towards better transport

Towards bettertransportFunding new infrastructure with future road pricing revenue

Richard Wellings and Briar Lipson

edited by Oliver Marc Hartwich

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

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

Trustees

Charles Moore (Chairman of the Board), Theodore Agnew, Richard Briance, Camilla Cavendish, Richard Ehrman,Robin Edwards, George Robinson, Andrew Sells, Tim Steel, Alice Thomson, Rachel Whetstone.

About the authors

Dr Richard WellingsDeputy Editorial Director, Institute ofEconomic AffairsDr Richard Wellings is the DeputyEditorial Director at the Institute ofEconomic Affairs. He is a deputy editor ofthe journal Economic Affairs and works onthe production of the IEA’s monographseries. After graduating from OxfordUniversity, he undertook a PhD on trans-port policy at the London School ofEconomics, which he completed in 2004.Subsequently, he worked as a researcher forA & F Consulting Engineers, before join-ing the IEA in August 2006. He con-tributed two papers to The Railways, theMarket and the Government (IEA, 2006)and is co-authoring a forthcoming bookon road privatisation.

Briar LipsonResearch Fellow, Policy ExchangeBriar Lipson is a Research Fellow at PolicyExchange specialising in EconomicCompetitiveness. After graduating with anMA in Economics from the University of

Edinburgh, she worked as a ParliamentaryResearcher for Grant Shapps MP.

Dr Oliver Marc HartwichChief Economist, Policy ExchangeDr Oliver Marc Hartwich is Policy Exch-ange’s Chief Economist. He was born in1975 and studied Business Administrationand Economics at Bochum University (Ger-many). After graduating with a Master’sDegree, he completed a PhD in Law at theuniversities of Bochum and Sydney (Aus-tralia) while working as a Researcher at theInstitute of Commercial Law of Bonn Uni-versity (Germany). Having published hisaward-winning thesis with Herbert UtzVerlag (Munich) in March 2004, he movedto London to support Lord Matthew Oak-eshott of Seagrove Bay during the process ofthe Pensions Bill. He is the UK Represent-ative for the German think tank the Institutefor Free Enterprise. He is the co-author ofUnaffordable Housing: Fables and Myths,Bigger Better Faster More, Better Homes,Greener Cities and The Best Laid Plans. Hejoined Policy Exchange in January 2005.

2

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Contents

Acknowledgements 4Executive summary 5

1 A competitive disadvantage: Britain’s transport infrastructure 82 The case for road pricing 143 Harnessing private finance 204 The institutional framework 325 Taxation and investment 466 Additional policy options 577 Conclusions and recommendations 65

www.policyexchange.org.uk • 3

Acknowledgements

Policy Exchange would like to thank Serco,Bevan Brittan and an anonymous charita-ble donor for their financial support. Theauthors would like to thank all those whomet with them to discuss aspects of theresearch, as well as Nick Boles, DavidWorskett and two anonymous referees fortheir advice and comments. In addition wewould like to thank Philippa Ingram forproof-reading and Oliver Marc Hartwichfor his insight, expertise and ongoing edi-torial support.

4

Executive summary

Transport has become one of the keyrestraints on Britain’s economic growthand quality of life. Successive governmentshave failed to provide the standard of infra-structure necessary to keep up with anincreasingly mobile and dynamic econo-my. Traffic congestion is now endemic,affecting not just large cities but also thecore motorway network and small towns.It currently costs our economy in theregion of £20bn per year, a figure set to risesignificantly in the coming years. This willharm our future economic competitivenessand growth.

International comparisons suggest thatthe UK is close to the bottom of the tablewhen it comes to transport infrastructure.Among the world’s leading economies, theUK has the most crowded and congestedroads, and the fewest motorways. Eachyear more than 1.6 million passenger kilo-metres are travelled on each kilometre ofBritain’s road network: more than twicethe European average. The UK also per-forms poorly in terms of the quality of itspublic transport.

Clearly a step change is needed in thequality of Britain’s infrastructure. Not onlywould this improve our global competi-tiveness – it would also improve the day today lives of the travelling public.

The deficiencies of UK transport infra-structure do not reflect a shortage of taxrevenues from transport. In 2006 privateroad users paid around £32bn in trans-port-related taxes. Of this £32bn, just£8bn was spent on the road network. Andof this £8bn – which is enough in theoryto construct at least 400 miles of six-lanemotorway – a large proportion was spenton repairing damage to the roads (causedprimarily by good vehicles) and anothersignificant portion on anti-traffic and safe-ty measures. New roads have also tended tobe built for political reasons rather than to

tackle congestion. Inefficiency of govern-ment transport spending is a serious prob-lem. Just 6 per cent of passenger travel isundertaken by train, compared with 84 percent by car, yet the railways receive annualsubsidies totalling almost £6.5 billion –nearly as much as the government spendson roads. The apparent misallocation ofresources reflects the fact that transportinfrastructure investment has becomedetached from consumer demand. Theabsence of price signals means it is difficultfor government planners to allocate expen-diture efficiently.

As a method of allocating a scarceresource, to ration roads without employ-ing road user charges is comparable onlywith the Soviet system of queuing: some-thing so discredited as to be consideredridiculous in almost every sphere of life butmotoring. The waste and inefficiency ofsuch a system is painfully obvious to anyonewho has sat in congestion and traffic jams.

