FINANCING TRANSPORT INFRASTRUCTURE - CURRENT ISSUES IN BRITAIN Chris NASH` Professor Institute for Transport Studies University of Leeds UK INTRODUCTION The problems of the transport sector have risen high on the political agenda in Britain in recent years. There are a number of reasons for this. Firstly, the continued growth of road traffic has led to acute problems of traffic congestion spreading from the urban peak to the off-peak and to inter-urban roads. Secondly, growth in the demand for public transport in London has led to acute overcrowding on the underground and suburban rail systems. Thirdly, a spate of accidents on all modes has led to major concern about transport safety, with a resulting large increase in spending, particularly on rail transport. Fourthly, the transport sector is a major cause of environmental externalities, both from the construction of infrastructure and from the movement of traffic. In the former case the principal direct effects are landtake and the destruction of property and visual intrusion; in the latter, noise and air pollution. Air pollution includes both local effects of emissions of lead, carbon monoxide etc, the contribution of nitrogen oxide and in the case of electric traction sulphur dioxide to acid rain, and the contribution to global warming particularly of carbon dioxide. In addition to these direct effects there are significant indirect effects, for instance from the production and transport of oil, and from the extraction of construction materials. One reason for taking the problems of the transport sector very seriously is the rapid growth in demand for the most congested and polluting transport modes - namely road and air. For instance, in Britain road traffic has doubled since 1968 and the DTp forecasts that road traffic will grow by between 83 and 142% by the year 2025 compared with 1988 (Table 1). This will more than offset any environmental gains from planned measures such as the fitting of catalytic convertors to cars, whilst even major spending on transport infrastructure is unlikely to be able to keep pace with such a growth in demand. The initial reaction of the British Government to the emerging situation was to announce a major increase in transport spending, financed in the traditional way through government spending, and concentrated on trunk roads (Table 2). However, it was soon realised that this would do nothing to solve the problems in urban areas, and might well make them worse. In London, studies of new public transport schemes suggested at • I am grateful to Dr John Preston for comments on an earlier draft of this paper, and for permission to reuse material prepared as part of a joint paper with him (Nash and Preston, 1992). 1563 SS30 least one north-south and one east-west tunnel should be built to supplement the capacity of the existing rail system, whilst extensive investment would be needed in upgrading and renewing the existing aged and somewhat decrepit rail system. In other cities, public transport had been dominated by the bus since the closure of tramways in the 1950's, and the rapid transit and light rail revolution which had already swept through continental Europe and North America had largely passed Britain by. However, local authority after local authority now began studies of light rail systems, each one costing hundreds of millions of pounds. At the same time the main line rail system was seen to be in need of major investment, particularly to link it to the Channel Tunnel and to upgrade the busiest route in the country, the West Coast Main Line, where speeds had improved little since electrification in the 1960's. Partly as a consequence of this major perceived need for investment, and partly as an element of the general pro-privatisation of the government, the last few years have seen a spate of schemes designed to bring private capital into transport infrastructure investment. The most important of these are the idea of private toll roads, private investment in light rail systems and the complete privatisation of British Rail. We now consider methods of funding infrastructure in each of these three sectors in turn, before reaching our own conclusions on an appropriate way forward. 1. THE ROAD SYSTEM In Britain, as in most countries, responsibility for investment in roads is divided between central and local government. Central government takes responsibility for motorways and trunk roads; other roads are the responsibility of local authorities, although théy receive earmarked funding towards these roads in the form of Transport Supplementary Grant. This is paid towards the cost of justified improvements in local roads which are of more than local significance. There is no direct link between receipts from fuel tax and vehicle excise duty,- which are paid to central government - and spending on roads. Only a limited number of very expensive estuarial crossings bear a toll. It has been argued that private funding of road infrastructure would both increase the volume of resources devoted to it and lead to greater innovation and efficiency. Apart from a limited amount contributed by developers to the cost of road improvements to serve their schemes, the first schemes announced involved estuary crossings (the Dartford bridge over the River Thames and the second crossing of the River Severn between England and Wales), where tolls were already the norm. However, since then private consortia have been encouraged to prepare proposals for toll roads to parallel a number of existing congested trunk roads - the first to be built will be the Birmingham Northern Relief Road. Whether private trunk roads will actually be of benefit remains the subject of much debate. The costs of requiring private consortia to develop competitive proposals in detail with no certainty that they will be built appears to be prohibitive, so it is likely 1564 Christopher NASH that the scope for completely original developments, as opposed to handing to the private sector developments planned by government, appears to be limited. Roads are already designed and built by private companies as a result of competitive tendering, so the scope for increased efficiency in their construction is small. Most seriously, the imposition of tolls on new roads designed to relieve existing untolled roads could lead to an inefficient allocation of traffic which would reduce the degree of relief of congestion and environmental degradation produced by the new road. Whilst there is a growing opinion that the use of tolls or more sophisticated road pricing systems should be introduced, it is generally thought that these should be set so as to restrict traffic on existing congested roads and particularly in urban areas, rather than being designed to earn a commercial rate of return on specific new pieces of infrastructure. 2. URBAN RAIL SYSTEMS Urban rail systems in Britain at the present time are provided by two main operators - London Underground Limited, in London, and British Rail for longer distance services in London and all suburban services in other cities. In the major cities outside London British Rail operates services as specified by the Passenger Transport Executive, a joint board of local authorities in the area, which also plays a major role in funding investment. Two PTE's also own their own rail systems; Tyne and Wear a modern metro and Glasgow a very small underground system. London Underground and British Rail are both owned by central government, and fund investment either from their own resources or by borrowing from central government. In recent years, a large part of rail investment has been funded by the sale of property (Table 3), but the current recession in the property market has led to the collapse of this source of funds, and consequently - given the simultaneous decline in railway revenue from customers - to a virtual halt in the authorisation of new rail schemes. Local authority rail investment used to be funded on the same basis as local road schemes, through the transport supplementary grant, but this was stopped some years ago, and an earlier measure, Section 56 of the 1968 Transport Act, was revived. Under this, local authorities may apply for funding of investment of more than purely local significance if the benefits to nonusers (in the form of decongestion of roads, economic development and environmental improvement) exceed the total public sector contribution towards the cost. Benefits to users are excluded from the case for grant aid, as they are expected to be recouped by the operator in the form of revenue. This both leads to a requirement for premium fares, which reduces the volume of traffic attracted to the system, and greatly reduces the measured net present value of the project (see, for example, the figures quoted for the Manchester light rail scheme in Table 5. In fact in Manchester the justification of the scheme was based largely on reductions in subsidy required compared with the existing rail service). The sponsoring authority also has to show that it has exploited to the full any possibilities of private sector funding either from developers, who stand to gain from the investment, or 1565 SS30 operators, who might be able to service the capital from fares revenue (Nash and Preston, 1991). So far the contribution to infrastructure costs from the private sector under these measures has been small. The Docklands Light Railway received a considerable contribution to the costs of upgrading and extending it from the developers of the Canary Wharf office complex, this being a case where a single developer was undertaking a massive development for which improved public transport would be absolutely essential. A number of other developments have received contributions to the costs of particular stations or alignments. But in general it appears that the effects on property values are too marginal and the ownership of the property too diverse for this sort of voluntary contribution to be achieved.