAPRR (Autoroutes Paris-Rhin-Rhône), ATMB (Autoroutes et Tunnel du Mont Blanc), SFTRF (Société Française du Tunnel Routier du Fréjus), COFIROUTE (Compagnie Industrielle et Financière des Autoroutes), SMTPC (Société Marseillaise du Tunnel Prado Carénage). 108 Agrell, Pouyet: The regulation of transborder services. Working paper 2004-38, Institut National de la Statistique et des etudes economiques, 2004. 109 Deliverable 9, “IMPROVERAIL” project, funded by the 5th Framework Programme. Annex A 150 REVENUE D3 CASE STUDIES SPECIFICATION

– Loans and other resources (19%). Urban transport fares are set by the AOTUs. They vary every year depending on the contract with the public operator. Air In France, the model of airport ownership and management adopted is the regional ownership and operations. According to the French Civil Aviation Code any proposal for modifying the level of airport charges is first submitted to the “Commission Consultative Économique” (composed by representatives of Aéroports de Paris and represent- tatives of the airline sector). The airport operator has to specify all the changes in costs associated with charges when presenting its proposal to the committee. The pricing of air transport is based upon two components: – the cost of control on the way (cost of the use of the sky including the cost of the weather data) and the cost of landing; – The pricing of the use of the airport facilities. The latter is intended to cover the cost of ground facilities (landing strips, boarding buildings, runway services). In the case of the Aéroports de Paris (Charles de Gaulle and Orly), there are the following types of airport charges: – Landing charges – Passenger charges – Transfer charges – Parking charges – Other (lighting charge, etc.) The aeronautical charges are regulated by the state. Landing fees are based on weight and noise pollution. Passengers charge are based on flights' features (domestic, European or international flight). Airport charges do not fully cover costs. Extra aeronautical charges subsidise aeronautical charges. Kerosene is exempted from taxes and levies. Inland In France there are about 8.500 km of channels and navigable rivers in France, 6.700 km of them are managed by the Waterways Voies Navigables de France (VNF), a public body depending on the central government. Most of the remaining is managed by the local authorities. By concession of the central government and under convention with VNF, some other companies can maintain and operate certain networks. The pricing of the inland waterways is not covering operating and maintenance costs. The essential resources of VNF come from the state and hydroelectric tax (hydrant and water rejection). The debt is very low (21 million Francs in 2000) because VNF does not take out loans to finance its investment and moreover the initial loan during the creation of VNF is refunded gradually. VNF's own resources come to 112 million euros, broken down as follows111: – The hydraulic tax (hydrant and water rejection), 70% – Fees for use of the public waterways (management of public waterways), 12% – Goods tolls, 6% – Leasure boat tolls, 3% – Others, 9%

Maritime The French Port system distinguishes three categories of ports: – 7 autonomous ports (Bordeaux, Dunkerque, La Guadeloupe, Le Havre, Marseille-Fos, Nantes-Saint-Nazaire et Rouen) ; – 23 ports of national interest; – 532 decentralised ports. The autonomous ports are State owned and they handle more than 80% of the maritime goods traffic. These ports have substantial financial autonomy in regard to day-to-day operations and maintain financial accounts as if they were commercial enterprises. Charges are the pricing instrument used in this mode. The legal structure of prices considers the bulk of the ship, so implicitly it is both linked to the port cost level (bigger ships need bigger infrastructure and more and longer operations) and to the financial ability. Port public agencies have gained more and more flexibility, and tend to price according to Ramsey-Boiteux oriented logics.

7.5.2. Earmarking of revenues

Mode Solution

110 See Urban Public Transport in France: Institutional Organization, Directorate for Land Transport. 111 Voies Navigable de France: http://www.vnf.fr/vnf/content.vnf?action=content&occ_id=4543. Annex A 151 REVENUE D3 CASE STUDIES SPECIFICATION

Road See allocation schemes Rail RFF revenues remain within RFF. Urban PT The best-known example is the “versement - transport” in France. This is a tax paid by the employers located within urban transport areas with more than nine employees and designated for public transport financing. This tax is 100% earmarked to urban transport authorities The tax is based on the wages and the size of the urban area. This gives a main resource for funding the public transport system in France and represents on average 30% coverage of the whole expenditure for investment and operation of urban public transport systems. The tax totalled about € 4 billion in 2001. It is used either for operation or for investment. In Ile de France, for example, where most of this tax is collected, it is almost entirely used to reduce fares for PT users ("carte orange"). Air In 1992 a new law (Loi n° 92-1444 du 31 décembre 1992) created an earmarked tax for airplanes. This law set the legal framework necessary to reduce the harmful noise effects near the airports. The tax is earmarked to cover the assistance cost of the residents that live near the airports. More specifically, this tax, managed by a public body in charge of environment and energy savings (the ADEME), is used for helping noise-protection housing investments or for the repurchase of buildings. Noise hindrance is mapped. They define the zones of noise exposure related to the current aeronautical activity and determine the beneficiaries. The tax is applied to each takeoff and varies according to the weight of the airplane, its acoustic classification and of the airport in question. The tax on airplane noise was formerly allocated to the Parisian Airports (ADP) but some years ago it was handed to ADEME, as said before, although next year it should go back to ADP. The special budget for civil Aviation (BAAC), and the Intervention Fund for Airports (FIATA) get the result of a tax on civil aviation operators, shared according to a ratio defined in the yearly finance law. Inland As said before, the hydroelectric tax (hydrant and water rejection) reverts to the Voies Navigables de France, public Waterways agency in charge of most French waterways. This is their main source of revenue for infrastructure maintenance and development. Maritime No specific earmarking of revenues from transport pricing was identified for the construction and maintenance of infrastructure. Port service fees are used by port authorities for infrastructure development, maintenance and operation.

7.5.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The intermodal fund AFITF (French Agency for Transport Infrastructure) became operational on January 1st, 2005. Its funding will come from the motorway companies’ dividends (as the State is the main shareholder of motorway companies) and fees on land use paid by these companies. AFITF's board has six members from the government, one parliament member, one senator, two local politicians and two 'qualified persons'. The budget for 2005 foresees a government grant of €200m, and revenues from the tolls of motorway concessionaires of €280m, as well as a rent of €155m that the concessionaires must pay for the use of the land that they occupy. AFITF is expected to have spent €7·5bn by 2012 on projects costing €20bn in total. Priority projects are TGV Est, the Perpignan - Figueras high speed line, railway upgrading at Perpignan and the Dijon - Modane corridor. Some earmarked funds have shortly existed in France previously (the last one was the FITTVN – Fund for Terrestrial Transport and Inland Waterways). Rail RFF revenues remain within RFF. Urban PT The LOTI (“Loi d’ Orientation des Transports Intérieurs”) acknowledges that public transport use satisfies economic, social and environmental objectives but it is not possible to consider that the passengers alone should finance this service. Therefore, the government and local authorities participate in paying the expenses incurred by the development of urban public transport networks through subsidies. A tax has been created known as Transport Tax (“Versement Transport"), paid by employers whose offices are located within the urban transport area. The tax is applied by decision of the Urban Public Transport Organizing Authority (AOTU). Air Aéroports de Paris account for the vast majority of airport results, in 2002 the Paris airports represented 77 % of the total turnover sales, 79 % of the total added value, 75 % of the gross operating surplus, 74 % of the investments and 72 % of the debt in medium and long term.

Annex A 152 REVENUE D3 CASE STUDIES SPECIFICATION

The aviation fund BAAC plans all activities of the General Directorate for Civil Aviation (DGAC), except for the financing of airport construction, which appears in the budget of the Ministry for Transport, and actions in the field of safety and security, which concern the Funds for the Airports and Air Transport (FIATA). BAAC’s resources come from the provisions of services rendered to the airline companies: – Route royalties, which remunerate the air traffic services and represent approximately 64% of the total resources (loans included). – Royalty for terminal services, which remunerate the services related to air traffic safety (approximately 15 % of the total). – Civil Aviation Tax (TAC), paid by the passengers, which finances the services relating to safety, as vehicle inspection, certification, State subsidies regarding airport infrastructures (approximately 16% of the resources).

Inland The funds collected from all the users of the waterways are reinvested and spread over the entire territory covered by Waterways VNF. In addition, the State and the Local Government Authorities contribute with 95 million euros, especially via the State-Region long-term plans and the jointly funded programmes. This means that VNF can dedicate 156 million euros to investment and maintenance of the network (2004): – Network maintenance, 45% – Development, 11% – The operation of VNF, 24% – Others, 20% 15 million euros are earmarked for developing transport, tourism and recreational activities. Maritime All port-generated revenue stays in the ports.

Forms of co-operation between the public and private sector

Mode Solution

All modes Draft secondary legislation aimed at creating a new contractual framework for Public-Private Partnerships (PPP) using design/build/finance contracts is currently being prepared. Road The companies that have the concession of motorways can be of the following type: – State-owned company – Private company – Mixed investment company – Public-Private Partnership Presently there are 10 concessionaires of interurban motorways: – 4 mixed investment companies of which 99% of the capital is held by the French State (half directly, half by the state-owned company Autoroutes de France) – 2 mixed investment companies with capital opened in March 2002, State-owned (51% of capital) – 2 state owned companies (French State owns the majority of the capital) – 1 private company – 1 public-private partnership (PPP)

Rail RFF encourages partnerships with interested parties, other contracting authorities or urban communities, the central government, the local authorities and Europe.

The construction of Channel Tunnel to England was awarded to the Anglo-French Eurotunnel consortium, granting the two concessionaires "jointly and severally...the right and the obligation to carry out the development, financing, construction and operation" of the tunnel. built by and is currently operated under a concession. Eurotunnel also operates the shuttle trains carrying lorries and cars through the tunnel.

The new mixed-use freight/high-speed line from Perpignan to Figueras (Spain) is currently under preparation by the concessionaire TPFerro, a French-Spanish consortium. Project cost is €952m.

Urban PT The urban transport organizing authority (AOTU) is responsible for organizing urban transport within the urban transport area. In most of the cases in which it delegates the operation of its network, it must organize an invitation to tender in order to select the eventual operating company. According to the object of the contract and the mode of remuneration it proposes, the local authority delegates the service or it signs a public contract.

The public service delegation (DSP) is the most frequently used method. It permits creating a genuine partnership

Annex A 153 REVENUE D3 CASE STUDIES SPECIFICATION

between the AOTU and the company on a contractual basis. The infrastructures, equipment and rolling stock usually belong to the AOTU, which makes them available to the operator.

When an AOTU wishes to build new infrastructure for public transport, they either act as a contracting authority delegating feasibility studies and construction (the most common scenario), or appoint a concessionaire.

Air No relevant co-operation between the public and private sector (like PPP) was identified but there are some projects in the air transport sector in procurement. Inland No relevant co-operation between the public and private sector (like PPP) was identified, although there are some Waterways important partnerships between the State and the Local Governments. Other partnerships include companies like VNF (inter modal partnership charter) and other infrastructure managers (partnerships for real-time traffic management and tracking system). Maritime The autonomous ports are state-owned and the ports of national interest are generally conceded to the Industry and Commerce Chambers. The decentralised ports are managed by the “Départements” and the “Communes”. In the port sector, any project has to coordinate public and private elements. Co-operation exists on a daily basis. The general trend is that public takes care of infrastructure, leaving as the superstructure to private initiative. Many examples of formalized cooperation exist in various domains (for development of port information systems, for land transport development, etc.). Some innovative examples of partnerships have emerged in Dunkerque in the last years (transfer of some freight handling superstructure operation to the private sector for instance). The port of Le Havre has even managed to induce private/private cooperation through call for tenders about “Port 2000” new terminals.

Role of the institutions in the decision making process

Mode Solution

Road The Road Directorate is in charge of the national network that includes national roads and concessioned and non-concessioned motorways. Routes of the “Départments” fall under the responsibility of the “Départment”. “Communes” are in charge of municipal roads. The role the concessioned companies is defined case by case in the concession contract. The French “Régions”, which contribute financially fort he national motorway network, do not manage any network. Rail The operator of almost all rail passenger services is SNCF, which is a state owned company. Separate consortia (generally joint ventures of the national railways) including Eurostar and Thalys operate international long high-speed services, but SNCF is an important partner in them. There has to date been no open ac-cess to the French high-speed rail network and the government opposes open access. Rail infrastructure, including all the high-speed lines, is owned by RFF, which is also a state owned company, formed in order to comply with the EU legislation on the separation of infrastructure from operations. RFF contracts all operation and maintenance back to SNCF, although as a result of the most recent EU legislation, capacity allocation is now undertaken by RFF independently of SNCF. Central government, through the Ministry of Transport and Tour-ism, defines the extent of the network, gives its approval to major projects, participates in financing these, and guarantees the respect of official procedures for the conduct and carrying out of projects and of safety rules. The Regions carry out an increasing number of services, in order to better integrate transport into everyday life. They also make major contributions to financing the development of the network. Urban PT The general institutional structure is France is composed by the Government, the “Régions”, the “Départments”, and the ”Communes” and groups of “Communes”. The mission of the AOTU (”Communes” and groups of “Communes”) is to organize urban public transport services and define mobility policy with the other relevant stake-holders involved. This implies that they: – Formulate urban mobility plans – Define transport supply – Finance the development of networks – Regulate transport activities – Promote the public transport service The AOTUs (228 in total) can have different legal statuses: – Communes or groups of communes (25%) – Inter-local authority boards (16%)

Annex A 154 REVENUE D3 CASE STUDIES SPECIFICATION

– Inter-communal and urban authorities (52%) – Joint management boards (7%)

Air In France, the airports are managed by public bodies placed under the control of the Minister for transport (for Paris) or the local Chambers of Commerce. Aéroports de Paris is the most important with more than 60 % of the national air traffic: at the beginning of 1995 its own funds represented about half (44%) invested capital. The activities of these public bodies exceed the simple management of the installations of takeoff and landing. They include the supply of facilities and services to the airlines (assistance in stopover in particular), to the passengers (shops, automobile parking), to the users of airport area (real estate, associated industrial services). The aeronautical activity falls under the responsibility of a single administration, the DGAC (“Direction Générale de l’Aviation Civile”), placed under the authority of the minister in charge of Transport. The DGAC collaborates moreover with a certain number of advisory organizations, among which the Higher Council for Infrastructure and the Aerial Navigation, the Higher Council for Commercial Aviation and the Higher Council for Meteorology. Inland VNF is a public corporation answerable to the Ministry for Infrastructure, Housing, Transport, Tourism and the Sea Waterways and in that way VNF acts in close cooperation with institutional partners and waterway users. Large investments are decided by the government. Investments are financed essentially by the State and by other entities (European Union, Local Communities, etc.) Maritime The Secretariat of State for Transport and Sea, under the responsibility of the Minister for the Equipment, Transport, Tourism, the Regional Planning and Sea, is in charge of the preparation and the development of the French maritime policy. It also takes part of the work of the Commission, the Council, and the Parliament Europeans. One of the departments of the Secretariat is the Directorate for Maritime transport, Ports and Littoral (Dtmpl) that is in charge of the economic development of the maritime and harbour sector, the layout and the protection of the littoral and the safety of the nautical recreations. Regarding the maritime ports, the Dtmpl has the following missions: – To reinforce the economic role of the ports and the competitiveness of the harbour position. – To ensure the supervision of the autonomous port, the administration of the ports of national interest and the follow- up of the legislative and legal framework of the ports managed by the “Départements” and “Communes”. – To work out legal texts intended to reinforce safety in the harbour installations. To take care of their application in practice. – To integrate the harbour activities in a multimode approach. – To organize and adapt the harbour staff regulations. Port infrastructure investments are carried out by Local Authorities (autonomous ports and others) as a result of the decentralization process.

Annex A 155 REVENUE D3 CASE STUDIES SPECIFICATION

7.6. Germany

7.6.1. Transport pricing

Mode Pricing schemes

Road Motorways and other roads of national importance (Bundesstrassen) are owned and maintained by the Federal Ger- man Government. Private financing of road infrastructure (motorways, tunnels, bridges, alpine passes) is allowed for within the Private Sector Funding of Trunk Road Construction Act of 1994. The importance of private investment in road infrastructure development has been very minor so far. Fuel taxes are 0.486 EUR/l Diesel and 0.65 EUR/l gasoline. Vehicle taxes for passenger cars differ between gasoline and diesel cars. They increase with engine size, ranging from 5 to 25 EUR per 100 cm2 engine size for gasoline cars and from 14 to 38 EUR per 100 cm2 engine size for diesel cars. Vehicle taxes for lorries and trucks vary according to emission and noise category.