But the greatest barrier to pricing – pub-lic opinion – has arisen not because thepublic cannot appreciate the need for it. Itis instead because, having endured decadesof special taxation for the benefit of gener-al spending, motorists do not trust govern-ments to introduce pricing from whichthey will benefit.

One solution, as proposed in this report,is to upgrade transport infrastructure now,and then, once users have began to experi-ence substantial benefits, introduce theroad user charges necessary to cover the


“ As a method of allocating a scarce resource, toration roads without employing road user charges iscomparable only with the Soviet system of queuing:something so discredited as to be consideredridiculous in almost every sphere of life but motoring”

costs. There is, of course, the problem ofhow to finance the gap between the start ofconstruction and collection of the revenuestream. The answer to this lies in privatefinance. The Private Finance Initiative(PFI) has a largely successful track recordin the transport sector. The PFI was usedin the Design, Build, Finance and Operate(DBFO) road contracts first employed inthe early 1990s. Cost savings compared topublic sector estimates were between 14per cent and 22 per cent for the first eightsuch projects (depending on the discountrate used). The M6 Toll is another exampleof PFI in transport. Despite traffic projec-tions failing to live up to expectations, ulti-mately it has provided a brand new road ina highly congested area at very minimalcost to the taxpayer. Similarly, PFI hasenabled cities such as Nottingham to buildand operate better public transport servic-es.

One of the greatest problems for the pri-vate financing of transport infrastructure ispolitical risk compounded by a lack of longterm stability and accountability in trans-port governance. The Treasury,Department for Transport, HighwaysAgency, Network Rail, RegionalAssemblies, Passenger Transport Executivesand Authorities, not to mention the EU,all have some influence over policy in thisarea; and these are just the public sectorbodies. With so many layers of governanceand such diverse needs in different parts ofthe country we advocate a significantlymore devolved approach to transport, pos-sibly supported by a strategic road networkmanager, Network Road (by analogy withNetwork Rail). Simplifying the system andimproving accountability would maketransport investment considerably moreattractive to potential investors, therebylowering financing costs and raising thequality of affordable schemes.

Hand in hand with reforming anddevolving the institutional structuresmust be consideration of both the fiscalframework around transport and thecharges to be set. At least to begin with,the scheme we advocate will be revenueadditional, but further investigationreveals two very striking facts. First, rela-tively small charges on congestion hot-spots will soon pay for improvements. Forexample, a six-hour peak time weekdaycharge of 10p/km on a six-lane motorwaypriced to run close to capacity could in ayear raise around £1.5 million per km –sufficient to pay for widening to eightlanes or indeed, to construct a brand newsix-lane motorway in parallel. Second, thedynamic effects of pricing and improvedtransport infrastructure on the economywill increase overall tax yields, which intime could facilitate cuts in fuel and vehi-cle taxes.

The issue of transport taxation has beencomplicated in recent years by environ-mental justifications for high fuel taxes.Although both are externalities of roadtransport, congestion and carbon emis-sions are separate problems with differentsolutions. Fuel consumption is a muchmore accurate proxy for carbon emissionsthan distance travelled, and should remainthe preferred tool. That said, even accord-ing to the high-end estimates of the cost ofcarbon emissions detailed in the Sternreport, the carbon tax on a litre of petrolshould be around 11 pence, which is muchless than the current petrol tax rate ofaround 50 pence per litre.

The British economy is suffering fromits reliance on a centrally planned model oftransport governance. It has left the coun-try crying out for an injection of invest-ment which is simply not available fromthe Treasury. In a relatively small countrysuch as Britain with tightly centralised

Towards better transport

6


Executive summary

planning laws and an affluent car-lovingpopulation, roads are – and will undoubt-edly remain – a scarce resource for whichrationing by queuing and congestion isinefficient. By combining investment with

pricing, and in that order, Britain’s sub-standard transport infrastructure can beupgraded, thereby improving economiccompetitiveness and the quality of life ofthe British public.

1A competitivedisadvantage:Britain’s transportinfrastructure

Decades of insufficient and inefficientinvestment in transport have damagedBritain’s international competitiveness.In their Economic Survey of the UnitedKingdom, the OECD stated that:

“The United Kingdom ranks poorly ininternational comparison both on surveybased measures regarding the quality oftransport infrastructure and on measuresof congestion.” 1

In March 2006 the EconomistIntelligence Unit warned us that the UKrisked slipping down the global businessenvironment rankings if its “congestedand unreliable land transport infrastruc-ture” did not improve.2 The Departmentfor Transport has itself admitted that:“The core of our railway network wasestablished well over a hundred years ago.Most of our motorways were built 30 or40 years ago. Successive governmentshave devoted insufficient resources toupgrading and modernising the transportsystem, while travel on our road and railnetworks has increased to levels that werenever anticipated when they were built.”3

The following figures from a 2001report by the Prime Minister’s StrategyUnit illustrate this analysis:

� In no other major country were theroad lengths per person as short as inthe UK, where there were on average

six metres of roads per inhabitant.Even in the Netherlands, which ismuch more densely populated, thefigure was seven metres.4