Since the 1st of January 2005, a distance related heavy vehicle fee (“LKW-Maut”) is levied from all trucks with a weight above 12 tons. The rate of the fee is 0.124 EUR on average per kilometre driven on highways within Germany. It is foreseen to increase the rate to 0.15 EUR/km in the future. The fee is differentiated according to emission categories and number of axles (between 0.09 and 0.14 EUR/km). The level of the fee has been determined to cover resource costs; external costs are not included.

Rail The system of infrastructure charges in Germany is rather complicated.112 It comprises a set of linear, differentiated tariffs. There are nine different line categories with different technical quality of the tracks and speed limits. Charges range from 1.92 to 3.38 EUR per train-km (one line has a much higher tariff). The charging system also distinguishes different product categories which reflect the importance of a path in the network. There are five different products, some of which are only available to freight trains. In addition to line and product categories, a number of additive and multiplicative surcharges are applied, including surcharges for out-of-gauge load, gross train weight (above 1’200 t), regional factors, and lines with high demand (20% surcharge). The average price is between 1 and 4.5 EUR per train- km for freight trains, and between 2 and over 10 EUR per train-km for regional passenger trains. Long-distance passenger trains pay no more than 7.3 EUR per train-km. Up until 2004, railway companies pay only 50 percent of the regular electricity fuel tax, this rate of taxation was increased by 12% in 2004. They do, however, pay the full fuel tax for diesel trains.

Urban PT Fuel taxes for regional passenger transport have increased less than for the other sectors in the course of the ecological tax reform.

Air There are 17 international airports and about 40 aerodromes in Germany. Airport charges differ for each airport. Most of them include:113 – Landing fees (related to maximum weight and noise category) – Passenger charges (per passenger and per movement) – Infrastructure fees (air-bridge charges and/or central ground infrastructure charges) As in all other countries, commercial air transportation is exempted from the mineral oil tax.114

Inland Commercial shipping, their auxiliary activities and professional fishing are exempted from the mineral oil tax.115 The Waterways use of some segments of channelled waterways and channels is charged, non-channelled waterways and the river Rhine are free of charge. Infrastructure charges cover only about 12 percent of total costs.116

Maritime Commercial shipping, their auxiliary activities and professional fishing are exempted from the mineral oil tax. Harbour charges are levied by the port authorities. In Hamburg, for example, there are charges for official acts and user fees. User fees are differentiated according to the type of ship (cargo, passenger) and the size of the ships.117

112 See Peter (2003), Rail Infrastructure Charging in the European Union, p. 16. 113 Cranfield University et al. (2002), Study on Competition between Airports and the Application of State Aid Rules, Volume 2, p. GER-22. 114 Deutsches Mineralölsteuergesetz, Artikel 10. 115 Deutsches Mineralölsteuergesetz, Artikel 10. 116 Link (2001), Country Summary Germany, p. 2. 117 Gebührenordnung über die Hafen- und Schifffahrtsverwaltung (2003). Annex A 156 REVENUE D3 CASE STUDIES SPECIFICATION

7.6.2. Earmarking of revenues

Although revenues from transport related taxes and charges are earmarked as described below, the “earmarking” of funds for specific purposes is not legally binding in Germany and earmarked quotas or amounts can be changed yearly within the annual federal budget.

Mode Solution

Road Revenues from fuel taxation were originally partly earmarked for investment to federal roads, however, this earmarking is not legally binding and the usual procedure is to collect fuel tax revenues within the state budget. About 3 Cents per litre go to the municipalities to finance municipal public transport, this is a legally binding earmarking. The revenues from annual vehicle taxes belong to the States (Länder), parking charges are municipal revenues. Eco- tax, which is added on top of fuel tax, is intended to be used to reduce labour-related taxes. It is like the other fuel tax revenues collected within the state budget. The net revenues from the heavy vehicle fee (approximately 2’400 mill. EUR) are earmarked for investment in transport infrastructure: 50% are allocated to motorways, 38% to railways and 12% to waterways.118 The newly created transport financing agency (Verkehrsinfrastrukturfinanzierungsgesellschaft, VIFG) administers the revenues from the HVF and from waterway charges. The agency will develop investment programs and PPP projects.

Rail Track access charges for DB’s track network have to cover DB’s operating costs, depreciation of the rail network and repayments to the federal government for investment grants. In 2003, total revenue from track charges amounted to 3’251 mill. EUR, of which 245 mill. EUR came from other (external) railway companies.119

Urban PT Total revenues of public road transport companies were 10’800 mill. EUR in 2002. 4’284 mill. EUR were earned by private companies, 4’949 mill. EUR by municipal or jointly owned companies.120 16% of total revenues (1’728 mill. EUR) represented compensations (independent of the number of persons conveyed) from the public sector.

Air Total airport revenues were 3’544 mill. EUR in 2001. Of these, 1’026 mill. EUR were landing fees, and 1’194 mill. EUR fees for ground services, passenger and trucking services.121 Financial support from the federal, regional and municipal governments in the form of investments, loans, compensation for air traffic control etc. amounted to 124 mill. EUR.122

Inland Revenues from waterway charges are administered by the newly created transport financing agency VIFG (see Waterways above).

Maritime In Hamburg, the largest maritime port in Germany, harbour charges go to the treasury of the city of Hamburg.123

7.6.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road Presently, the major transport-related tax is fuel tax with annual revenues amounting to € 36 billion (2002). Fuel tax is a federal tax which, although it is a general tax, was originally intended to finance road infrastructure, an intention which is reflected in the earmarking of fuel tax revenues for road construction. Since 1955 parts of the fuel tax revenues have been earmarked for specific purposes. At present, about 3 Cents per litre are earmarked for urban transport infrastructure (both urban roads and public transport). These revenues are transferred to the municipalities. Originally, about 0.5 Cents per litre and 50% of the remaining fuel tax revenues were earmarked for road construction at the federal level (motorways and federal roads). Thus, more than half of the fuel tax revenues were originally earmarked for roads. However, since 1975 the annual budget laws have usually allowed this revenue to be used for other purposes in the transport sector. Additionally, parts of the fuel tax revenues go from the federal budget to the

118 BMVBM (2005), Lkw-Maut ist gestartet. 119 DB (2004), Geschäftsbericht 2003, p. 161. 120 Statistisches Bundesamt (2004), Strassenpersonenverkehr 2003. 121 Hopf et al. (2003), Analysis of financial support to the aviation sector in Germany, p. 7. 122 Hopf et al. (2003), Analysis of financial support to the aviation sector in Germany, p. 4. 123 Behörde für Wirtschaft und Arbeit Hamburg (2004), email from Claudia Quast (24.05.2004). Annex A 157 REVENUE D3 CASE STUDIES SPECIFICATION

budget of the Federal States in order to finance regional rail services (so-called regionalisation funds). The net revenues from the heavy vehicle fee will be used to finance investment in transport infrastructure. This includes investment in railway infrastructure (3.2 billion EUR from 2004 to 2007), road construction (1.1 billion EUR in 2004), and investments in national waterways (0.25 billion EUR in 2004).124

Rail

Urban PT

Air

Inland Waterways

Maritime

Forms of co-operation between the public and private sector

Mode Solution

Road There are two types of private financing models: the F-model and the A- model.

Under the F-model, a private company is granted a concession to build, maintain and operate a road for a defined concession period (the infrastructure is transferred to the state after this period has expired). The concessionaire has the right to charge for the use of this infrastructure, but the level of the toll is set by the federal government.

Under the A-model, the concessionaire upgrades an existing route or section, maintains it during the concession period and transfers it back to the state when the concession period expires. The concessionaire receives 50% of the investment costs as a state subsidy and part of the revenues from the HGV charging scheme at the start of the project. The concessionaires are entitled to levy tolls (user-fees) from all users (see above).125 Because of conflicts that arise when charging tolls for this type of privately financed road at the same time as the Eurovignette, the A-model has been restricted to tunnels, bridges and alpine passes. Currently, there are approximately 525 km of motorways being considered for upgrading under the A-model.

The tunnel under the Warnow River (“Warnow-Querung”) is the first toll-tunnel in Germany. It is operated by a private consortium and belongs to the category A-model. Each passage costs between 1.50 and 2.50 EUR, depending on the form of payment (cash and credit card payments are more expensive than the special electronic cards). The user fees are used to refinance the construction costs of approximately 220 Mio. EUR within 30 years. The user fee is set by the federal ministry of transport.126 Another tunnel under the Trave River near the city of Kiel is planned to open in 2005.

Rail

Urban PT

Air Most airports are public companies owned jointly by the States (Länder), municipalities and private investors. For example the Federal States have an ownership of up to 75% in the 17 international airports. Some small regional aerodromes are held by private investors only.

Inland Waterways

Maritime The city of Hamburg owns most of the land in the port of Hamburg. Concessions for up to 30 years are given to port operation companies. The city is responsible for the development and financing of the infrastructure.127

124 BMF (2004), Finanzplan des Bundes 2003-2007, p. 31. 125 BMVBW (2004), Betreibermodelle für die Bundesfernstrassen. 126 Pöker (2000), Warnowquerung Rostock. 127 Port of Hamburg (2005), Port Inside. Annex A 158 REVENUE D3 CASE STUDIES SPECIFICATION

Role of the institutions in the decision making process

Mode Solution

Road The Ministry of Transport, Building and Housing (BMVBW) is in charge of national transport planning. New road, railway and waterway projects are evaluated based on traffic forecasts and cost-benefit analysis.128 The analysis takes transport costs, maintenance and renewal costs, security, accessibility, spatial effects, environmental effects, induced traffic, waterway and air transport connections, and investment costs into account.129

Revenues from the HVF are administered by the newly created transport financing agency VIFG.

Rail German national railways are in the process of being privatised. According to the German constitution, the Federal Government has to keep the majority of shares for the rail network. The Federal Government remains responsible for railway law, funding the construction and upgrading of federal railway infrastructure and for the overall railway reform.

The German states (“Länder”) and local authorities are responsible for regional and local railway passenger transport. To fulfil this duty, they receive part of the revenues from fuel taxation. The planning of new railway lines is integrated in the planning process of the entire transport sector (see above).

Urban PT National public transport policy and coordination of funding in public transport is carried out by the Federal Government. The Federal States coordinate with the Federal Government regarding the funding of infrastructure and services. The Federal States are also responsible for the regulation of public transport operators and planning and operation of urban public transport (especially in the cases of Federal City States such as Berlin, Bremen, Hamburg). Municipal governments direct the role and extent of local public transport services, run public transport or coordinate with private operators. The financial responsibility for local public transport is also at the municipal level, but funding is provided by the Federal Government within the framework of the Local Infrastructure Funding Law.

Air The federal government (Ministry of Transport, Building and Housing, BMVBW) oversees public air transport policy. The States play an important role in administration and regulation of airports; among other things, they approve the scale of charges in their territory.

Inland The planning of waterways is integrated in the planning process of the entire transport sector (see above). Waterway Waterways charges are administered by the newly created transport financing agency VIFG.

Maritime Shipping and sea port policy is determined at the federal level.

128 BMVBW (2002), Bundesverkehrswegeplan 2003, p. 13. 129 BMVBW (2002), Bundesverkehrswegeplan 2003, p. 7. Annex A 159 REVENUE D3 CASE STUDIES SPECIFICATION

7.7. Greece

7.7.1. Transport pricing

Mode Pricing schemes

Road Fuel taxation has been traditionally used by the government as a mean for internalizing the cost of using the private car, and for gaining substantial revenues. Before the fuel market liberalization, the fuel retail price was determined by the Greek Government, usually at the beginning of the year, and was stable for relatively long time periods. Fuel tax has always represented more than 50% of the fuel retail price. The annual car ownership tax is paid to the Ministry of Economy and Finance. There are also road tolls. For road infrastructure projects that are constructed through Public- Private Partnerships, the State concedes to the participating consortia of private companies the right to receive the income from the investment for a certain period of time to offset the investment, after which the revenue comes to the State. In the case of the Athens ring road, a law defines an upper contractual toll limit within witch the tolls may vary in any period of time and per toll station. The collection of toll revenues and the monitoring of the collection process is a responsibility of the Managing Authority of the infrastructure project. Rail The pricing proposals by The Hellenic Railways Organisation (HRO) are accepted either by the two Ministers under a joint ministerial decree, or by the Minister of Transport, or by the Minister of Economics and Finance. Urban PT The urban public transport fares are among the lowest in Europe. Revenues from fare collection should cover approximately 50% of the operating expenses of AUTO and its subsidiaries. The fixed-track transport modes (metro, tram) have a higher fare as they offer significantly higher speed than normal buses. The first step in the decision-making process of urban transport pricing is that the AUTO’s subsidiaries examine possible pricing alternatives and makes the final recommendations to the MoTT on fare levels. The next step is the initial approval of AUTO’s proposals by the MoTT, on the basis of conformance of the proposed measure with the Ministry’s objectives. If the proposal is initially approved by the MoTT, it is then forwarded to the MoEF for second- phase approval on the basis of its conformance with the overall goals of the economic policy. The Minister of Economics and Finance brings the proposed policy measure to the Government Committee 130 for final approval. In case of a positive opinion by the Governmental Committee, the final decision is reached by the Minister of Transport. The agreed pricing measure is implemented by the urban transport authority that has made the proposal, namely AUTO and its subsidiaries (depending on the transport mode), THUTO or GBOA (Greek Bus Owners’ Association). The monitoring of the pricing policy is performed by the MoTT (Department of Urban Transport) [131]. Air Special tax is incorporated in the pricing policy of Greek airports and airline companies which is used for the modernization and development of Greek airports. The revenues generated from this tax are collected by the HCAA and distributed to the airports. Kerosene is exempted from taxes and levies. Inland Some tolls are payable for using the Corinthian channel. Waterways Maritime Under new regulation decisions on the coastal shipping fares are made by the operating coastal shipping companies. The MMM has retained its statutory rule of supervising fair competition in the sector, thus ensuring the social dimension of transport services (territorial continuity of the country, social cohesion) and monitors the pricing policy of the coastal shipping companies. According to the same law, the MMM has the institutional ability to intervene and enforce pricing measures that ensure the social character of water transport (e.g. impose upper fare levels for certain routes) .132 With respect to port dues and other taxation measures, the port funds and port authorities themselves articulate and submit their proposals on the structure of port dues to the Ministry of Economics and Finance. The Directorate of Macroeconomic Analysis of the MoEF examines the proposed measures and, after discussions with the interested authorities, submits its opinion to the Minister who then reaches the final decision. The implementation of the proposed measures is performed by the relevant port authorities and port funds. The monitoring and observation of issues concerning port rates, dues and other expenses, in the framework of free and fair competition, is under the responsibility of the Department of Pricing Policy of the General Secretariat of Ports and Port Policy. Effective monitoring is also accomplished through the collection of relevant pricing data for Greek ports and mapping of pricing policies implemented in major ports worldwide.

130 The Government Committee is responsible for overall issues concerning governmental policy, the coordination of governmental actions, and the decision-making for issues referred by the Prime Minister or Ministers. It is presided by the Prime Minister and consists of the Ministers of: Internal Affairs, Defence, External Affairs, Economics and Finance, Development, and Public Works. 131 Department of Urban Transport, webpage of the Ministry of Transport and Telecommunications, http://www.yme.gr/struct/gentrans/gentrans2.html#2a 132 “New institutional framework of coastal transport”, Ministry of Mercantile Marine webpage, http://egov.yen.gr/Folder.2003-07- 23.4639/Folder.2003-07-23.5843/Folder.2003-07-23.5859/

Annex A 160 REVENUE D3 CASE STUDIES SPECIFICATION

7.7.2. Earmarking of revenues

Mode Solution

Road The annual car ownership tax revenues are used for covering any type of national need and not to finance improvements of the existing transport infrastructure.

Rail The revenues from ticket fees cover only part of the operational expenses. The difference between the expenses and revenues is covered by the public subsidy and by bank loans. Every year the government allocates a specific amount of money to the various public transport organizations; this subsidy is not adequate to cover the difference between the cost and revenues of the Public Transport Organizations. Urban PT The revenues from fees cover only part of the operational expenses. The difference between the expenses and revenues is covered by the public subsidy and by bank loans. Every year the government allocates a specific amount of money to the various public transport organizations; this subsidy is not adequate to cover the difference between the cost and revenues of the Public Transport Organizations. Air Special tax is incorporated in the pricing policy of Greek airports and airline companies which is used for the modernization and development of Greek airports. The revenues generated from this tax are collected by the HCAA and distributed to the airports. Inland Waterways

7.7.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The process for the proposal and selection of road infrastructure projects to be developed is a part of the similar process for other transport infrastructure projects. At the first step of the policymaking process for road transport infrastructure, the selection of road infrastructure projects begins with the assignment of a preliminary study by the MoPW to an external consultant. Following, a Feasibility Study is conducted and the entire project plan is submitted to the MoEF for approval. The MoEF then submits all the proposed projects to the European Commission for the final selection. Regional Authorities also have the institutional capability of strategic planning for transport infrastructure works which are not included in the Trans-European Networks, and are able to commence infrastructure works within their budgetary limits. MoPW retains the funding. Road infrastructure projects that are constructed through Public-Private Partnerships, the State concedes to the participating consortia of private companies the right to receive the income from the investment for a certain period of time to offset the investment, after which the revenue comes to the State. Rail See Road. The articulation of proposals for rail infrastructure projects is made by the Board of Directors of HRO, only when requested by the state, and the proposals are submitted to the MoTT. The Minister of Transport and Telecommunications proposes the final conditions under which these proposals can be realized, through the issue of a Presidential Decree.133 Funding of the proposed infrastructure project through Community funds is coordinated by the “Operational Programme–Railways, Airports, Urban Transport” (OP-RAUT) to the European Commission for approval. The final beneficiary and responsible authority for the implementation of the rail transport projects that are funded through European funds is ERGOSE S.A. The MoTT and the MoEF, through the Managing Authority of the OP- RAUT, exercise the supervision of the projects included in the OP. The financing of new rail transport infrastructure is a decision made by the MoTT, in the case of financing through national resources only, or a joint decision by the MoTT and the MoEF (through the Management Organisation Unit), in the case of financing via Com- munity funds. Urban PT The accepted pricing proposals are affirmed, either by the two Ministers under a joint ministerial decree, or by the Minister of Transport, or by the Minister of Economics and Finance. The difference between the expenses and revenues is covered by the public subsidy and by bank loans. Every year the government allocates a specific amount of money to the various public transport organizations; this subsidy is not adequate to cover the difference between the cost and revenues of the Public Transport Organizations.

133 Law 2671/1998, “on the regulation of issues concerning the Hellenic Railways Organisation”, Official Government Gazette, issue 289 A’/28- 12-1998. Annex A 161 REVENUE D3 CASE STUDIES SPECIFICATION

Air The phase of proposal articulation regarding air transport infrastructure projects is controlled by the HCAA, which prepares a master plan for the development and modernization of Greek airports. This master plan covers a time span of 5 years [134], [135]. The financing of the airport infrastructure projects is achieved through the existing national and Community resources available for this scope and through the revenues which are realized from the activities of the airports. The phase of proposal articulation regarding the financing of air transport infrastructure projects is controlled by the HCAA, which prepares a master plan for the development and modernization of Greek airports. This master plan is then submitted to the MoEF for approval. The implementation of the financing is effected through the transfer of credits by the Ministry to the HCAA and to the MoPW. Maritime The General Secretariat for Ports and Port Policy is responsible for planning the national port development policy and for nominating the responsible bodies that will be in charge for the implementation of the port works. The Secretariat is under the direct supervision of the Minister of Mercantile Marine. The responsibility for the execution and the monitoring of the planned port infrastructure works depends on their characterization as “of major importance”. Works that are performed in the “national ports” (Thessaloniki, Alexandroupoli, Kavala, Patras, Volos) and have a budget that exceeds €10 million are classified as “works of major importance” and are executed and monitored by the Directorate of Port and Airport Works (former Directorate 4) of the MoPW. Works that are classified as “of lesser importance” are executed either by the regional departments of the MoPW that are located in the respective regions or by the respective regional or prefectoral authorities. The two Port Authorities that have the legal form of a “Societe Anonyme”, namely Piraeus Port Authority S.A and Thessaloniki Port Authority S.A., have the institutional ability to perform infrastructure works without lying under the supervision of the Ministry of Public Works. However, a prior approval of the General Secretariat of Ports and Port Policy is required. With respect to financing of port infrastructure projects, two categories of port works are identified. 1) Works funded through European sources such as the Trans-European Networks budget, the Cohesion Fund and the Structural Funds: The proposal articulation for candidate projects to be included in these financing schemes is performed by the relevant Regional Authorities. The selection of the projects is made by the MoEF and the MoPW, through the Managing Authority of the Operational Programme “Road Axes, Ports, Urban Development”, following the classification of the proposed projects according to specific criteria. The financing through Community resources is implemented through the relevant authorities of the MoEF (MOU, Cohesion Fund etc.). The MoPW and MoEF (through the Operational Programme) are responsible for monitoring the progress of the utilization of the resources. 2) Port infrastructure projects that are funded through national resources: These are funded through the Regional Operational Programmes with the approval of the General Secretariat of Ports and Port Policy.

Forms of co-operation between the public and private sector

Mode Solution

Road PPP: Road infrastructure projects that are constructed through Public-Private Partnerships, the State concedes to the participating consortia of private companies the right to receive the income from the investment for a certain period of time to offset the investment, after which the revenue comes to the State. Rail The Hellenic Railways Organisation (HRO) is the sole public authority providing for rail transport in Greece. Urban PT No tendering procedures for public transport services exist in the two major Greek cities (Athens and Thessaloniki), since the Greek state is the sole provider of such services. The respective public transport authorities (AUTO for Athens and THUTO for Thessaloniki) are legal entities functioning under legislation for private enterprises but the Greek State is the sole shareholder in both. Urban public transport in other Greek cities is performed by bus fleets which belongs to the Greek Bus Owners Association (KTEL), and are known as “urban KTEL”. Air The provision of the air transport service is performed by the air carriers. The HCAA is the owner and operator of all Greek airports, except for the Athens International Airport. The Athens International Airport is operated by “Athens International Airport S.A.”, constituted by the Government of the Hellenic Republic and the private consortium led by HOCHTIEF Aktiengesellschaft (winner of the international tender for a strategic equity partner under a BOOT -

134 Christou, I. (1998), “Development of infrastructure in the airports of Southern Greece and the impact on economic development”, Proceedings of the International Conference on Air Transport and Airports, 3-4 December 1998, Athens, Greece. 135 Hellenic Civil Aviation Authority, Informative Booklet, 2003.

Annex A 162 REVENUE D3 CASE STUDIES SPECIFICATION

Build, Own, Operate and Transfer – scheme). The Airport Development Agreement (ADA) establishes a 30-year concession ratified by Greek Law 2338/95, granting the Airport Company the exclusive right to design, finance, construct, complete, commission, maintain, operate, manage and develop the airport. Concerning the air traffic management infrastructure, this belongs to the HCAA and there is no intention to assign it to the private sector at present or in the future, as it comprises the “hard core” of the state’s activities. National security, safeguarding of public interest and air traffic safety are mentioned as the main arguments towards this trend. The infrastructure for the remaining activities (e.g. airport concessions, ground and cargo handling activities, commercial activities), can be assigned to private interests. Inland Waterways Maritime The operation of the coastal passenger shipping system is performed by the passenger shipping companies operating in Greece. The overall supervision and administration of the system is performed by the Ministry of Mercantile Marine. Ten major ports (Alexandroupoli, Kavala, Volos, Rafina, Lavrio, Elefsina, Patras, Igoumenitsa, Heraklion and Kerkyra) have recently been privatised into private-sector companies and all Port Funds into municipal port corporations.

Role of the institutions in the decision making process

Mode Solution

Road The Ministry of Transport and Telecommunications (MoTT) is the government body responsible for the formation and implementation of the transport and telecommunications policy. The Ministry of Transport and Telecommunications is the supervising authority of the following transport organizations: Hellenic Civil Aviation Authority (HCAA), Hellenic Railways Organization (HRO) and its subsidiaries, Athens Urban Transport Organization (AUTO) and its subsidiaries, Olympic Airlines and its subsidiaries [136]. The MoTT is also the supervising authority for the Managing Authority of the Operational Programme “Railways, Airports, Urban Transport”. The aim of this operational programme is the development of public transport in Greece through the use of exclusively selected Community funds, and includes projects such as the completion of the country’s main rail route (Patras–Athens–Thessaloniki–Eidomeni) with a double-track, electrified high-speed line, development of the suburban railway and tramway in Athens, expansion of Thessaloniki and Heraklion airports, and the development of a series of modern cargo centres. The Ministry of Environment, Physical Planning and Public Works (MoPW) maintains the responsibility for the supervision of the construction of those transport infrastructure works included in the Trans-European Networks and for the works that are characterized, after a ministerial decision, as “of national importance”. The participation of the Ministry of Economics and Finance (MoEF) in the transport policymaking process is focused in the following two sectors: – financing of transport infrastructure development – pricing and taxation of transport services The fuel taxation policy is decided by the Greek Parliament, is prepared and introduced by the Ministry of National Economy in co-operation with the Ministry of Economics, the Ministry of National Development, the Ministry of Commerce, and the Ministry of Transport and Telecommunications, and is enforced and implemented by the Ministry of Economics. The annual car ownership tax per vehicle is prepared and introduced by the Ministry of Economy and Finance in co- operation with the Ministry of National Development and the Ministry of Transport and Telecommunications, is decided by the Greek Parliament, and is implemented and monitored by the Ministry of Economy and Finance. The road tolls for the highways that have been constructed strictly through public financing are decided by the Ministry of Economy and Finance, after the proposal of the Ministry of Public Works. The Company for Administration and Exploitation of Greek Highways S.A. (former National Highway Fund), supervised by the Ministry of Public Works, is responsible for the toll collection and monitoring of the tolling system. Rail The Hellenic Railways Organisation (HRO) is the responsible authority providing for rail transport in Greece. New legislation will establish the separation of the HRO in two organizations, with the former organization acting as a provider of rail transport services activities and the latter having the responsibility of managing the existing rail infrastructure. Urban PT The planning, organization, control and provision of the public transport services belongs to AUTO (The Athens Urban

136 Ministry of Transport and Telecommunications webpage, http://www.yme.gr/superv.html

Annex A 163 REVENUE D3 CASE STUDIES SPECIFICATION

Transport Organisation), while the operation of the services (using thermal and natural gas buses, trolley buses, metropolitan railway and, as of 2004, tramway) is performed by its subsidiaries. The urban public transport system is operated by the urban public transport authorities. For Athens and Thessaloniki, the respective authorities are the Athens Urban Transport Organisation (AUTO) and the Thessaloniki Urban Transport Organisation (THUTO). Air The operation of the air transport sector is supervised by the The Hellenic Civil Aviation Authority (HCAA). The HCAA is also the sole owner and operator of the Greek air traffic control system. HCAA is responsible for the preparation of recommendations concerning issues on airport charges. HCAA is directly supervised by the Ministry of Transport and Telecommunications. The implementation is performed by the HCAA and the process is monitored by the HCAA and the MoTT. Maritime The Ministry of Mercantile Marine (MMM) is the responsible authority for the maritime transport in Greece

Annex A 164 REVENUE D3 CASE STUDIES SPECIFICATION

7.8. Italy

7.8.1. Transport pricing

Mode Pricing schemes

Road Road is charged through many devices: annual registration tax, annual vehicle tax, fuel tax, charges for motorways and tunnels usage. The criteria to calculate the tolls for the Italian motorway network are established by the detailed set of rules of this sector, assimilated in the current conventions between the concessionary firms and the granting authority ANAS. The toll fares are adjusted annually, starting from January, according to the price cap formula, which takes into account the planned inflation, the objectives of productivity assigned to the concessionaries, the changes in the quality of the service. The fares take into account the costs of construction, management and maintenance of the motorway route, and vehicle type. There are 5 categories of toll fares in most cases, that are based on the number of axles and also the vehicle weight.

Charges are levied by RFI, the railway infrastructure manager. According to DPR 277/98, art. 7.2, the charge should Rail cover the direct and indirect costs, energy, direct general expenses and part of the indirect ones. It is calculated in order to balance the circulating costs on network level, and not on each single path (principle of network solidarity). The charges are calculated based on train speed and weight, traffic density, peak/off-peak and the use of the main stations in nodes. The costs of energy are calculated on the effective usage. The total access charge is the sum of the following factors137: – Charges for the sections on the primary network; – Use of the complementary network; – Charges for access to nodes. The allowed tariffs of operating companies are price-cap regulated and are related to the quality of service. The price- cap limits the increase in prices for services while maintaining quality standards. Urban PT In urban areas the transport fares are proposed by the operators and approved by the municipality. They must respect a maximum fixed by the region. For suburban areas, the fares are proposed by the company and approved by the region. Air The Italian CAA (ENAC) is in charge of monitoring the process of aeronautical charge regulation according to a new regulatory formula implemented in 2002. A new regulatory formula takes into account the level of costs/investments, quality service, environmental aspects, productivity efficiency and European benchmarking. Costs of infrastructure are not covered by the current level of charges. In the case of the Rome-Fiumicino Airport the airport charges are composed by the following types: – Landing charges to cover all maintenance and operating costs related to taxiways, runways, airside lighting, surveillance, draining and water system, etc. – Passenger charges – Parking charges – Other charges that cover maintenance, operating costs, depreciation and remuneration related to passenger security, etc. These charges are strongly regulated. A deliberation by CIPE (Public Fare Regulation Committee, Deliberation 86/2000) encouraged the Ministry of Transport to establish new criteria (dual till approach) for the determination of airport charges. The Ministry established a structure of tariffs for the following activities: landing, take-off and parking for aircrafts; passenger boarding, freight loading and unloading; controls and security operations, utilisation of common infrastructure and common use goods and of exclusive use goods, handling fees. The tariffs are partly cost-based, and made peak load pricing possible for airport operators. Kerosene is exempted from taxes and levies by the Chicago convention. There is also a noise charge. Inland The importance of inland waterways transport in Italy is very limited. Waterways Maritime Maritime charges include port dues and other charges related to the use of port facilities.

137 Deliverable 9, “IMPROVERAIL” Project, funded by the 5th Framework Programme. Annex A 165 REVENUE D3 CASE STUDIES SPECIFICATION

7.8.2. Earmarking of revenues

Mode Solution

Road Revenues from tolls go 100% to the concessionaires that will pay the VAT on the amount (20% in Italy). All revenues are earmarked since they will be re-used on some motorway that generated them. Concessionaires are also allowed to have a profit margin. Rail All revenue collected by RFI stays there, as it is not enough to cover maintenance and operations costs of the railway network. Urban PT All revenue collected by urban PT operators stays there, as it is not enough to cover operational costs. According to Law 537/95, part of the revenues from aircraft charging have to be earmarked to financing infrastructure Air and airport services improvement programs. The noise charge is earmarked to finance measures to reduce noise emissions from aircraft and in particular to complete and improve noise pollution monitoring systems, to reduce noise pollution and to pay compensations to residents living near the airport area. Inland Not applicable. Waterways Maritime All port-generated revenues stay within the ports.

7.8.3. Revenue allocation scheme

Design and allocation rules

Mode Solution Road The concessions are not required to adjust or expand the infrastructure according to traffic volume. Infrastructure enhancement can be developed in the framework of the concession, but must be agreed on with co-ordinating body (ANAS). The investments are normally self-financed - public funding could be present, on a case-by-case basis. Rail All revenue collected by RFI stays there, as it is not enough to cover maintenance and operations costs of the railway network. Urban PT All revenue collected by urban PT operators stays there, as it is not enough to cover operational costs. Air Who is actually receiving service revenues depends on the airport management structure: – in the “full management” airports (one concessionary manages the whole airport, including the flight infrastructures, for a very long period) every aeronautic and commercial income is received by the airport manager; – in the “partial management” airports (flight infrastructure ownership is public, while a concessionary is in charge of passenger and freight terminal services and possibly handling operations; other services can be entrusted to other concessionaries) the State gathers start / landing fees and parking fees for aircrafts, while the manager collects revenues from boarding and handling operations and from commercial activities; – in the “public direct management” airports (the State directly manages all activities but handling and commercial activities, that are realised by concessionaires) the State takes all incomes stemming from aircrafts movements and parking, and also concessionary fees for the activities entrusted to other actors.

Inland Not applicable Waterways Maritime All port-generated revenues stay within the ports.