� We have fewer kilometres of motor-way than other European countries ofcomparable population. Spain, Franceand Germany each have a motorwaynetwork that is more than twice thesize of ours.5

� Only 30 per cent of railway trackswere electrified in the UK, comparedwith more than 70 per cent inBelgium, Sweden and the Nether-lands.6

As Figure 1.1 shows, Britain has fallen along way behind its economic competi-tors in the provision of a modern trans-port network, even though it imposes thehighest fuel taxes on road users.7 Alreadyby 2004 China had constructed a motor-way network ten times the size of theUK’s and was investing around thirtytimes the UK figure (adjusted for pur-chasing power parity) in its road net-work. The disparity cannot be explainedby lack of space. Motorways carry 20%of total traffic and 40% of road freight,yet they take up less than one two-thou-sandth of Great Britain’s land area.8

Sir Rod Eddington, who reviewed thelong-term links between transport andthe UK’s productivity, growth and stabil-ity for the Government in 2005-06,

8

1. OECD, Economic Survey of

the United Kingdom 2005:

Public Services and

Infrastructure: Tracking the

Improvements, www.oecd.org

/document/27/0,2340,en_2649

_201185_35461339_1_1_1_1,

00.html

2. The Independent, 28th March

2006, available at: www.findarti-

cles.com/p/articles/mi_qn4158/is

_20060328/ai_n16180583

3. Department for Transport, The

Future of Transport, Stationery

Office, 2004

4. The Strategy Unit, Transport

Strategy Review: Phase One,

Cabinet Office, 2001

5. A large discrepancy remains

even after adjustments are made

for land area and population

density. In fact, densely populat-

ed countries such as the UK

would be expected to have more

motorway km per head of popu-

lation than less densely populat-

ed nations, since there would be

greater demand for high capaci-

ty routes (traffic also declines as

distances increase).

6. Ibid.

7. World Road Statistics 2006,

Tables 8.1 and 8.2, International

Road Federation, 2006

8. Calculated from Department

for Transport, Transport

Statistics Great Britain, Ch. 7,

2006


A competitive disadvantage

9. Sources: World Road

Statistics 2006: Data 1999-2004,

International Road Federation,

2006; and Connecting East Asia,

A New Framework for

Infrastructure, World Bank, 2005.

Traffic volume excludes motor-

cycles and mopeds. Figures are

the latest available, 2004 or ear-

lier (purchasing power parity

adjusted).

0

10

20

30

40

50

60

Canada China France Germany US UK

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

US China Canada Germany France Japan Italy UK

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

Motorway length (km) per billion vehicle km

Motorway network (km)

0

50

100

150

200

250

300

China France US Canada UK

Annual road expenditure ($) per thousand vehicle km

found that air transport performed rela-tively well (although planning delays nowthreatened this competitive advantage),but that land transport was a particularweakness. His study concluded that:“Continued economic success is forecastto lead to rising demands – if leftunchecked 13 per cent of traffic will besubject to stop-start travel conditions by2025.”10

British governments have always had apeculiar reluctance to invest in roads. Inthe 1920s and 1930s, when the firstmotorway networks were being con-structed in Germany, Italy and the US,the Ministry of Transport actually pre-vented entrepreneurs from buildingmotorways in England.11 The UK wouldhave to wait another 30 years, until the1950s, for its first motorway. If such ananti-road building tradition is upheld inthe 21st century, perhaps rationalised onenvironmental grounds, the country willbe unable to fulfil its economic potential.

Very little extra capacity has beenadded since 1995, despite rising inter-urban congestion. Existing motorwaysoften take indirect routes that add tojourney times; the M1 heads north westtowards Birmingham before headingnorth to Leeds. There are still obviousgaps in the network; Manchester andSheffield, two of the country’s largestcities and only 30 miles apart, have nodirect motorway connection – travellersmust choose between the tortuous anddangerous Woodhead and Snake Passesor divert 25 miles north to the M62.Motorway provision is also patchy alongthe route of the Great North Roadbetween London and Edinburgh. Thereis no link between Newcastle andEdinburgh or Newcastle and Glasgow,and the current A1 link follows an indi-rect and time-consuming route. The largeconurbations of the North East ofEngland (Teesside and Tyneside) have yetto be linked to the main motorway net-

work, although some progress has beenmade in recent years in upgrading the A1in North Yorkshire. No direct motorwaylink exists between Southampton, one ofBritain’s biggest ports, and the ChannelTunnel.

The misallocation of investmentThe pattern of new roads has borne littlerelation to congestion levels or consumerdemand, with the possible exception ofthe privately built and operated M6 Toll(Birmingham Northern Relief Road).The A74 through southern Scotland didnot suffer from chronic congestion, yetthis road was chosen for upgrading tomotorway standard, probably for politi-cal reasons as it links Scotland (almost) tothe English network. Similarly, theupgrade of the A1 in North Yorkshire wasdriven, at least in part, by regional devel-opment objectives.