Annex A 166 REVENUE D3 CASE STUDIES SPECIFICATION

Forms of co-operation between the public and private sector

Mode Solution Road The prevailing principle at the core of toll motorway management in Italy is that of the "Concession", governed by a National Law made in 1929. The toll motorway network is assigned to concessionaires under a Convention that is stipulated between the Administration and the Concessionaire company. The Convention, of a contractual nature, establishes the terms of the concession, such as its purpose, validity, financial plan, and the obligations and rights of the Concessionaire and of the assigning authority. One of the aspects regulated by the convention is the annual revision of toll charges, based on a complex "price-cap" mechanism. In the beginning, the Concessionaire companies were private, public and mixed. Lately, the beginning of the privatisation process determined a progressive change, to the point where today the majority of the network is under the management of concessionaires mostly of a private nature. Some of these, namely the companies Autostrada Torino-Milano, Autostrade and Autostrade Meridionali, are listed on the Stock Exchange. Rail PPP is currently considered for the construction of the new high-speed railway between Lyon and Turin, as well as the Brenner base tunnel between Fortezza and Innsbruck (as part of the European North-South axis). Urban PT Air The regional/local authority ownership model is followed by several airports in Italy, although like Germany, airports are increasingly being privatised. Both Milan airports (Malpensa and Linate) are owned by a holding company, SEA, which itself is predominantly owned by the Municipality of Milan - 84.6% and the Province of Milan - 14.6%. SEA also holds management contracts at Bergamo, Rimini, Naples and Turin airports. The company was scheduled to be partially privatised (30% of the total shareholding) at the end of 2001, but this was delayed due to the impact of September 11. Despite the trend towards privatisation, some Italian airports continue to be fully owned by local authorities. Most of the regional airports in Italy (e.g. Bologna) are technically owned by the national government (in terms of infrastructure) but are operated by the local Chamber of Commerce. Inland Not applicable Waterways Maritime No PPP observed.

Role of the institutions in the decision making process

Mode Solution

Road In Italy, there are: – Tolled motorways and Tunnels and – Toll free motorways, main urban roads, etc. ANAS S.p.A. is the company (100% state ownership) owning the road and motorways network having a national relevance. ANAS manages directly a part of the network, which is free of charge, while allowing private companies138 to manage the other part of the network through concessions: the motorway concessionaire companies have the right of building and managing motorways and tunnels, and collecting tolls. Concessionaire companies are monitored by ANAS. No State guarantee is foreseen. Public funding can be decided on a case-to-case basis, depending on the local conditions and on the expected societal benefits, when the investment could not possibly be paid for by traffic revenues only. Rail Presently, there is a holding company FS with independent subsidiaries (RFI as Infrastructure Manager, Trenitalia as Railway Undertaking) that have separate budgets and profit and loss accounts. RFI is a subsidiary company of FS spa holding company with 100% state ownership. The principle operator is Trenitalia Spa. and it is the only one providing passenger services.

138 Autostrade per l’Italia, Autostrade Meridionali, Autostrada Torino-Milano, Societá delle Autostrade di Venezia e Padova, Milano Mare – Milano Tangenziali S.p.A., Autostrada Torino-Savona, Autostrada Torino-Ivrea-Valle d’Aosta, Autocamionale della Cisa, Autovie Venete, Autostrada Brescia-Verona-Vicenza-Padova, Autostrada del Brennero, Soc. Aut. Torino-Alessandria-Piacenza, Autostrade Centro Padane, Societá Autostrade Valdostane, Societá Autostrada Ligure Toscana, Autostrada dei Fiori, Societá Autostrada Tirrenica, Tangenziale di Napoli, Consorzio per le Autostrade Siciliane, Societá Italiana per il Traforo del Monte Bianco, Societá Italiana Traforo Autostradale del Frejus, Raccordo Autostradale Valle d’Aosta, Societá Italiana Traforo Gran San Bernardo, Strada dei Parchi. Annex A 167 REVENUE D3 CASE STUDIES SPECIFICATION

RFI manages the infrastructure on the basis of a concession that has been granted by the Ministry of Infrastructure and Transport. The contract establishes the duration of the concession of 60 years. The infrastructure manager proposes access/infrastructure tariffs to the Ministry of Transport. The Ministry ultimately establishes the tariffs taking into account the opinion of CIPE (Comitato Interministeriale per la Programmazione Economica). Trenitalia is also a subsidiary company of FS spa Holding with 100% state ownership. Regions and operating companies negotiate public service contracts for local passenger transport. The law states that the Regions have to tender these services since 2003. Subsidies are not allowed to cover more than 65% of the costs involved. At least 35% of the costs have to be earned through ticket revenues. Urban PT The Italian public transport system underwent an institutional modification that conferred in 1997 all competences and duties concerning public transport to regions and local entities. Air In Italy, all major airports are managed by concessions as in the case of French regional airports. The concessionaires are either wholly owned by the private sector (AdR), a mix of private and public shareholders or wholly owned by public sector shareholders. At most airports, the public-sector shareholders are either the local city council or regional authority. This combination of national government ownership of land and public sector shareholding in the concessions means that the public sector’s role in capital expenditure financing is quite significant. Even at Rome Fiumicino, which handled approximately 26 million passengers in 2000, 55% of funding for capital expenditure in 2000 was secured from the Italian government. Inland Inland waterways in Italy are managed by the regional authorities. Waterways Maritime The Ministry of Transport is in charge of the following: – Programming and regulation in navigation matters, transport and safety; – Collaboration in shipbuilding; – Training of maritime labour; – Infrastructure execution in the ports of national and international interest, regulation of the port activities and monitoring on the Port Authorities; – Management and protection of the State maritime property.

Annex A 168 REVENUE D3 CASE STUDIES SPECIFICATION

7.9. Netherlands

7.9.1. Transport pricing

Mode Pricing schemes

Road Vehicles with a maximal authorised mass above 12 tons must purchase an Eurovignette. The price of the Eurovignette depends on the number of axles, the emission of polluting gases, the country of registration and the period of validity.139 The only road tolls that exist are related to two road tunnels (Kiltunnel and Westerscheldetunnel). These are aimed at investment recovery and are therefore target-oriented. They have four price levels, related to vehicle size. A bridge in the Southwest (Zeelandbrug) used to have tolls, that were used for paying the investment costs. The tolls were suspended after costs had been covered. There are currently no other road charges in the Netherlands. Plans for cordon tolls or distance-based road pricing have been subject to heavy political debate, but implementation of any new road pricing scheme is not expected until 2010. Fuel taxes can be broken down as follows (figures as of Jan 1, 2005): – Unleaded petrol (per 1000 l): levy EUR 668.10 , strategic oil reserve EUR 5,30 – Diesel (per 1000 l): levy EUR 364,91 (€10 less for low-sulphur diesel), strategic oil reserve EUR 5,30 – These price exclude VAT.140

Rail Prorail, the infrastructure manager, charges railway undertakings for using its infrastructure. (Private infrastructure is exempt). The charges for passenger transport are calculated according to the formula (Pkm*A) + (Ps1xB1) + (Ps2*B2), in which Pkm is the tariff per revenue-earning train-km, A the number of revenue-earning train-km, Ps1 and Ps2 the tariffs for serving stations (Ps1 for main stations, Ps2 for others) and B1 and B2 the number of times that each of those stations is served each year. For freight transport the charges are calculated according to Pkm*C*M, with C being the number of revenue-earning tran-km over the public network and M being a transition factor that increases from 0,3 in the year 2000 to 1,0 in 2007. In addition, a transition factor applies to all charges – increasing from 15% in 2000 to 100% from 2005 on. The law states that Prorail must set its parameters in a target-oriented way so that the total budgeted revenue for each term in the above equations must be equal to the total budgeted costs for that term – so, track charges must equal track maintenance and renewal costs, traffic control costs, signalling costs; station charges must be equal to station costs etc. The charges may include internalisation of externalities. Urban PT All bus, tram and metro transport companies use one ticket system throughout the country, the so-called Strippenkaart. This is a zone-based system where passengers can travel within a certain area for a certain time – without restrictions on changing line or even mode – in the large cities this ticket is also valid on trains. This system is based on average cost pricing but does not seem to have any target associated with it. Air All Airports are state-owned. Scheduled passenger and cargo flights take place in Amsterdam Schiphol (AMS), Rotterdam (RTM), Groningen (GRQ), Enschede (ENS), Eindhoven (EIN) and Maastricht (MST), all of which have paved runways. Amsterdam Schiphol Airport is the largest airport of the Netherlands. Aeronautical charges are split between airport charges and governmental levies. The airport tax is based on the type of flight (pax/cargo/instruction), maximum Take-Off Weight (MTOW) and noise emission level. The governmental charges are ATC levies (varying according to MTOW), security and noise levies (fixed amounts per flight), and can be considered second-best Aircraft fuel is exempted from taxes and levies by the Chicago convention (in case of international flights), but for domestic flights there is fuel taxation since 1 January 2005 (up to €159,72 per 1000L). Domestics flights in the Netherlands form only a tiny fraction of total traffic, however. Inland There are 5046 km of navigable inland waterways in the Netherlands. The main waterways (definition: more than 5m Waterways tonnes of international freight passing each year – 2200km of network) are maintained and managed by DGG, the Freight Transport Department of the Ministry of Traffic. The smaller waterways are under the jurisdiction of regional and local authorities. Infrastructure charging on using waterways is forbidden by law. Additionally, the Mannheim Act forbids charging on the Rhine. The passing of bridges and locks is free of charge on the large waterways, but may be charged elsewhere.

Maritime The main ports in the Netherlands are Rotterdam (322,1m tonnes in 2002) and Amsterdam/IJmuiden (50,4m tonnes).

139 http://www.transport-pricing.net/nationalreport.html. 140 Eindejaarspersbericht 2004, Ministerie van Finaciën.

Annex A 169 REVENUE D3 CASE STUDIES SPECIFICATION

Other ports are in Vlissingen, Den Helder, Delfzijl and Eemshaven. Sea ports in the Netherlands are owned by the municipalities in which they are based. Revenues include port dues, and the rental of quays, ground and other services. Dutch ports make profit (Rotterdam: €56m in 2002 on €397m turnover). Other than large infrastructure projects, they do not involve government financing.

7.9.2. Earmarking / non-earmarking of revenues

Mode Solution (design, rule, reasoning)

Road The tolls of the two tolled tunnels are fully earmarked for investment recovery. A tiny part of the fuel tax is earmarked for strategic oil reserves (€5,30 per 1000l). No other allocation schemes are currently in place for road pricing. Rail Revenues from infrastructure charging are fully earmarked, although cost coverage is not achieved. Urban PT No earmarking of revenues from transport pricing was identified for the construction or maintenance of infrastructures. Ticket revenues are earmarked internally. Air Noise charge is earmarked for the insulation of houses. See the allocation section. Inland Charges are earmarked internally. Waterways Maritime Charges are earmarked internally.

7.9.3. Revenue allocation scheme

Design and allocation rules

Mode Solution (design, allocation rules)

Road The revenues of the vehicle tax does not have any allocation rule associated with it. The scheme called “Kwartje van Kok” (an increase in fuel taxes by NLG 0,25 (€0,11)) does not have any allocation scheme connected to it either. A small part of the fuel tax (€5,30 per 1000l) is earmarked for strategic oil reserve keeping. No other allocation schemes for road pricing. Rail Currently, charges do not cover the full cost and therefore railway revenues stay within the railway sector. Construction of new infrastructure is financed by the government, not the infrastructure manager. Prorail, the Infrastructure Manager, is a semi-independent government agency. It receives government subsidies to compensate operational losses each year. This seems in contradiction with the legal requirement of the charges being target- oriented and cost-covering, but these are phased in gradually. There are no cross-subsidies. Revenue is collected from railway operators through user charges. Urban PT In all cases, the networks are owned, managed and operated by the municipal transport operators, that are all entirely government-owned. Operational losses are compensated by municipalities and occasionally also by the Ministry of Traffic and Public Works on an ad-hoc basis. Currently, all bus, tram and underground companies use the national ticket system called “strippenkaart”. In this system, tickets are sold everywhere in the country and may be used anywhere – making it difficult to see which lines generate most revenue. Every three years, the transport operators and the government negotiate the revenue allocation for the following period – insight into passenger travel behaviour is obtained through questionnaires held nationally. Operator performance/reliability has no influence on payments. The “strippenkaart” is due to be replaced by a national system of electronic cash, allowing for direct linking of income to different lines and systems, eliminating the need for questionnaires. Introduction expected in 2006. Air Landing charges are insufficient to cover all costs. Therefore no money is transferred to other modes; however, other commercial activities make that some airports, including Schiphol, have operational profits and therefore receive little if any government subsidies. A strict allocation scheme applies to the noise charge, it is used for the funding of the Schiphol noise mitigation project – houses located in areas where noise levels are high and cannot be lowered, houses are bought from their current owners or given extra insulation (total cost about €645m for insulation, €178m for demolition). The costs of

Annex A 170 REVENUE D3 CASE STUDIES SPECIFICATION

the project are carried by the airlines through a governmental noise charge (€33m in 2003, to be continued until approx. 2015). Inland Currently, subsidies are available for companies wishing to build inland terminals and waterway connections (SOIT Waterways and SBV programmes) – these programmes are aimed at changing the modal shift in favour of inland waterways. Subsidies are handed out by the Ministry of Traffic and Public Works – up to 50% of a new project can be financed this way.

Maritime Any profit stays within the same port.

Forms of co-operation between the public and private sector

Mode Solution

Road PPP was used for some infrastructure construction projects (e.g. Wijkertunnel in the A9 motorway). The A59 motorway and N31 carriageway are projects currently underway under a Design, Build, Finance, Maintenance (DBFM) contract. More projects of this kind are expected (A4 extension) and the Dutch government is keen on further developing this concept of infrastructure financing. Rail PPP was used for the construction of the “upper structure” (track, catenary and signalling) of the Amsterdam- Brussels high-speed railway line. DBFM was used. Urban PT There is no specific form of co-operation between the public and the private sector in urban transport. Most non- urban bus companies are privately owned and receive revenue from the “strippenkaart”-fund. Air The Schiphol Group, that manages the Airports of Amsterdam, Rotterdam, Eindhoven as well as the small airport of Lelystad, also has some minor revenues from the privately owned airports of New York JFK (Terminal 4) and Brisbane. Total net revenue of Schiphol Group was €860m in 2003, net profit being €191m. Inland Other than the financing scheme for small projects mentioned above, there is no co-operation between the public and Waterways the private sector. Maritime Companies wishing to build terminals and other port facilities rent the ground from the port authority, and anything they build on those grounds (cranes, buildings etc.) is the private property of the companies.

Role of the institutions in the decision making process

Mode Solution

Road National roads are the property of Rijkswaterstaat, the Public Works department of the Ministry of Traffic and Public Works. Other roads fall under provinces and municipalities. Investment decisions are usually taken on the authority level responsible for the (future) road, although the national government will assist financially if it considers a local project important enough. Rail Infrastructure is owned by the government, construction of new infrastructure is decided on by the government. The level of the infrastructure charges is set by Prorail, there is no specific earmarking of revenue within the infrastructure manager. This might change with the opening of the new high-speed line Schiphol-Rotterdam-Antwerp (expected in 2006/2007), for which higher charges will apply. Urban PT Decisions are nearly always taken locally, unless they concern large infrastructure decisions; in those cases the decisions will be taken by the municipalities and the national government (as both will be financing the new project). Air Decisions regarding long-term infrastructure investments (new runways, terminals etc) are taken by the national government, although the influence of the Schiphol board on national decision-making is considerable. Tactical/operational decisions are taken by the airport managements, and sometimes by the municipalities in which they are located (most notably in case of Maastricht). Inland Decisions regarding maintenance are taken by the relevant authorities (national/regional/local), decisions regarding Waterways water quality and other environmental concerns are taken by the Ministry of Traffic and Public works, although the local water authorities may have some influence on this as well. Maritime Large infrastructure decisions (such as de Maasvlakte expansions of the Rotterdam port) are taken by the government, who finances their construction largely. The port authority then takes over the management, as well as the maintenance and operational costs.