Expenditure on public transport hasalso been driven by political expediencyrather than economic efficiency. Thelevel of government subsidy has risen sig-nificantly over the past 15 years to about£10 billion a year.12 Of this, approximate-ly £6.5 billion per annum is destined forBritain’s railways; even though theyaccount for only 9 per cent of freightmileage and 6 per cent of passengermileage (see Table 1.1).13 Furthermoreoperating subsidies are disproportionate-ly concentrated on poorly used regionalrailways rather than the overcrowdedLondon commuter routes.14

Money has also been lavished on largeinfrastructure projects such as theChannel Tunnel Rail Link and the mod-ernisation of the West Coast Main Line(£5 billion and £7.6 billion respectivelyin 2004 prices). Neither scheme is likelyto achieve a commercial return on invest-ment.15 Local transport schemes have pos-sibly been even worse investments. Ofthe numerous light rail schemes con-


10

10. The Eddington Transport

Study, the Case for Action: Sir

Rod Eddington’s Advice to

Government, The Stationery

Office, 2006

11. Plowden W, The Motor Car

and Politics, The Bodley Head,

1971

12. Department for Transport,

2006, op. cit.

13. Ibid.

14. Wellings R, ‘Rail in a Market

Economy’ in The Railways, the

Market and the Government,

IEA, 2006, p 225

15. See www.ctrl.co.uk and

Modern Railways, June 2004,

pp 52-4

structed over the past 20 years none hasmanaged a commercial rate of return.17 Infact many have been plagued by operat-ing losses for much of their history.

The failure of supply and demandLack of investment in transport infrastruc-ture, especially roads, has definitely notbeen due to a lack of tax revenue fromtransport. The Government receives about£14 billion more from transport users thanit spends on transport annually.18

Department for Transport figures showthat UK taxes on petrol and diesel havealways been among the highest in theEuropean Union.19 A recent report fromthe Institute for Fiscal Studies found thatBritain has the highest combined tax rateon unleaded fuel of any EU memberstate.20 But tax revenue from transport isdecoupled from spending on transportinfrastructure.

Since rail and bus transport are heavilysubsidised, the burden is far higher forprivate road users, who pay £32 billion inspecial taxes compared with governmentexpenditure on the roads of about £8 bil-lion per annum.21 The latter is still a sig-nificant sum, enough to construct at least400 miles of six-lane motorway. However,much of it is spent on maintenance (dam-age to the roads is primarily caused bygoods vehicles) and a significant propor-tion on anti-traffic and road safety meas-ures. In general, the economic efficiency

of government expenditure on transportand roads is questionable. And there aresound theoretical reasons to expect a highdegree of government failure in thisregard.

Gabriel Roth believes that governmentsprovide roads using methods similar to thecommand economies of Eastern Europe –and with similar results: “Congestion insome parts of the system, wasted capacityin others, and widespread deteriorationand financial losses.”22 Indeed, the trans-port sector as a whole is subject to a highlevel of state intervention in the UK. Thereis direct political control of fuel duty ratesand road tax, while numerous centrallydecided regulations determine matterssuch as speed limits, safety standards andvehicle sizes. The Government chooseswhich transport modes to subsidise, whichto neglect and which to tax heavily; it isnot surprising that a large proportion ofconsumers are dissatisfied with the provi-sion of transport services or that trans-port prices bear very little relation todemand.

Market prices play some part in thetransport sector, as one would expect in a



16. Precise figures are unavail-

able. For example, not all road

expenditure provides infrastruc-

ture and services for motorists.

Wear and tear is predominantly

caused by goods vehicles.

17. Babalik E, Urban Rail

Systems: A Planning Framework

to Increase Their Success,

unpublished PhD thesis,

University of London, 2000

www.env.leeds.ac.uk/its/private/l

evel2/instruments/instru-

ment002/l2_002a.htm#cost

18. Calculated from Department

for Transport, Transport

Statistics Great Britain, 2006

19. Ibid., Chapter 10

20. Leicester A, Fuel Taxation,

Institute for Fiscal Studies, 2005,

www.ifs.org.uk/bns/bn55.pdf


2006, op cit.

22. Roth G, Roads in a Market

Economy, Avebury Technical,

1996, p 1

“ The Government receives about £14 billion morefrom transport users than it spends on transportannually”

Table 1.1: Travel and public expenditure by surface transport mode

Mode Proportion of surface passenger Estimated annual government

miles (%) expenditure (£ bn) 16

Car/van 84 8

Rail 6 6.5

Bus 5 2.0

Underground 1 1.0

mixed economy, but their role is subordi-nated to that of political control, prima-rily from central government depart-ments. For example, the provision of newinfrastructure is largely centrally planned.If there is a congested road then it is veryunlikely that capacity will be increased asa response (raising tolls is impossibleunder the present regime). New roads areperhaps more likely to be built in rela-tively uncongested areas as part of regen-eration schemes.

Central planning authorities are lesscapable of making efficient resource allo-cation decisions than free markets operat-ing within relatively unrestrictive regula-tory framework. Because governmentdecision-makers do not personally ownthe capital they are allocating they haveweaker incentives to act responsibly orshow initiative.23 They are further ham-pered because they may not have accessto relevant market prices and thereforecannot accurately calculate costs and out-puts.24 Transport officials have faced thisproblem when planning new roadschemes. In the absence of toll revenuefrom road users, the true value of thefacility to users cannot be known andtherefore the rate of return on the capitalspent cannot be calculated. Vital infor-mation about the best way of allocatingcapital resources is lost.

Although it is impossible to quantifyprecisely the impact of the current misallo-cation of transport sector resources on theBritish economy, the negative effects couldbe of far greater magnitude than those sim-ply relating to congestion. Commentators

have often neglected transport’s integralrole in productivity increases and theresulting production of wealth. Traveltimes are not only dependent on theabsence of congestion but also the patternof infrastructure provision.

One should remember, too, that subsi-dies for public transport are financedfrom taxation, with the associated harm-ful effects on the production of wealth,including reduced incentives and distort-ed decision making. Then there are thecosts of tax collection (and the effortexpended in avoiding taxes) to consider.Some economists have estimated that“deadweight losses” mean every addition-al pound collected by taxation costs theeconomy a further 50p to £1.50.25 Thuspublic transport subsidies inflict substan-tial economic damage for the sake of a rel-atively small proportion of the market formobility.

Transport and wealth creationAs our economy has expanded the need totravel has increased, but investment intransport infrastructure has not kept paceand existing transport networks havebecome increasingly congested. In noother major European country are roads ascongested as in the UK. On every kilome-tre of Britain’s road network more than 1.6million passenger kilometres are travelledevery year – more than twice the Europeanaverage.26 It has been estimated that trafficcongestion costs the UK economy as muchas £21 billion per year.27

Eddington estimated that by 2025,without action, congestion on England’sroads will rise by 30 per cent, increasingcosts to businesses and freight by over £10billion a year, and wasting an extra £12billion worth of time for households.28

As for the opportunity costs (negativeeconomic impacts of the exchanges notundertaken because perceived congestionacts as a deterrent) associated with conges-


12

23. Mises L, ‘Economic calcula-

tion in the socialist common-

wealth’, in F. A. Hayek (ed.),

Collectivist Economic Planning:

Critical Studies of the

Possibilities of Socialism,

Routledge and Kegan Paul,

1935, pp 87-130

24. See Mises L, Human Action:

A Treatise on Economics,

William Hodge,1949, p 696

25. See, for example, Harrison F,

Wheels of Fortune, London: IEA,

2006, p 165

26. Calculated using data from

Panorama of Transport, Eurostat,

2007

27. Blythe P, ‘Congestion

Charging: technical options for

the delivery of future UK policy’,

Transportation Research Part A,

38; pp 571-87, 2006

28. Eddington R, op. cit., p 30

“ On every kilometre of Britain’s road network more than

1.6 million passenger kilometres are travelled every year –

more than twice the European average”

tion, they are difficult to estimate.Examples include businesses not compet-ing for trade in congested areas, potentialemployees not applying for jobs becausethe travel-to-work time would be too greatand directors not holding a meetingbecause it would waste too much time totravel the distance to convene.

The economic benefits of efficientlydistributed transport capacity could besubstantial. If travel costs allow, morecompanies can locate in one area, increas-ing competition, enabling economies ofscale and thus increasing productivity.For example, new motorways could dra-matically increase the population within,say, two hours’ drive of a particular loca-tion. The new infrastructure could makethe construction of a large and efficientdistribution centre viable where previous-ly only a small centre would have beenprofitable. Reduced transport costs bringsimilar gains in the retail and manufac-

turing sectors. Trade is facilitated thatotherwise would be uneconomic, result-ing in more specialised and productiveeconomic activity. Of course, for the fulleconomic benefits of improvements intransport infrastructure to be realised it isessential that businesses and individualsare free to locate their activities at themost efficient sites. Thus the biggest eco-nomic gains are likely to be achievedwhen efficient transport networks arecombined with a high degree of freedomin land markets.29

The widening gap between supply anddemand for transport in our fast-movingeconomy is threatening our very economiccompetitiveness. Rather than risk slippingdown the international league tables of thebest places to live and do business in theworld, Britain must bring about a stepimprovement in transport. This reportexplores a long-term and politically viablesolution.



29. On the economic impact of

planning controls, see Evans A

and Hartwich O, The Best Laid

Plans: How Planning Prevents

Economic Growth, Policy

Exchange, 2007

2The case for roadpricing

The true costs of motoringAt present a significant proportion ofroad user costs such as depreciation,insurance and vehicle excise duty (VED),are fixed. Once paid, they may actuallyencourage motorists – equating marginaljourney costs to the price of fuel – to usetheir cars more than they otherwise wouldin order to justify the sunk payments.Road pricing could help reduce this‘information’ problem by, in relativeterms, reducing the fixed element andincreasing the marginal element of roadtravel costs – for example, by abolishingvehicle excise duty and introducing pay-as-you-go insurance and tolls for usingcongested roads.

Fuel tax, and to a lesser extent VED, arethe only pricing mechanisms currentlyavailable to the government to ration roaduse. Although they undoubtedly do this,they do not accurately reflect the externalcosts of using particular roads. These exter-nal costs vary widely by location, time ofday, type of vehicle and grade of road.Evaluated rationally, they could be incor-porated into road user charges. Thedetails of such a scheme are outlinedbelow.

Congestion costsAt certain times and locations road space isclearly a scarce resource. The evidence iscongestion. But such variations in thescarcity of road space are not reflected incurrent motoring taxes: users pay roughlythe same no matter what kinds of roadthey use, where or at what times.