Annex A 171 REVENUE D3 CASE STUDIES SPECIFICATION

7.10. Norway

7.10.1. Transport pricing

Mode Pricing schemes

Road Cities of Trondheim, Oslo and Bergen have area pricing in use. In these toll-ring systems the toll is paid when vehicle is entering the area. The payment can also be solid daily, monthly or annual payment.On freight the value added tax level is 24%. The principle in Norway is that the energy related taxes are based on the environmental properties of the engine fuel and with the level of taxation related to the damage that marginal use of energy causes. Energy tax for petrol is 0,43 EUR/l. The value added tax level is 24%. Rail No energy related taxes if there is not any use of petrol. Energy tax for petrol is 0,43 EUR/l.On freight the value added tax level is 24 %.Norway there is a general value added tax on transport. From 1 March 2004 the taxation level on public transport is harmonized with the other countries in the EES-area, so that for domestic transport the level is 6%. On public direct transports between a place in Norway and a place in another country there are no tax. Urban PT No energy related taxes if there is not any use of petrol. Energy tax for petrol is 0,43 EUR/l.For domestic transport the VAT level is 6 %. On public direct transports between a place in Norway and a place in another country there are no taxes.

Air Avinor is authority for all actors on the air travel market, leads the air traffic and is responsible for security. Airport charges are second best multipart tariffs. Energy tax for petrol is 0,43 EUR/l, and for domestic transport the VAT level is 6%. However, commercial international flights are exempted through the Chicago convention.. Maritime Port dues and charges are target-oriented.No energy related taxes if there is not any use of petrol. Energy tax for petrol is 0,43 EUR/l. For domestic transport the level is 6 %. On public direct transports between a place in Norway and a place in another country there are no tax.

7.10.2. Earmarking of revenues

Mode Solution

Road Excise tax on fuel 8530 M NOK (2002, ~1000 M EUR). Auto fuel tax 3955 M NOK (2002, ~450 M) No earmarking on taxes. Revenues from urban pricing schemes are used for financing the infrastructure (e.g. tunnels).

Rail No earmarking on taxes. Fare revenues are used for operation. Urban PT No earmarking on taxes. Fare revenues are used for operation. Air The revenues from aircraft charges are collected and used by airport authorities. Maritime Dues and charges are earmarked internally.

7.10.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The Norwegian Road Administration (Statens Vegvesen) is responsible for the road network. Rail The Norwegian Railroad Administration is responsible for physical railway infrastructure.Unprofitable services are subsidised by the Norwegian Parliament the Norwegian State Railway and the counties. Urban PT Unprofitable services are subsidised by the counties. Air Avinor is authority for all actors on the air travel market, leads the air traffic and is responsible for security. Unprofitable services are subsidised by the Norwegian Parliament.

Annex A 172 REVENUE D3 CASE STUDIES SPECIFICATION

Maritime Unprofitable services are subsidised by the Norwegian Parliament and the counties in local and regional passenger sea routes and The Norwegian Parliament and The National Road administration in car ferries.

Forms of co-operation between the public and private sector

Mode Solution

Road The existing three PPP projects are: E39 Klett-Bårdshaug, E39 Lyngdal-Flekkefjord and E18 Grimstad-Kristiansand.In the PPP Model the selected PPP Company gives full responsibility to design, construct, build, finance and operate a road section on behalf of the State for 20-30 years. Norwegian Public Roads Administration is responsible for planning and the impact assessment of the project, and is also controlling the quality and performance of the road service.The operating period starts when the road is opened, and the PPP Company will be paid an annual compensation during the 20-25 year operating period. The payment is based on the incentives and performance against a number of pre-defined criteria incorporated in the payment mechanism in the PPP Contract.

Rail The counties operate as regional transportation authority limited to their geographical coverage. They purchase profitable and unprofitable railway services within the area. Urban PT The counties operate as regional transportation authority limited to their geographical coverage.

Air Private companies operate domestic and foreign flights, and the airports are owned by Avinor AS (100 % government owned). Maritime The public ports in Norway are mostly owned by the municipalities.

Role of the institutions in the decision making process

Mode Solution

Road The public road are owned and administrated by The Norwegian Road Administration (Statens Vegvesen). Rail The Norwegian Railroad Administration (Jernbaneverket) is responsible for physical railway infrastructure and coordinates transports through a scheduling process. Urban PT The counties operate as regional transportation authority limited to their geographical coverage. Bus stations often are owned as joint venture with contributions form municipalities, counties, transport companies and other owner interests. Air The airports are owned by Avinor AS (100 % government owned). Avinor is authority for all actors on the air travel market, leads the air traffic and is responsible for security. Inland Kystverket is responsible authority for security and coordination at sea. The public ports are mostly owned by the Waterways municipalities. Maritime Kystverket is responsible authority for security and coordination at sea. The public ports are mostly owned by the municipalities.

Annex A 173 REVENUE D3 CASE STUDIES SPECIFICATION

7.11. Portugal

7.11.1. Transport pricing

Mode Pricing schemes

Road In Portugal road pricing on motorways was introduced in the 60’s. BRISA, formerly a state-owned company and operated under a monopoly situation, operates most of the tolled motorway network. The company acts on the basis of 30-year concessions. Four user categories are defined by law depending on vehicle dimension. Other private operators were selected, through public tendering, for the construction and exploitation of part of the motorway net- work141. Some motorways are operated without tolls. These are the so called SCUT projects, where SCUT stands for “no direct cost for the user”. There are also two bridges in the Lisbon area that are tolled by LUSOPONTE. Road pricing schemes are not applied to other roads (municipal and national roads). Besides motorway tolls (which are defined as charges, because there is a clear service associated to the payment) other main pricing instruments are: – Motor vehicle tax (applied to new vehicles); – Fuel tax; – Municipal circulation tax (light vehicles and motorcycles); – Road haulage tax (light + heavy lorries – transport providers); – Circulation tax (light and heavy goods vehicles– private use). Despite recent political discussion there are no signs of (gradual) adoption of marginal cost pricing schemes in the road sector. The recent changes in road financing result from the search for new options for financing infrastructure needs rather than efficiency aspects. Rail Infrastructure management separated from train operations in the late 90´s. The infrastructure charging system has been recently defined by the new infrastructure manager REFER, the regulator INTF and the government. The operator Fertagus is the only new private railway operator, it operates a suburban passenger line in the Lisbon area. Currently, the infrastructure charges to be paid by Fertagus are defined in the concession contract. The fee is calculated by train unit and some factors (e.g. variations of traffic volume). The law defines the fees to be paid by state-owned CP, which operates all other freight and passengers services. The fees aim at covering the infrastructure management costs. The calculation of the usage fees takes into account train.km available (capacity of the track) and the type of rolling stock (i.e. freight or passenger). The infrastructure management costs for the estimation of the fees are as follows142: – Track preservation costs; – Signalling costs; – Telecommunication costs associated to the command and control of the circulation; – Bridges and tunnels conservation costs; – Preservation costs of the electric traction installation; – Command and control costs of the circulation in the command costs, including the; – Centralised traffic command; – Command and control costs of the circulation in the stations; – Staff intervention, regarding indispensable activities for the circulation of the trains; – Circulation control and conservation managers; – Quays, platforms and technical buildings (with the exception of stations under concession contracts signed with the operators). Marginal cost pricing principles are not considered in the determination of rail infrastructure charges in Portugal. Urban PT In Lisbon the metro operations are carried out by a State-owned company and in Porto by a company controlled by a group of municipalities. Infrastructure investments are financed by the State. There is no significant evidence that marginal cost pricing principles influence the discussions about current and future pricing approaches. Air There are three international airports on the mainland and four on the islands of Madeira and the Azores. Until late 90’s, ANA SA, was in charge for the investment programmes in all airport infrastructure (air traffic control, aviation and non aviation), but currently NAV EP, a new public company, is responsible for air traffic control. With the exclusion of air traffic control, all the remaining charges are classified in four groups: – Traffic charges (take-off and landing, parking, hangar use and passenger service - also considered a traffic charge by law);

141 Auto Estradas Atlantico (A8 motorway); AENOR, Auto Estradas do Norte SA; SCUTVIAS (Autoestradas da Beira Interior); EUROSCUT - Soc. Concessionária da Scut do Algarve; S.A LUSOSCUT Costa de Prata; NORSCUT - Concessionária de Auto-Estradas, S.A; LUSOSCUT das Beiras Litoral e Alta; EUROSCUT Norte. 142 Main sources: Deliverable 9, “IMPROVERAIL” project, funded by the 5th Framework Programme and Law Decree 270/2003 of 28 of October. Annex A 174 REVENUE D3 CASE STUDIES SPECIFICATION

– Handling; – Commercial areas; – Other commercial charges. The main criterion for pricing differentiation of traffic charges is the maximum take-off weight (MTOW) of the aircraft. Environmental criteria are not used for price differentiation in the Portuguese airports. The law clearly defines the relation between the amounts paid and the services provided. The charges are revised every year, after the approval of the ANA proposal by INAC (the State authority for the economic regulation of all airport activities, including air traffic control143). The main objective of the pricing scheme is full cost recovery. Marginal cost calculation is neither required nor suggested by INAC or carried out by ANA. Kerosene is exempted from taxes and levies. Inland In Portugal there are nine inland waterway operators, mostly in passenger transport.144 41,6 million passengers used Waterways this mode in national and international traffic (INE, 2001)145. The major operator (Transtejo) is a stock holding company owned by the State also owning the correspondent infrastructure. This company usually receives compensatory subsidies from the State, which are related to the provision of public services. Pricing regulation determines that tariffs of inland transport services, with significant traffic density, should be approved by the government. Although tariffs are not based on marginal costs estimates, the recurrent subsidisation suggests that equity aspects are taken into account in the determination of prices. Therefore, in general, the inland waterways pricing principle could be classified as target-oriented. Charges are the pricing instrument used in this mode. Maritime The National Ports Charging System highlights the following: – The direct relation between service and charge born by the user; – The publication of tariffs, as well as of the unitary charges, in order to allow the budgeting of the global infrastructure use cost (in line with the EC recommendations); – The charging proposals of the port administrations is subject to approval by the National Maritime and Ports Council (consulting body of the Ministry of Transports) – Update of charges should be carried out taking into account the total costs related with the operational and human resources needed for the production of the services, the prices of foreign ports and inflation. Therefore, in general, the pricing principle in ports can be classified as target-oriented. Charges are the pricing instrument used in this mode.

7.11.2. Earmarking / non-earmarking of revenues

Mode Solution (design, rule, reasoning)

Road The tolls and charges are fully earmarked for use by their respective concessionaires. None of the taxes are earmarked for road maintenance and financing purposes. Rail Infrastructure charges are earmarked internally Urban PT No earmarking of revenues from transport pricing was identified for the construction or maintenance of infrastructures. Air All charges are earmarked internally. Revenues are used to finance the activity of the infrastructure manager under a single till system - the profits from the non-aviation airport activities are used to reduce aeronautical charges. The infrastructure manager intends to gradually evolve to a dual till system, where regulated prices are constrained. Inland No earmarking of revenues from transport pricing was identified for the construction or maintenance of Waterways infrastructure. Maritime All dues and charges are earmarked internally.

143 See Law Decree n.º 133/98, of 15.05. 144 The operators are: Transtejo, Soflusa, Transado, Transria, City Council of Caminha, City Council of Vila Nova da Cerveira, Transport Company of the Douro, Transport Company of Guadiana River and Portela Brothers Company. 145 Including national traffic and international traffic link Vila Nova da Cerveira-Goyan. Annex A 175 REVENUE D3 CASE STUDIES SPECIFICATION

7.11.3. Revenue allocation scheme

Design and allocation rules

Mode Solution (design, allocation rules)

Road The Portuguese Institute of Roads (IEP), a public institute of the Ministry of Transports, is responsible for: – the execution of the policy orientations for the road sector stated in the National Road Plan; – the conception, construction and maintenance of the roads included in the National Road Plan; – representing the State in road concession processes; – the supervision of the concession contracts. The funds for the construction of new infrastructure come from the general State budget, subsidies granted by public or private entities, including the European Union and the private sector (PPPs). Revenues from motorway or bridge tolls and subsidies from the EU are used to finance the activities of the private concessionaires. Some charges regarding the use of BRISA motorways (see above) are born by the State. The financing of the new Vasco da Gama bridge, in Lisbon, mainly came from the private sector. As the concessionaire also operates the other Lisbon bridge – bridge 25 of April – part of the respective toll revenues were used for the construction of the new bridge.146 In the case of SCUT motorways (no cost for the user) the revenue does not come from the user but from the State. The values of the payments are defined in the concession contract. Muni- cipal roads are financed through the Municipalities and EU subsidies. Rail REFER is a State-owned company that is responsible for rail infrastructure management in the fields of construction, maintenance and traffic management. The main source of revenue are the infrastructure charges. The company can also get loans for the financing of the activity. Coverage of operational deficits is ensured by the State trough subsidization. Urban PT In Lisbon and Oporto, the operations of the State-owned companies are financed through ticket revenue and by the State through a public service obligation contract. When necessary debt coverage is also assured by the State. Any remaining funding need comes from bank loans. From time to time, the accumulated debts are transferred to owner’s capital and consequently extinguished. New investments are financed by the State. Public companies in other cities are financed by the local authorities, while private owned companies operate on a self-financing basis. In Setubal, there is cross-subsidization from interurban transport. In Evora, profits from the concession for the management of public parking spaces are used to finance public transport operations. Air All international airports are managed by ANA, which uses a single till approach in the proposal of charges to the regulator, INAC, which has limited powers at the present. This means that cross-subsidisation between aviation and non-aviation activities ensures the financial sustainability of the company and the relatively low aviation charges. Traffic charges are reviewed by INAC, and subject to government approval after customer/user consultation. Ground handling charges are reviewed and approved by INAC after customer/user consultation. Commercial charges are set by ANA at its discretion. Inland Operational deficits of Transtejo (Lisbon operator) are covered by the State through subsidisation. This company is Waterways responsible for infrastructure management and transport service provision. Maritime Port activities are financed through charges for the use of infrastructure or services provided, including fees for land occupation and buildings inside the port area (for instance, trough concession contracts). In general, the ports do not generate sufficient revenue to cover operational costs. The deficit is covered through bank loans or State subsidies.

Forms of co-operation between the public and private sector

Mode Solution

Road PPP solutions have been applied lately in the construction and operation of highways and of the Vasco da Gama bridge (Lisbon). In the case of motorways there are two distinct solutions. Private concessions are awarded, through a tender procedure for the construction and operation of motorways on the basis of 30-year contracts, where tolls are paid by the user. In the other case, private concessions are also awarded for the same period and aims but without tolls. The main distinctive characteristic of this solution, the so called SCUT, is that the cost of use is not directly born by user but by the State. In the case of the Vasco da Gama bridge, the PPP was also used. In general, all these projects fall under the BOT (Build-Operate-Transfer) model. Rail In 1999 Fertagus was awarded the first rail concession. In 2002 the same company was awarded the concession contract for the design, construction and operation of the new light rail network in the south bank of Lisbon

146 The breakdown of financing resources for the construction of the new bridge are as follows: Cohesion Fund : 35%, European Investment Bank Loan: 33%, “25 of April” tolls: 6.0%; other resources including public equity and State subsidies: 26%. Annex A 176 REVENUE D3 CASE STUDIES SPECIFICATION

Urban PT No relevant co-operation between the public and private sector identified. Air Currently, there is no specific form of co-operation between the public and private sector. However, the issue of privatization of the infrastructure manager (ANA) is in the political agenda. NAER is the State-owned company which in charge of the preparation, planning and implementation of the new Ota airport PPP and first phase of ANA privatisation. At the moment NAER does not generate revenues and is funded by its capital and EU grants. The objectives of the government are as follows: - To secure, with the private sector, the design, construction, funding and operation of the new Lisbon airport; - Maintain control of ANA in the medium term; - Secure a sound capital basis and commercial footing for ANA with investment by strategic partner; Inland No relevant co-operation between the public and private sector was identified. Waterways Maritime Though no relevant co-operation between the public and private sector was identified, the concession contracts for the provision of port services might include infrastructure investments.

Role of the institutions in the decision making process

Mode Solution

All modes The body responsible for the management of the Operational Programme of Transport is responsible for : - The assessment of the project proposals to be financed trough the ERDF (European Regional Development Fund); - The national coordination of all transport activities that, under Transport Ministry responsibility, are eligible for ERDF funding; - Representing Portugal in Transport and Infrastructure Committee of the EU.

Road Large infrastructure investments are decided on by the government. The Road National Institute (IEP) is in charge of the operational management of the national road network. Investment on municipal roads is decided by the Municipalities. The role of the private concessionaires is defined case by case in the concession contract.

Rail The new model for the rail sector makes a clear distinction between the roles of the different entities: - Large investments are decided on by the government. Presently, state-owned RAVE is in charge of the development and coordination of the studies on the planning, construction, financing and operation of the future Portuguese high- speed network; - INTF, the rail regulator, is in charge of proposing and implementing the legal, economic and technical framework - REFER EP, the infrastructure manager, is in charge of the management of the rail infrastructure in terms of construction, maintenance and traffic management.

Urban PT Large investments in the metropolitan areas (Lisbon and Oporto) are still decided by the government and the monopolist operators. In the future, the newly formed Transport Metropolitan Authorities of Lisbon and Oporto will be responsible for: - Planning, coordination and organization of the transport market; - Development and management of the transport system.

Air Decisions regarding long-term infrastructure investment are taken by the government, although the influence of ANA can be considered relevant. Tactical and operational decisions are taken by the airport managers or by ANA departments. The new State owned company NAER is in charge of the preparation, planning and implementation of Ota airport PPP (new Lisbon airport) and for the first phase of ANA privatization.

Inland Investment decisions are taken by the Government. The coordination of the construction of the Cais Sodre intermodal Waterways station, which is also used by users of the Transtejo service, was carried out by the Metro of Lisbon.

Maritime The Maritime Institute is the public institution which is responsible for the strategic planning and supervision of the sector. By law the port authorities have a high degree of autonomy on new investments decisions and on the nego- tiation of concession contracts. However, as usual, revenues are not enough to cover operational and investment costs so the port authorities still depend on State funding, EU grants and bank loans.

Annex A 177 REVENUE D3 CASE STUDIES SPECIFICATION

7.12. Spain

7.12.1. Transport pricing

Mode Pricing schemes (design, pricing principles, pricing instruments)

Road Charging takes place on several motorways (through 21 concessionaire companies), and charges are calculated as a function of travelled distance and vehicle category (of which there are two or three, depending on which motorway is considered).

In addition, there are fuel taxes and flat taxes on all motorised road vehicles.

Rail There are 14’189 track-km of railways, of which 455 are high-speed (standard gauge) line operated by GIF, the separate infrastructure manager. 1’902 km are narrow-gauge regional railway in the North, that are and will remain vertically integrated. The remainder is broad-gauge and currently operated in a vertically integrated manner by RENFE, the state railways. Separation of train operations and infrastructure management is foreseen for 2005. there is currently no railway pricing in Spain other than on the GIF-managed Madrid-Zaragoza high-speed railway. This is bound to change though when the separation between infrastructure management and train operation will be complete. This separation will be implement from 2005 on.

Urban PT There is no pricing scheme for urban public transport in Spain. All systems are vertically integrated.

Air AENA, the Spanish Aviation Authority in charge of the main airports, charges airlines on an MTOW basis. Airports are divided in three categories in terms of importance (they can switch categories between summer/winter though). Kerosene is exempted from taxes and levies.

Inland There are 1045 km of navigable waterways in Spain. Their economic importance is negligible though. No pricing Waterways scheme was observed.

Maritime The pricing principle of the public ports of Spain is that they should be financially self-supporting. Port dues are set in such a way that they cover at least the handling costs, financial costs, handling, depreciation and a reasonable margin in order to make new investments. The ports do not cover all costs (in 1996 and 1998 the costs were 11% higher than the revenues).

7.12.2. Earmarking / non-earmarking of revenues

Mode Solution (design, rule, reasoning)

Road Road tolls collected by concessionaires are fully earmarked and stay within the concessionaire.

Rail Infrastructure charges collected by GIF are fully earmarked and stay within GIF.

Urban PT Revenues are earmarked internally.

Air Airport charges are fully earmarked and stay within the airports.

Inland Not applicable. Waterways

Maritime Port dues and other charges stay within the ports.

Annex A 178 REVENUE D3 CASE STUDIES SPECIFICATION

7.12.3. Revenue allocation scheme

Design and allocation rules

Mode Solution (design, allocation rules)

Road The tolls collected by private concessionaires stays within their budget. No other allocation schemes detected.

Rail Infrastructure charges collected stay within GIF.

Urban PT No specific scheme was detected that allocates traffic revenue towards urban public transport. Urban PT receives government subsidies.

Air Airport charges stay within the airports.

Inland No allocation scheme observed Waterways

Maritime Port dues and other charges stay within the ports.

Forms of co-operation between the public and private sector

Mode Solution

Road ENA is a public limited company wholly owned by the Spanish State through the corporation Sociedad Estatal de Participaciones Industriales (SEPI). The ENA Group deals with the administration of the toll motorway companies and the construction, promotion and operation of other toll roads or motorways. ENA will be privatised. There are 21 concessionaire companies in Spain that operate and maintain motorways.

One example of PPP used in motorway (re)construction is the M-30 ring road of Madrid (EUR 4bill.) – where a 35-year concession was given in a special-purpose mixed company system.

Rail The new mixed-use freight/high-speed line from Perpignan to Figueras (Spain) is currently under preparation by the concessionaire TPFerro, French-Spanish consortium. Project cost is 1’121 mill. EUR of which 52 mill. EUR for construction. The concession was awarded in February 2004 and has a period of 50 years, of which 5 for construction.

Urban PT PPP is currently used in several cities in Andalusia to construct underground lines. For example in Seville, a 35- year concession was given to Guadalmetro for a 19km metro network (497 mill. EUR in total). One third of the investment was a grant from the regional authority, and 260 mill. EUR an EIB loan.

Air “Don Quijote”, a new business airport is built near Ciudad Real under a PPP concession.

Aena, the Spanish airport authority is currently bidding (in consortium) to deliver and operate the Galileo satellite navigation system.

Inland No PPP observed. Waterways

Maritime Some ports operate under concessions

Role of the institutions in the decision making process

Mode Solution

Road The planning of infrastructure and the management of public services other than falling under State responsibility, have been passed on to the Regional and Local Governments, with the State maintaining responsibility for the planning and development of infrastructures which are of general interest (i.e. which affects several regions). All decisions regarding

Annex A 179 REVENUE D3 CASE STUDIES SPECIFICATION

national roads are taken by the Dirección General de Carreteras (DGC), the road department of the Ministry of Traffic.

Rail Decision on railways are taken almost entirely by the national government. With the independence of the future infrastructure manager ADIF this might change.

Urban PT Decisions are normally taken by municipalities and other local governments.

Air AENA, the Spanish Airport Authority, is in charge of decisions on the airports that it governs. Private airports (such as Don Quijote) fall under the Ministry of Development.

Inland Inland waterways usually fall under the regional authorities. Waterways

Maritime Spain has 27 port authorities that have a high degree of freedom in taking their decisions.

Annex A 180 REVENUE D3 CASE STUDIES SPECIFICATION

7.13. Sweden

7.13.1. Transport pricing

Mode Pricing schemes

Road Vehicles with a maximal authorised mass above 12 tons must purchase an Eurovignette. The price of the Eurovignette depends on the number of axles, the emission of polluting gases, the country of registration and the period of validity.147 The following taxes are collected from road transport: – For freight transportation the tax rate in Sweden is 25 %. – Vehicle tax is levied on motor vehicles. – A sales tax is levied on motorcycles, cars, buses/coaches and lorries. The energy tax on fuel is levied as a fixed sum per weight or unit of volume. Carbon dioxide tax is levied on all fossil fuels and is calculated according to the carbon content of the fuel. Total tax on petrol is 0,5 EUR/l. Rail National Rail Administration collects a railway infrastructure charge from the operators. Railway infrastructure charge covers the costs of infrastructure use. Electric rail transport is freed from electricity taxes. Rail transport, which uses petrol pays energy-related taxes for total 0,5 EUR/l. For freight transportation VAT in Sweden is 25 %. Passenger transportation services have a tax rate of 6 %. Passenger transports in and out of Sweden do not have value added tax liability. Urban PT Passenger transportation services have a tax rate of 6 %. Passenger transports in and out of Sweden do not have value added tax liability. Total tax on petrol is 0,5 EUR/l. Fares vary. Air The National Civil Aviation collects charges from traffic including for example landing fees For professional air transportation there is not energy related taxes and freight transportation of airplane petrol does not have tax liability. For freight transportation VAT in Sweden is 25 %. Passenger transportation services have a tax rate of 6 %. Passenger transports in and out of Sweden do not have value added tax liability. Inland Waterways Maritime The National Maritime Administration (Sjöfartsverket) collects fairway charges from merchant shipping. Professional shipping do not have energy related taxes if it does not use any petrol. Total tax on petrol is 0,5 EUR/l. Passenger transportation services have a tax rate of 6 %. Passenger transports in and out of Sweden do not have value added tax liability. Total tax on petrol is 0,5 EUR/l. For freight transportation the tax rate in Sweden is 25 %. Passenger transportation services have a tax rate of 6 %. Passenger transports in and out of Sweden do not have value added tax liability.

7.13.2. Earmarking of revenues

Mode Solution

Road Petrol tax revenues 12’349 mill. SEK (2001, approx. 1’200 mill. EUR). Taxes and Eurovignette revenues are not earmarked. Rail Railway infrastructure charge covers the costs of infrastructure use. The operator uses fare revenues. Urban PT Taxes are not earmarked. Fares are used for operation. Air The revenues landing fees etc. are used to recover the airport operation costs. Maritime The revenues from fairway charges are used to recover the operation costs.

147 http://www.transport-pricing.net/nationalreport.html. Annex A 181 REVENUE D3 CASE STUDIES SPECIFICATION

7.13.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The largest part of the road infrastructure is financed through state budget. Each investment project is mentioned separately in the annual state budget. The actual decision on the allocation of funds for a particular project then takes place in the National Road Administration’s annual budget process. Rail The largest part of the rail infrastructure is financed through state budget. Each investment project is mentioned separately in the budget. The actual decision on the allocation of funds for a particular project then takes place in the National Rail Administration’s annual budget process. Train services are financed mainly though ticket revenues. Unprofitable regional services are subsidised by the Transportation company of the county and interregional by Rikstrafiken. Urban PT Local and regional public transport is financed both by tax funds and income from services. A certain portion of the central government funds is allocated to the counties for regional public transport. Regional unprofitable services are subsidised also by the Transportation company of the county. Interregional unprofitable services are subsidised by Rikstrafiken. Air Aviation is largely financed by charges from traffic including landing fees. The municipal airports receive central government operating grants. Interregional unprofitable services are subsidised by Rikstrafiken. Maritime Shipping is largely financed by charges from traffic including fairway charges. Ports are usually operated as municipal companies and do not receive central government grants. Interregional unprofitable services are subsidised by Rikstrafiken.

Forms of co-operation between the public and private sector

Mode Solution

Road The National Public Transpoirt Agency’s (Rikstrafiken) promotes the development of a co-ordinated long-distanse public transport system of coach, ship, flight and train transport. Rikstrafiken operates behalf of the government. Rail There is full competition between and free access to the railway for train operators. The national Public Transport Agency (Rikstrafiken) purchases unprofitable interregional connections. In case a Rikstrafiken purchased line runs through a county, the county’s company has to buy validity for its tickets along the line. A-Train is Sweden's first privately financed infrastructure project and operates Arlanda Express, the express rail service between Stockholm Central Station and Stockholm Arlanda Airport. A-Train will be transferred to a European Infrastructure Fund. The Macquarie European Infrastructure Fund is a new wholesale vehicle that will target investments in infrastructure and related assets located in European OECD countries. A-Train is the second seed asset acquired for the Macquarie European Infrastructure Fund, following Macquarie's recent acquisition of leading UK utility South East Water. Urban PT All the counties have a regional transportation company limited of its geographical coverage. The primary municipalities own half of the company stocks in the dual municipality system of Sweden. Other half is owned by the secondary municipalities that cover the counties. Air The airports are private companies or owned by Luftfartsverket. Private companies operate domestic flights. Rikstrafiken has purchased airline connections in northern Sweden. Maritime Sea transports are private. Risktrafiken has purchased the lines form Oskarshamn and Nynäshamn to Gotland Island. The public ports are mostly owned by the municipalities but increasingly by private companies.

Annex A 182 REVENUE D3 CASE STUDIES SPECIFICATION

Role of the institutions in the decision making process

Mode Solution

Road The Swedish Road Administration (Vagverket) is responsible for the public road network in the coutnryside and for the through traffic routes in built-up areas. The municipalities are responsible for local road maintenance in built-up areas. Rail The Swedish Railroad Administration (Banverket) is responsible for the physical rail infrastructure and coordinates the transports. There is full competition between and free access to the railway for train operators.

Urban PT All the counties have a regional transportation company limited of its geographical coverage. The primary municipalities own half of the company stocks in the dual municipality system of Sweden. Other half is owned by the secondary municipalities that cover the counties. Air The Civil Aviation Administration (Luftfartsverket) is authority for all actors on the air travel market: companies, airports etc., leads the air traffic and is responsible for security. The airports are private companies or owned by Luft- fartsverket. Maritime The National Maritime Administration (Sjöfartsverket) is the responsible authority for the fairways and for pilotage, ice-breaking and sea charts. Sjöfartsverket is an agency under the Ministry of Industry, Employment and Communi- cations. The agency is controlled by the Riksdag and government through financial objectives and guidelines for activities. The public ports are mostly owned by the municipalities but increasingly by private companies. Inter-urban The National Public Transpoirt Agency’s (Rikstrafiken) promotes the development of a co-ordinated long-distanse Public public transport system of coach, ship, flight and train transport. Rikstrafiken operates behalf of the government. transport The Swedish Institute for Transport and Communications Analysis (SIKA) carries out studies for the government, develops forecasts and planning methods, is the responsible authority for official statistics.

Annex A 183 REVENUE D3 CASE STUDIES SPECIFICATION

7.14. Switzerland

7.14.1. Transport pricing

Mode Pricing schemes

Road Trucks with a weight above 3.5 tons are subject to the distance-related heavy vehicle fee (HVF). The HVF depends on the kilometres driven within the borders of Switzerland (on any road), the maximum permissible weight (including trailer) and the emission standard of the vehicle.148 Currently, the tariff is 1.92 cent/ton-kilometre (tkm) for trucks meeting the EURO 0 and EURO 1 standard. For the EURO 2 category, the tariff is 1.68 cent/tkm, and 1.43 cent/tkm for EURO 3 to 5 categories. Currently, the average rate is 1.6 cent/tkm. It will be raised to its maximum level of 1.83 cent/tkm in 2007 when the first of the new transalpine railway tunnels will open.149 Personnel passenger transportation vehicles must purchase a vignette for driving on high-ways. The vignette costs 40 CHF and allows unlimited use of the highway network for one year. Tourists that intend to drive on highways must purchase the vignette as well. Besides these charges, there are vehicle taxes and a fuel tax. The fuel tax is a federal tax levied from fuel importers. Tax rates are 0.83 CHF/l of gasoline and 0.86 CHF/l of diesel (approximately 62% of the final sales price for both fuels). Vehicle taxes are collected by the cantons (departments). Tax rates differ between cantons and generally increase with engine size. Transport pricing follows a target-oriented principle, with an (increasing) tendency towards social marginal cost pricing. The level of the heavy vehicle fee has been set such that its revenues do not exceed the uncovered infrastructure costs and the external costs of heavy vehicle traffic. External costs are taken into account, but on an average rather than a marginal level. There is a differentiation between more and less polluting trucks, but it is limited and, at current levels, actually favours the most polluting trucks.150 Hence, the price signals are not optimal. Nevertheless, the heavy vehicle fee is much closer to the polluter-pays principle than the earlier flat rate regime and many existing systems in other European countries. Unlike in most neighbouring countries, the fuel tax on diesel is higher than the tax on gasoline. Hence, diesel prices are significantly higher than in the rest of Europe, and the use of diesel is not encouraged by the tax regime. Rail Infrastructure charges are linear and consist of two parts: – Minimum charge for freight trains: 0.0065 EUR per gross tkm (maintenance) and 0.26 EUR per train-km (operation) – Minimum charge for passenger trains: 0.016 EUR per gross ton (maintenance) and 0.26 EUR per train-km (operation) – Contribution margin for franchised passenger transport: Fixed percentage of revenues. – Contribution margin for non-franchised passenger transport: 0.0018 EUR per km. – Contribution margin for freight transport: 0.003 EUR per net tkm (SBB infrastructure) and 0.0023 EUR per gross tkm (BLS infrastructure). Slow freight carriers pay extra fee. The contribution margin for freight trains is currently paid by the federal government. The decree on the railway network access stipulates that the minimum charge corresponds to marginal costs. Infra- structure charges are uniform and do not take congestion into account, as pure marginal cost pricing would require. Average prices per train-km are approximately 1 EUR for regional passenger transport, 1.7 EUR for long-distance passenger transport, and 1.2 EUR for freight transport.151 Urban PT Urban transportation is not subject to special taxes or charges. It is subsidised by the federal and cantonal governments. The pricing is target-oriented. Air There are six international airports in Switzerland (the EuroAirport Basel-Mulhouse-Freiburg is a binational airport). In Zurich, which is the largest airport of Switzerland, the following charges and taxes are levied: – Landing charge – Fleet charge – Emission tax – Cargo charge – Baggage sorting charge – Passenger charge (including security) – Noise charge (per aircraft and per passenger)

148 See BTS (2000), Fair and efficient – The distance-related Heavy Vehicle Fee (HVF) in Switzerland. 149 See Borgnolo et al. (2005), Position and Recent Trends in European Countries, p. 117. 150 See Suter/Walter (2001), Environmental Pricing – Theory and Practice. The Swiss Policy of Heavy Vehicle Taxation, p. 390. 151 See Peter (2003), Rail Infrastructure Charging in the European Union, p. 15. Annex A 184 REVENUE D3 CASE STUDIES SPECIFICATION

A differentiated emission tax which was introduced in 1997 in Zurich, and since then in all major Swiss airports as well. Depending on the emission category of an airplane’s engines, the emission tax ranges from 0 to 40% of the landing charge.152 The passenger charge is 21 CHF for local and 8 CHF for transfer passengers. The security charge amounts to 10 CHF for local passengers and 7 CHF for transfer passengers. The noise charge is CHF 5 per passenger for all passengers. The level of charges is determined such that infrastructure costs can be covered without government subsidies. Hence, average cost pricing is applied. Noise charges and particularly the differentiated emission tax show a tendency towards social marginal cost pricing. Inland In the freight harbour of Basle, the following charges are levied by the port authorities: Waterways – Harbour charge (on goods arriving on waterways, rail and road) – Further charges for harbour operation and navigation – Calibration charges Charges appear to be target-oriented (coverage of average costs). Maritime Switzerland has no access to the sea.