To put it in blunt economic terms, driv-ers at busy times do not pay the full mar-ginal costs they impose on other road usersthrough resulting congestion. Of course,motorists using congested roads pay a pricein the sense that their time is wasted.However those for whom time has a lowervalue (for example the retired or unem-ployed) are able to impose higher costs onthose for whom time has a greater value(hospital consultants or couriers deliveringexpensive just-in-time products for exam-ple). Any system that fails to account forthe fact that different people value timedifferently is intrinsically inefficient. As amethod of allocating a scarce resource, toration roads without employing roadcharges is comparable only with the Sovietsystem of queuing: something so discredit-ed as to be considered ridiculous in almostevery sphere of life but motoring.

Road pricing would force motorists totake the value of their time into account.People with a high degree of flexibilityabout when they travelled could choose togo at off-peak times when tolls were low.Road operators could even offer specialrates, like saver fares on the railways, toencourage travel at the quietest periods.Such variations in price would even outtraffic levels over time and space, poten-tially increasing the use of existing roadcapacity.

Track costsIt clearly makes sense for drivers usingextremely expensive urban motorways –perhaps built on expensive land and

14

involving the purchase of hundreds of prop-erties and tunnelling – to pay more than adriver using a neglected rural A-road thathas barely been improved since the 1920s.

However, although this principle caneasily be applied to newly built infrastruc-ture, it is more difficult when it comes toexisting roads. Drivers may feel, with somejustification, that they have already paidthe construction costs through theirmotoring taxes. But it is important that thecurrent capital value of roads is reflected inpricing regimes to ensure an efficient allo-cation of resources. These issues and possi-ble institutional solutions are discussedfurther in Chapters 4 and 5.

Environmental costsThe environmental costs of road use –such as noise and pollution – also varygreatly over the road network and, onceagain, the current taxation regime does notreflect this. The introduction of road pric-ing offers the possibility of more closelyrelating vehicle charging to differences inenvironmental impact. For example, noiseand local air pollution costs might be neg-ligible in many sparsely populated ruralareas but considerable in densely populat-ed urban areas. Any attempt to includeenvironmental charging within a road pric-ing scheme would undoubtedly be compli-cated by disagreements over valuationmethodologies.30

Another subject for debate would bewhether revenues from environmentalcharges should be appropriated by govern-ment for general expenditure, as with cur-rent fuel duty revenues or whether theyshould be used directly to reduce environ-mental costs (or perhaps compensateaffected individuals). If these problemscan be overcome then pricing could createincentives for road users to reduce theenvironmental impact of their journeys by,for example, using quieter and less-pollut-ing vehicles or driving less in urban resi-dential areas.

Accident costsSimilar benefits could be forthcoming inroad safety. More than 3,000 people arekilled on Britain’s roads every year, with ahuge human and economic impact.31 Itcould be possible to pay accident-insurancebased on usage, as Norwich Union nowoffers, or even as a component of tolls. Witheither system, insurance companies couldcharge road users more to travel along roadswith a high casualty rate or after midnight,and less to travel along safer roads or at off-peak times during the day. This would givedrivers an obvious financial incentive to usesafer roads and could, if some form of par-tial pricing is introduced, help deter thediversion of motorists from motorways onto minor roads.

At the same time, infrastructure opera-tors would have an incentive to ensurethat their roads were safe in order toattract customers – particularly if theinstitutional framework encouraged adegree of competition between infrastruc-ture providers/ operators. Thus pricingoffers the potential to introduce strongfinancial incentives towards reductions inthe accident rate.

It is also possible that a pricing systemcould reduce the number of untaxed anduninsured drivers using the road network.Research suggests that such individuals aremore likely to be involved in accidentsthan other motorists.32 Thus, dependingon the nature of the scheme(s) implement-ed, there could be an additional road safe-ty effect beyond the incentive structuresdetailed above.


The case for road pricing

30. See Wellings R, op. cit.


2006, op. cit.

32. RAC Foundation, News

Release, available at: www.rac-

foundation.org/index.php?option

=com_content&task=view&id=31

8&Itemid=35, 7th November

2005

“ Variations in the scarcity of road space are not

reflected in current motoring taxes: users pay roughly the

same no matter what kinds of road they use, where or at

what times”

Clearer choiceRoad pricing would make it straightfor-ward to compare the total cost of travellingby car or public transport. Distortionsfrom discriminatory taxes and subsidieswould be removed or at least minimised,externalities would be costed and account-ed for and, with congestion reduced,motorists would be able to estimate theirjourney times with far more accuracy thanat present. Britain’s transport infrastructurewould be used more efficiently by all users.

Better investmentRoad pricing is not just about enablingindividuals to make rational transportdecisions, the revenues produced wouldalso provide valuable information aboutconsumer demand for travel and point tothose locations where new infrastructuremay be most profitably provided. Byexploiting the scattered preferences of 30million drivers, road prices would providefar more accurate and dynamic informa-tion about transport preferences than thatcurrently available to planners.