7.14.2. Earmarking of revenues

Mode Solution

Road Two thirds of the revenues from the HVF (344 mill. EUR in 2002) are directed into the fund for large railway infrastructure projects (Finöv-Fonds). The remaining 33 percent (171 mill. EUR) are allocated to the cantons which must use it primarily to pay uncovered costs in connection with road transport. The Finöv-Fonds is also fed by revenues from the fuel tax (approx. 281 mill. EUR in 2005) and the value-added tax (187 mill. EUR). The revenues from cantonal vehicle taxes belong to the cantons. In some Cantons, they have to be spent on road construction or maintenance. 50% of the revenues from the fuel tax belong to the treasury. The other 50% are used for construction and maintenance of the national motorway network as well as the construction of the new transalpine railway tunnels (up to 25% of total construction costs may come from fuel tax revenues. Rail The infrastructure charges are internally earmarked for maintenance and construction. The revenues of the train companies do not cover the full costs. The deficits are covered by the government through payments for infrastructure projects and operations. Urban PT Air Noise charges flow into an aviation noise fund, which is used to finance – among other things – noise abatement and mitigation measures. Inland Charges are internally earmarked. Waterways

7.14.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road The sources of funding of the Finöv-Fonds are: – the HVF (2/3 of total revenues) – fuel taxes – the capital markets (not used) – the value-added-tax (0.1 percent) – funds from private persons or international organisations (not used)

152 FOCA (2004), Emissionsabhängige Gebühren (Emission Charges). Annex A 185 REVENUE D3 CASE STUDIES SPECIFICATION

The following projects will be financed by the Finöv-Fonds: – improvement and extension of the railway network (rail 2000) – the New Alpine Rail Tunnels (NART) – links to the European high-performance rail networks – noise reduction programme

Rail The infrastructure management company (a subsidiary of the SBB) receives all revenues from track charges as well as infrastructure-related subsidies.

Urban PT

Air

Inland Waterways

Forms of co-operation between the public and private sector

Mode Solution

Road There are no toll-roads, bridges and tunnels in Switzerland.

Rail Up to now, no funds from private persons or international organisations have been directed to the Finöv-Fonds. Financing via the capital markets, which was originally intended to take place, has been abandoned.

Urban PT

Air Airports are held by the States (cantons), with the exemption of Zurich, where the canton only holds 49% of the shares (the rest is privately held).

Inland Waterways

Role of the institutions in the decision making process

Mode Solution

Road Both the cantons and the federal government are involved in the planning of national roads. The federal government is responsible for network planning. It approves projects, which are developed by the cantons. National roads are financed jointly by the federal government and the cantons. Since 2003, the economic, environmental, and social impacts (sustainability) of all major road projects are assessed using an indicator system called NISTRA.153

Rail Since 1999, the Swiss railways (SBB) are a special stock corporation owned by the federal government. In its owner strategy, the federal government specifies objectives for passenger and freight transport, infrastructure and other businesses. These objectives are then transformed into a performance contract between the federal government and the SBB for a period of 4 years. A financing framework agreement specifies the level of subsidies for investment and operations in the 4-year period. Operational measures to achieve the objectives set by the performance contract are in the sole responsibility of the SBB management.

Urban PT The federal government and the cantons support regional public transport. The cantons organize regional transport services, sometimes using public tendering procedures. The cantons are responsible for local public transport.

Air The Federal Office of Civil Aviation regulates Swiss aviation and approves the charging regimes.

153 http://www.nistra.ch Annex A 186 REVENUE D3 CASE STUDIES SPECIFICATION

7.15. United Kingdom

7.15.1. Transport pricing

Mode Pricing schemes

Road Most costs for road travel are collected through fuel duty and vehicle excise duty. There are also toll roads and bridges. Prices are normally agreed as part of the construction contract process and may be linked to usage. Parking charges are determined at a local level with parking provision split between the public and private sector. There is legislation in place which permits local authorities to introduce road pricing schemes with the agreement of the Secretary of State for Transport. Two congestion charging schemes have been introduced. In Durham, there is a £2 charge for entering a small area of the city around the University and a shopping area. In London, there is a £5 charge for entering an area of 22 km2 in the centre of London although exemptions exist for a variety of groups including residents (90%), disabled people and low emission vehicles. The Freight Transport Association is currently negotiating with the Treasury and Customs and Excise over changes to the way lorries pay for travel in the UK. The current proposals are likely to be for a distance-based charging scheme which might be variable with the damage costs of the vehicle and potentially time of day. However, any increases in charges from the new scheme would have to be offset by reductions in fuel or other duty to operators (the principle of revenue neutrality). Rail The is a charge levied by the track operator (Network Rail) on users (passenger and freight operators) of the network and a charge levied by the operators on their customers (fares). Track access charges are levied by Network Rail on users of the network. The charges are regulated by the Office of the Rail Regulator as the network owner holds a monopoly position. Franchised passenger operators pay the marginal cost of their services plus a contribution to joint costs. Other operators only pay marginal cost. The Strategic Rail Authority is responsible for providing an extra grant funding to Network Rail over an above that which it receives from the users of the network and which the Regulator agrees is needed to fund the required standard of infrastructure. The train operating companies were established as private sector operators. They retain freedom to set their own fares on most fare types. However, fares on services which have a high degree of monopoly power are regulated such as season tickets into London, as well as one representative fare, usually the ‘Saver’ or ‘open return’ for all flows.. The Strategic Rail Authority and Transport for London are currently considering whether additional forms of taxation might be appropriate to fund transport investment. Alternatives include a possibility to capture more of the land value gains that occur around major transport investments which are currently lost to the system, and a local tax or transport levy. Urban PT Bus services outside London are registered and operated by private sector companies and they decide their fares independently. Only where companies are not prepared to run services and thus the local authority tenders subsidised services, can local authorities, in theory, influence fares on these. In London, the buses are run on a tendered franchise system. Transport for London is responsible for setting fares and determining frequencies. Air Pricing at airports is governed by a series of international and national obligations and regulations. Pricing is also part of the regulatory review of airports in the UK. British Airports Authority is regulated both by the Civil Aviation Authority and the Competition Commission. Kerosene is exempted from taxes and levies. Inland Waterways Maritime

7.15.2. Earmarking of revenues

Mode Solution

Road The income from taxation of motor transport was higher than spending on transport. The use of transport revenue for funding general government expenditure is a significant issue in linking payment for transport to costs of usage. There is currently an agreement that any above inflation rate rises in fuel duty will be hypothecated for use on transport measures. Also, the income from road pricing schemes must be used by the local authorities for approved purposes, usually within the transport sector, at least for the first ten years of the scheme.

Annex A 187 REVENUE D3 CASE STUDIES SPECIFICATION

Rail Rail revenue and subsidies simply go to the company providing the service, or the infrastructure manager. Although rail receives substantial subsidies there are no other earmarked sources of revenue. Urban PT Again this is mostly provided by private companies which retain their revenue and subsidies. There are no other earmarked sources of revenue. Air Airports retain the income from landing charges and greatly supplement these from commercial activities The rate of return is regulated by the CAA and the Competition Commission so BAA gets 7.5% of the profits from all commercial and airport operational incomes. Waterways

7.15.3. Revenue allocation scheme

Design and allocation rules

Mode Solution

Road Funding for major schemes (defined as schemes over €7.7 million - £5 million) can be approved by the Department for Transport within the agreed funding profile provided by the Treasury. Exceptions to this include projects that involve private finance or commitments which last over a longer period than the agreed financial settlement where the Treasury will need to provide its approval. The Highways Agency and local authorities have the ability to authorise funding for projects under £5 million in value without seeking further approval from the Department for Transport. Rail The Strategic Rail Authority has delegated authority for expenditure decisions of up to €77 million (£50 million) but must inform Ministers when this authority will be used. Urban PT Transport for London has a three tier process. For projects above €7.7 million (£5 million) approval is granted by the managing director of finance and planning, above €38.5 million (£25 million) this approval is through the Commissioner, and for projects above €154 million (£100 million) the approval is at the TfL Board level. However, Department for Transport and government approval is required for schemes which require specific approvals, particularly where legislative approval is required. Two examples are the Thames Gateway Bridge and Docklands Light Railway extensions. Within London, bus services are operated mainly by private companies under contract to Transport for London. Outside London bus services are operated and financed for the most part by private initiatives. The local authorities are allowed to subsidies and tender for additional services where no commercial operator would provide them. Air Infrastructure development for airports in the UK is undertaken by the owners of the airports with no subsidy from the government. Most airports are owned by private sector companies although some remain wholly or partly owned by consortia of local authorities. The cost of extra surface access infrastructure which is necessary solely to support the use of the airport is also expected to be borne by the airport operator. Waterways The Department for Transport has overall policy responsibility for navigable inland waterways, coastal ports and for international shipping. The Department does not develop a national ports strategy in the same way that it develops a national air transport strategy. Port development is left entirely to the private sector and is not funded by government. Ports, like airports are expected to contribute to the funding of new infrastructure requirements that are necessary to service them. Ports are also entirely responsible for financing their infrastructure development.

Forms of co-operation between the public and private sector

Mode Solution

Road The Government expects private finance to play a part in the development of infrastructure on national road and rail schemes and at a local level. Of the £180 billion 10 Year Plan for Transport, almost one-third of finance is expected to be provided by the private sector, with £2.6 billion (€4 billion) on strategic roads, £34.3 billion (€52.8 billion) on rail, £9 billion (€13.9 billion) on local transport and £10.4 billion (€16 billion) in London. It is costly to establish a private finance contract. Such schemes are rarely applicable for schemes as low as £5 million in value. Other major schemes can be solely funded by the government. Some roads have been built or upgraded on a shadow toll system; more recently the contracts have tied payment more

Annex A 188 REVENUE D3 CASE STUDIES SPECIFICATION

to quality indicators than to sheer growth of traffic. The Birmingham Northern relief road is a privately built toll road, and there are proposals for a further private toll road parallel to the M6. Rail All railway rolling stock is privately financed; usually operators lease rolling stock from specialist companies. It had been intended that major rail infrastructure projects would be funded by Special Purpose Vehicles combining public and private funding. However, these have been difficult to launch given the current financial crisis in the rail industry, and the limited projects now underway are largely publicly financed through the SRA. Urban PT The Transport Act 1985 established the privatisation and, outside London, deregulation of bus services. Bus services outside London are now registered and operated by private sector companies. Only where companies are not prepared to run services or are only prepared to run limited services (e.g. daytime only) can the local authority run a competition to run subsidised services. In London, the buses are run on a tendered franchise system. Transport for London is responsible for setting fares and determining frequencies. The government generally requires light rail schemes in urban areas to be developed as PPP schemes, under DBO contracts, where the government contributes to the capital cost but the operator must then cover all costs from revenue and bear the revenue risk. However, in view of the rapid rise in the costs of such arrangements following the poor financial performance of a number of schemes this is now under review. The infrastructure and rolling stock of the London Underground are now provided and maintained by the private sector under long term contracts; actual operation remains in the hands of the public sector. Air The 1985 White Paper on Aviation set out the aims of the government to move out of direct control of airports and airlines. The government has no control over either now, with the privatisation of British Airways and British Airports Authority both completed in 1987. More recently, it has established a Public-Private Partnership for the National Air Traffic Services where it holds 49% of the shares. Waterways The financing of port investment is not discussed but it is noted that the government does not fund this directly.

Role of the institutions in the decision making process

Mode Solution

Road The Highways Agency manages the construction of roads of national importance and local authorities are responsible for the construction of new local roads. The Highways Agency operates as a separate sub-budgetary unit within the Department of Transport. Rail The Strategic Rail Authority is a non-departmental public body, which specifies not only what passenger services should be run, but the development and funding of any new infrastructure. Network Rail, the new not-for-profit network operator is now only responsible for maintenance and renewal of the network. It is regulated by the Office of the Rail Regulator who agrees to the outputs the company will achieve and what price should be paid by the users of the network. The Strategic Rail Authority also formally consults with the 5 Passenger Transport Executives (local transport authorities), the Scottish Executive and Transport for London (the latter two from which it also receives formal directions and guidance). Urban PT Passenger transport executives (PTEs) are responsible for public transport within their area in partnership with the Districts and the commercial bus and train operators. They subsidise socially necessary bus services not offered by private operators, fund local train services, provide information, passenger facilities, some services for disabled passengers and manage a prepaid ticket and concessionary fares schemes. They are responsible, with their constituent District Councils, for the development of transport policy for the area. Transport for London is the integrated body responsible for the capital’s transport system, both the planning and delivery of transport facilities. It manages London’s buses, the Underground, the Docklands Light Railway (DLR), London Trams, a 580 km network of main roads, all of London's 4,600 traffic lights and regulates taxis and the private hire trade and runs London River Services, Victoria Coach Station and London's Transport Museum. Bus companies are regulated by the Health and Safety Executive, Traffic Commissioners and the Office of Fair Trading. Air BAA (British Airports Authority) owns seven UK airports, including the world's busiest international airport, Heathrow. It also has management contracts or stakes in ten airports outside the UK, plus retail management contracts at two airports in the USA. Airports are regulated for economic and safety issues by the Civil Aviation Authority and also by the Competition Commission. Despite the largely private sector operated and financed industry, the government has a key role to play in air transport policy. Waterways Ports in the UK are operated as private sector concerns. The government publishes broad policy aims for ports. The development of individual ports is left to the market. The Department, through the Maritime and Coastguard Agency, regulates the safety of the sector.

Annex A 189 REVENUE D3 CASE STUDIES SPECIFICATION

UK PPP-schemes

Commissioning body Project title Region Year of Capital Details financial value (£m) close Highways Agency Queen Elizabeth II Bridge South East 87 180.0 Dartford Thurrock crossing (Queen Elizabeth II bridge) Highways Agency Second Severn Crossing South West 90 331.0 New bridge across the River Severn. Highways Agency M6 Toll Road West Midlands 92 485.0 The BNRR, 27 miles of Dual 3-lane Motorway north and east of Birmingham, is to relieve the M6 between Junctions 4 and 11 (as part of the Trans- European Road Network). The BNRR will be the first freestanding UK tolled motorway scheme entirely designed, bui London Underground Northern Line Trains London 95 409.0 New trains and maintenance - now subsumed into the JNP PPP West Midlands Midland Metro Line One West Midlands 95 145.0 Route linking Wednesbury, West Bromwich, Snow Passenger Transport Hill and Handsworth Executive Highways Agency A69 Carlisle to Newcastle National/More 96 9.0 Construction of A69 Haltwhistle Bypass and DBFO Than One operation of A69 between the A1 Newcastle Region Western Bypass and the M6 (J43). Highways Agency A419/A417 Swindon to South West 96 49.0 Upgrading A419/A417 between A4 near Swindon Gloucester DBFO M5 near Gloucester (J11A). Construction of A419/A417 Cirencester and Stratton bypass, A417 Latton bypass and dualling of existing A417 between Stratton and Nettleton Highways Agency A1(M) Alconbury to East of 96 128.0 Upgrading to motorway standard and operation of Peterborough DBFO England section of A1 Highways Agency M1 - A1 Link Road Yorkshire & 96 214.0 To construct and operate a new motorway which (Lofthouse to Bramham) the Humber bypasses Leeds and connects the M1 and M62 south of Leeds and the A1 south of Wetherby. Highways Agency A50/A564 Stoke-Derby National/More 96 21.0 Construction of A564 Doveridge Bypass and Link DBFO Than One operation of Stoke-Derby Link Road between Region B6540 Sawley Crossroads junction and Blyth Bridge near Stoke on Trent Highways Agency A30/A35 Exeter to Bere South West 96 75.0 Construction of A35 Honiton to Exeter Regis DBFO improvement. Improvement of A35 Tolpuddle to Puddleton bypass Highways Agency M40 Junctions 1 to 15 National/More 96 65.0 Upgrading and operating the M40 from Junction 1 Than One to Junction 15, including widening of Junctions 1A- Region 3 from dual three-lanes to dual four-lanes and replacing the road surface of Junctions 6-8 Docklands Light Lewisham extension London 96 202.0 Lewisham DLR extension Railway (DLR) Highways Agency A19 Dishforth to Tyne National/More 96 29.0 Upgrading the dual two-lane Norton to Parkway to Tunnel DBFO Than One a dual three-lane. Operating and managing the Region A19/A168 trunk roads between the A1 at Dishforth and the A19 south of the Tyne Tunnel, the A174 Parkway, the A1053 and a short length of the A66 to Teesside Par Transport for London Croydon Tramlink London 96 205.0 17-mile light rail link network linking Croydon with Wimbledon Lambeth LB Depot and Vehicle London 97 9.0 Provision of vehicles for Lambeth Council Services Greater Manchester Manchester Metrolink North West 97 160.0 Four-mile extension to existing lines Passenger Transport Extension Executive Islington LB Depot and Vehicle London 98 21.6 Provision of a depot and vehicles for Islington Services Council London Underground Power Supply London 98 134.0 New emergency power provision Transport for London Prestige London 98 160.0 New integrated ticketing system for London

Annex A 190 REVENUE D3 CASE STUDIES SPECIFICATION

Brent LB Brent Street Lighting London 98 8.5 Replacement of 10,000 streetlights and upgrading of 4,000 over 4 years London Underground British Transport Police London 99 13.0 Two projects. New police station at West Ham and Central London HQ at Tottenham Court Road Essex CC A130 (A12-A127)(LA) East of 99 90.0 Chelmsford bypass England London Underground Connect London 99 468.0 New integrated radio system South Yorkshire Doncaster interchange Yorkshire & 99 26.0 New bus/rail interchange Passenger Transport The Humber Executive Luton Airport Parkway Luton Airport Parkway East of 00 20.0 New railway station England Vehicle & Operator MOT computerisation National/More 00 29.6 IT System to link MOT test centres to national Services Agency Than One register of vehicles Region Nottingham County Nottingham Express East Midlands 00 172.0 13 km light rail scheme linking Hucknall to Council & City Council Transit Nottingham City Centre Transport for London A13 Thames Gateway London 00 411.0 Upgrading of A13 from the City of London to Wennington Highways Agency Traffic Control Centre National/More 01 85.0 Establishment and management of a national Than One strategic traffic management system for motorways. Region London Underground Jubillee, Northern & London 02 5484.0 Modernisation and maintenance Piccadilly Lines (JNP) Walsall DC Walsall Street Lighting West Midlands 03 18.6 Upgrading and maintenance of street lighting Highways Agency A1 Darrington to Yorkshire & 03 245.0 Upgrade, operate and maintain a 33 mile stretch of Dishforth the Humber the M1 Staffordshire CC Staffordshire Street West Midlands 03 31.1 Upgrading and maintenance of street lighting Lighting London Underground Bakerloo, Central & London 03 4597.0 Modernisation and maintenance Victoria Lines (BCV) London Underground Sub Surface Lines (SSL) London 03 6180.0 Modernisation and maintenance Highways Agency A249 Stockbridge to South East 04 73.0 Sheerness Stoke MBC Street Lighting West Midlands 03 22.6 Street Lighting Docklands Light City Airport Extension London 03 165.0 Railway (DLR) Sunderland CC Street Lighting North East /2003 28.1 Street Lighting Wakefield MBC Street Lighting North East /2003 19.5 Street Lighting Islington LB Street Lighting London /2004 14.0 Street Lighting Portsmouth MBC Highway Maintenance South East /2004 121.0 Manchester City Street Lighting North West /2004 34.1 Street Lighting Council Newcastle and North Street Lighting North East 2004 44.4 Street Lighting Tyneside Scottish Executive - Scotland 2003 60.0 - Angus Council A92 Scotland 2003 61.5 Road Welsh Assembly A55 Angelsey 1998 100.0 Dual carriageway across Anglesey Government Newport CBC Newport Southern Newport, 2002 57.1 DBFO - Southern Distributor Road Distributor Road Wales M6/A74 - Scotland 1997 96.0 Upgrading and maintenance of motorway between Millbank and English Border

Annex A 191 REVENUE D3 CASE STUDIES SPECIFICATION

Current Highway DBFO Schemes

Project Name Status Region

A1 Darrington to Dishforth Current North East A1(M) Alconbury to Peterborough Current East, Midlands A19 Dishforth to Tyne Tunnel Current North East A249 Stockbury (M2) to Sheerness DBFO- incorporating A249 Current London & South East Iwade Bypass to Queenborough Improvement A30 Exeter to Bere Regis Current London & South East, South West A419 Swindon to Gloucester Current London & South East, Midlands, South West A50 Stoke to Derby link Current Midlands A69 Carlisle to Newcastle Current North East, North West M1 Lofthouse to Bramham link road Current North East M40 Denham to Warwick Current East, London & South East, Midlands

Local Government Schemes supported by the Government

Transport and Street Lighting newly endorsed Signed Operational

Birmingham City Council: Highway Maintenance & Street Lighting Scheme LB Brent: Street Lighting x x Cumbria CC: Carlisle Northern Development Route (CNDR) Derby City Council: Street Lighting Dorset County Council: Street Lighting Essex CC: A130 Road x x LB Islington: Street Lighting x x Leeds City Council: Street Lighting Project Manchester City Council: Street Lighting x x Newcastle City Council/ N Tyneside Council: Street Lighting x x Nottingham City Council : Notts Express Transit Light Rail Scheme x x Portsmouth City Council: Highway Management and Maintenance x x Redcar & Cleveland BC: Street Lighting South Tyneside MBC: Street Lighting & Highway Signs South Yorks Passenger Transport Executive: Doncaster Interchange x x Staffordshire CC: Street Lighting x x Stoke-on-Trent City Council: Street Lighting x x Sunderland City Council: Street Lighting & Highway Services x x Surrey CC: Street Lighting Wakefield MDC: Street Lighting x x Walsall MBC: Street Lighting x x Walsall MBC: Integrated Transport West Yorkshire Passenger Transport Executive: Leeds supertram

Annex A 192 REVENUE D3 CASE STUDIES SPECIFICATION

8. Annex B: Related research projects

AFFORD: Acceptability of Fiscal and Financial Measures and Organisational Requirements for Demand Management

Project website: http://europa.eu.int/comm/transport/extra/affordia.html

AFFORD combined conceptual economical analysis with approaches from other fields, such as system dynamics modelling, a questionnaire identifying legal and institutional barriers as well as acceptability issues. Some crucial elements of acceptability include social welfare gains, equity and distributional issues. An efficiency analysis considered the use of revenues as well as the shadow price of public funds. Acceptability issues were measured in three groups on different levels: society, politicians and business people. The first group was given questionnaires addressing topics such as problem awareness, subjective level of information, perceived effectiveness of the two packages proposed (strong and weak), expectations on personal benefits. The second group was interviewed on the same issues and showed strikingly similar opinions, while the third group was asked to rank policy packages using given assessment criteria.

CUPID: Co-ordinating Urban Pricing Integrated Demonstrations

Project website: http://www.transport-pricing.net/cupid.html

CUPID aims to give a thorough impact assessment at demonstration site level and to co-ordinate a cross-site and cross application assessment at European level to cover all of the relevant issues including user response and acceptance, enforcement, financial feasibility, institutional settings, privacy and technical aspects linked to infrastructure and equipment, wider impacts on EC policy, social and economic effects etc.

DESIRE: Designs for Interurban Road pricing schemes in Europe

Project website: www.tis.pt/proj/desire

The aim of the DESIRE research project is to assess, with the help of case studies, the scenarios for interurban road pricing in Europe. The project identified a set of best designs for future Interurban Road Pricing Schemes (IRPS) for heavy vehicles in Europe as well as a detailed study of the different aspects determining the success of the implementation of these schemes. The research concluded that there are several objectives concerning the introduction of road tolls. Some of these are dynamic but others are stable thus there will be for a long time legitimate reason for diversity of tolling strategies by national governments. Governments should bear in mind that transport policy is supported not only by prices but also by instruments like supply (infrastructure and technology) and regulation (technical and economical).

Annex B 193 REVENUE D3 CASE STUDIES SPECIFICATION

FISCUS: Cost Evaluation and Financing Schemes For Urban Transport Systems

Project web site: http://europa.eu.int/comm/transport/extra/fiscusia.html

The aim of FISCUS was to define and present a framework for evaluating the real costs of urban transport and assessing the appropriate choice of financing scheme. Seven types of cost were addressed, i.e. those associated with infrastructure, vehicle-related operations, congestion, accidents, emissions, noise and other external effects.

IMPRINT: Implementing Pricing Reform in Transport – Effective Use of Research on Pricing in Europe

Project website: http://www.imprint-eu.org/

IMPRINT aims at collecting the results of previous and ongoing research in the field of pricing and making it accessible to policy makers, industry, practitioners and other professionals in a series of deliverables and seminars, in a similar way that CAPRI did in the fourth framework.

MC-ICAM: Marginal Cost Pricing in Transport – Integrated Conceptual and Applied Model Analysis

Project website: http://www.mcicam.net

This project examines policy reform in the pricing of transportation. It examines optimal implementation (or transition) paths from a situation with low pricing of transportation to a situation with socially optimal pricing, in which users bear the full marginal social cost of their activities. MC- ICAM evaluates the different paths by examining how they affects social welfare over time, the technological and institutional changes which they generate or require, and the political support for marginal cost pricing which they induce over time. Policy makers must understand barriers and constraints very well in order to remove them, especially in the case of acceptability, which is the largest barrier in most cases.

PATS: Pricing Acceptability in the Transport Sector

Project webpage: http://www.tis.pt/proj/pats/pats.html

Taking into account external social costs in transports, prices can be a way of combating congestion and pollution as the same time it promotes modal shift. Information on successful implementation of new pricing schemes elsewhere can enhance acceptability because new measures are more difficult to implement than well-known ones. In order to increase acceptability, pricing measures should be introduced in a step-to-step method, allowing adjustments and can be accompanied by a higher quality or capacity. If there is no added value, acceptability is more difficult to achieve. The charging scheme should be clear, transparent and easy to understand. The prices should reflect the real costs of transport. Intermodal fairness of pricing is important however lower charges for environmentally friendly modes are accepted but this should be done on a case-to-case basis. The use of revenues is essential in terms of acceptability. The revenues have to be used in the transport sector for the transport users. Clear information should be given about the use of revenue from

Annex B 194 REVENUE D3 CASE STUDIES SPECIFICATION pricing. Ear-marking will increase acceptability. Cross-subsidization of public transport can also increase acceptability.

PETS: Pricing European Transport System

Project webpage: http://www.cordis.lu/transport/src/pets.htm

The objective of the PETS research project was to examine the current pricing situation of passenger and freight modes in Member States and to assess whether such prices provide appropriate price signals in the light of all relevant internal and external costs. PETS also aimed to forecast the consequences of moving to a more appropriate price level and structure in the light of transport demand and supply developments. The PETS project also concludes that an entirely commercial approach to transport pricing is not suitable because of the existence of economies of scale and the importance of externalities. These two effects push prices in opposite directions and their relative strength differs between modes and location. As for determining externalities like congestion, accidents or noise, it is important to calculate the marginal external cost rather than beginning with the total cost and then dividing it by the amount of traffic.

PRIMA: Pricing Measures Acceptance

Project webpage: http://www.certu.fr/internat/peuro/prima/prima.htm

The main objective of PRIMA was to identify and study the reasons behind the acceptance or non- acceptance of road pricing schemes. In order to do so, PRIMA evaluated different scheme designs in terms of feasibility and acceptance, looking for successful cases. Public surveys and interviews with stakeholders, local politicians and experts were carried out.

PROGRESS: Pricing Road Use for Greater Responsibility, Efficiency and Sustainability in Cities

Project website: http://www.progress-project.org/

PROGRESS aims to demonstrate and evaluate the effectiveness and acceptance of integrated urban transport pricing schemes to achieve transport goals and raise revenue. The work is to result in a report on local policy issues, implementation guidelines, standardisation issues and plans for the way forward in each site.

SCENES: Scenarios for European Transport

Project website: http://europa.eu.int/comm/transport/extra/scenes.html

The main goal of the SCENES project was to develop transport demand forecasts for Europe, taking into account different sets of socio-economic, environmental, regulation, investment and pricing policies. A deep analysis of the drivers of transport demand was carried out and a database for socio-economic indicators at regional level for most European countries was constructed. For this purpose, SCENES contributed with the development of scenarios and the assessment of transport policies. Policies were assessed with the help of two approaches: a Europe-wide model combined

Annex B 195 REVENUE D3 CASE STUDIES SPECIFICATION with the use of specific and local models. The reference scenario was produced for 2020 taking into account the main trends in population by group, car ownership, income, vehicle occupancy and trip rates. With this scenario, consequences on the modal shares generated by different transport cost inputs could be assessed. The forecasts include passenger and freight travels in all transport modes.

TIPMAC: Transport Infrastructure and Policy: A macroeconomic analysis for the EU

Project website: http://www.camecon.co.uk/services/projects/Tipmac/Tipmac_project.htm

TIPMAC analysed the role of transport in macroeconomic development and employment. It combined system dynamics and macroeconomic modelling to quantify the indirect macroeconomic impacts of transport infrastructure investment (TEN-T) and transport pricing policies in the EU. To provide robust results in a field which is still developing, two parallel analyses with different methodologies have been undertaken. In one, the SCENES transport network model was linked to the E3ME macro-econometric model. The other has used the ASTRA system dynamics model to study similar scenarios. This was a significant innovation in transport policy analysis. It was the first study to combine a full macroeconomic model with a detailed transport sector analysis, allowing for changes in both passenger and freight demand and a network analysis of the impact of new infrastructure and pricing.

TRENEN II STRAN: Models for Transport, Environment and Energy - Version 2 - Strategic Transport Policy Analysis

Project webpage: http://www.cordis.lu/transport/src/trenenii.htm

The goal of the TRENEN II STRAN project is the development of strategic models of urban and inter-urban passenger and freight transport, for the assessment of pricing reform in the transport sector in the European Union. These models, calculate optimum prices for transport in specific cities and countries. These prices take account of external costs (such as congestion, pollution, noise and accidents) as well as taxes and resource costs. Comparisons were made between current and optimum prices in a series of case studies.

UNITE: Unification of accounts and marginal costs for Transport Efficiency

Project webpage: http://www.its.leeds.ac.uk/projects/unite/

The aim of UNITE was to supply policy makers with the state-of-the-art cost estimates to develop this policy. The transport modes considered in UNITE were: road transport, public transport, railway transport, aviation, inland water transport and maritime shipping. As for the cost categories, UNITE covered infrastructure costs, supplier operating costs, transport users costs and benefits, accident costs, and environmental costs. Cost allocation was determined with econometric and engineering models. Accounts information is important for the estimation of marginal costs and for monitoring developments in the transport sector. More in detail, the pilot accounts will monitor the level and structure of social costs and revenues, the progress towards sustainable transport, financial viability, equity and budgetary needs for second-best pricing schemes.

Annex B 196