If roads were priced to avoid conges-tion, the highest tolls would be raised atthe biggest bottlenecks, providing a pow-erful incentive for infrastructure operatorsto construct additional capacity. Thiscapacity could be for public transportrather than private road vehicles if itwould harvest more revenue and the insti-tutional framework were sufficiently flexi-ble to allow such cross-modal investment.As Alan Day argues, road pricing shouldnot simply be used to ration existing road

space, but also as “a measure of whether ornot to add to (or, indeed, subtract from)the existing road space: it can and shouldbe used as an investment criterion.”33 Inthe absence of pricing and given the dis-tortions of the taxation system, it is diffi-cult to value our road infrastructure accu-rately. Potential investors struggle to calcu-late future demand and revenue risk ishigh.

Facilitating competitionThe revenue risk problem is well illustratedby the development of the M6 Toll (knownin the planning and construction phase asthe Birmingham Northern Relief Road).Such uncertainties meant that the cost ofthe scheme was inflated by high financingcosts, while traffic projections – and rev-enue forecasts – were overly optimistic.

In the absence of wider pricing the M6Toll suffered from ‘unfair’ competitionfrom the existing M6. In particular, exceptduring severe congestion, speed-limitedhauliers had little to gain by using the tollroute. At the same time, M6 Toll userseffectively paid twice when fuel duty andvehicle excise tax are included. If a nation-al road pricing system had been in placemotorists on the original M6 would alsohave had to pay a toll and, potentially,motoring taxes might have been reducedor abolished. The ‘unfair’ competitioncurrently observed would have been elim-inated.

The implications of this are potentiallygroundbreaking. It would enable privateinvestors to build new links to competewith existing ones in terms of price andquality of service – and bring about a stepchange in the quality of Britain’s infra-structure. However, the level playing fieldnecessary to obtain the greatest economicbenefit from private investment wouldrequire an appropriate institutional and fis-cal framework. As we examine next, thepolitics of transport could make this diffi-cult to achieve.


16

33. Day A, ‘The Case for Road

Pricing’, Economic Affairs, 18

(4), pp 5-8, 1998

“ If roads were priced to avoid congestion, the highest

tolls would be raised at the biggest bottlenecks, providing

a powerful incentive for infrastructure operators to

construct additional capacity”

What is the case against roadpricing?Road pricing could be a remarkable tool toimprove the efficiency of our transportnetwork, but honest analysis must concedethat it will have some inherent difficultiesto overcome.

Public oppositionAbout 1.8 million people signed a petitionagainst road pricing on the Downing Streetwebsite and surveys show that between halfand three-quarters of the public areopposed to pricing, depending on thedetails of the scheme.34

The same surveys demonstrate thatopposition is reduced when it is madeclear that road pricing revenues will beused to reduce motoring taxes or improvetransport infrastructure.35 Indeed, amajority of the public might support ascheme providing certain conditions aremet. However, there is widespread andunderstandable distrust of governmentmotives and a fear that road pricing couldend up being another tax-raising exercise,just as the road fund was appropriated bythe Treasury and fuel duty is used for gen-eral expenditure rather than improve-ments to transport infrastructure.36 Theway in which the proceeds from roadpricing will be used would have to beattractive and clear in order to build uppublic support.

What rates should be charged?If the primary goal is to reduce congestionand speed up traffic, then prices shouldreflect the scarcity value of sections of roadat various times. Prices would need to beset by trial and error until congestion dis-appeared and traffic flowed freely.37 Butgiven the likely opposition to the introduc-tion of pricing mechanisms, political expe-diency and not scarcity value may deter-mine the charge set. Economic benefitswould then be lost since prices could betoo expensive at certain times (leading to

wasted road space and lost economic activ-ity) and too cheap at others (causing con-gestion).

Although road pricing schemes must besophisticated enough to ensure the effi-cient use of road space, they must also bepredictable and easy for users to under-stand, so that motorists are not surprisedby a sudden rise in rates leading them toseek alternative routes. Unfortunately, it ishard to achieve both features simultane-ously, so a careful balance has to be struckbetween fine-tuning the system and notconfusing drivers. This also means dealingwith “boundary” effects that occur, forexample, when traffic increases just afterthe peak rate charges finish. These are dif-ficult technical questions, but they can beanswered. Over time and with the oppor-tunity to experiment with different charg-ing schemes, what works and what doesnot will become clear.

Competing transport systemsRoad pricing would not operate in a vacu-um because there are other modes of trans-port with which roads have to compete. AsEddington recommended, the Govern-ment needs to get prices right for all formsof transport, especially congestion pricingon roads and environmental pricing acrossall modes.38 For travellers to make efficientdecisions, therefore, price distortionsbetween different modes must be removedas far as possible. If congestion pricing isapplied to the road system then it mustalso be applied to public transport, includ-ing the busy commuter trains running intocentral London. This has, of course,already begun with peak and off-peak pric-ing on the rail and London Undergroundnetwork. Levels of overcrowding on thesetrains suggest that peak fares should beincreased further, although some passen-gers may wish to trade discomfort foraffordability. But on the rail network, sea-son tickets and fares for all journeys within50 miles of London are regulated so fran-



34. See Road User Charging,

RAC Foundation 2006, www.rac-

foundation.org/index.php?option

=com_content&task=view&id=35

0&Itemid=35

35. Ibid.

36. Plowden W, op cit.

37. See Hibbs J, ‘A Radical

Approach’, Economic Affairs, 18

(4), pp 2-4, 1998

38. Eddington R, op. cit., p 50

chisees are not at liberty to raise fares inorder to reduce demand on peak-timecommuter trains. The resulting congestionhas led to demands for expensive capacityincreases on the worst affected routes. Ifthe logic of road pricing were applied topublic transport it would be difficult tojustify the continued regulation of suchfares.

The same reasoning should apply toenvironmental charges. If an environmen-tal charge is included within road prices,public transport users should also pay sucha levy. Under-pricing the environmentalimpact of public transport will encourageinefficient use.

Taxation and subsidiesWhile road users pay taxes such as vehicleexcise duty and fuel tax, buses and trainsreceive substantial government subsidiesand a VAT exemption on their fuel. Thisimbalance should ideally be corrected.

From an environmental perspective andin certain locations the continued govern-ment subsidy of carbon emissions throughspecial support for public transport is diffi-cult to justify. The introduction of roadpricing – alongside an economy wide car-bon tax (see Chapter 5) – would demon-strate whether existing public transportservices are commercially and environmen-tally viable. This is a further argument infavour of increasing the pricing flexibilityof public transport operators and reducingsubsidy levels.

The introduction of a (non-carbon)environmental component to road pricing– it would probably vary according to theestimated (non-carbon) environmentalimpact of a journey – would, alongside aneconomy wide carbon tax, provide a pow-erful rationale for phasing out existingmotoring taxes. This would also increasethe political acceptability of road pricingand have economic benefits, since distor-tions are likely to occur when taxes arefocused on one sector of the economy

alone. These issues are discussed further inChapter 5.

Operating costsOpponents of road pricing argue that mostof the revenue generated would be spent onadministration. High estimates of the costsof introducing and administering a nationalscheme have been published recently.39 If,for example, the system cost £10 billion ayear to run (about £300 per vehicle), thisamount would constitute around half theannual current cost to the UK economy ofcongestion and, to put the figure in furtherperspective, would be sufficient to constructat least 500 miles of six-lane motorway. Acomplex IT driven road-pricing schemecould suffer from severe cost over-runs anddelays in implementation, as seen with theGerman lorry charging system, and the £6billion National Health Service “choose andbook” computer system, which may end upcosting £50 billion.40

Opinion differs on whether such a sce-nario is probable for road pricing; it hasbeen suggested that the costs of implemen-tation are likely to be concentrated in thetechnology installed in vehicles rather thancomplex computer systems.41 Withoutquestion, though, any proposal willinevitably have to balance the potentialbenefits with the costs and risks associatedwith administration.

Wider economic effectsThus the economic benefits of road pricingcould be lost through a combination ofpolitical interference, modal bias, failure toreform taxation and inflated administrativecosts. It would be foolish to deny that thesedangers exist or to ignore them whenintroducing a road pricing scheme.

If expensive peak-time pricing wereintroduced in major cities to eliminatecongestion, strict government planningcontrols could prevent businesses andhouseholds from moving out of cities toavoid the high charges (a market reaction


18

39. For example ‘Drivers face

£600 bill for an in-car road pric-

ing black box’, Daily Telegraph,

21 February 2007. www.tele-

graph.co.uk/news/main.jhtml?xml

=/news/2007/02/19/nroads19.xml

40. See Sunday Times, 2 April

2006 www.timesonline.co.uk/tol/

comment/columnists/simon_jenk

ins/article701108.ece

41. Private communication, 19

April 2007

that makes more efficient use of the avail-able road space and cheaper land).Companies could face demands forincreased pay from workers charged todrive into town at peak times.

At the same time, modal bias is likely tomean that public transport users wouldnot be paying the full costs of commutinginto city centres, since services are sub-sidised and environmental costs ignored.Thus significant numbers of commuterswould be displaced on to public transport,which is often already full at peak times.The Government might then think itexpedient to spend significant capitalsums on increasing capacity on publictransport. However, because market pricesare so distorted by the simultaneous use offuel tax, VED, road user charges and pub-lic transport subsidies, and because gov-ernments are notoriously poor at invest-ment, this may well represent a misalloca-tion of resources. A significant proportionof the economic gain from road pricingcould be dissipated on wasteful publictransport schemes. Although in some areaspublic transport schemes will be commer-cially viable, in others journeys cannot eas-ily be transferred to public transport andso businesses and individuals could facesubstantial economic losses, both fromdirect charging costs and opportunitycosts.

This is only one example, but it couldhave wider implications. Public transportreceives around £10 billion in subsidiesevery year.42 If the number of commutersusing public transport doubled as a resultof road pricing, the need for increased sub-sidy would be very significant indeed.

The redistributive effects of road pricingare also far from clear. A negative effect onsome less affluent inner city areas is possi-ble. Pricing could deter middle-incomemotorists from living in such locations,leaving inner cities to low-income publictransport users and increasing social polar-isation. Demands for regeneration subsi-

dies could then rise, dissipating yet more ofthe benefits of road pricing.

Finally, there is the possibility that, driv-en by bureaucratic and industry interests,the road pricing system would suffer fromhigh set up and administration costs, fur-ther undermining its economic case.

A new case for road pricingAll of this leaves transport policy on thehorns of a political dilemma. To realise theadvantages of a market-based solution, roadpricing has to be introduced. Yet on its ownsuch a proposal would be guaranteed tomeet with fierce political resistance, whichin turn could lead to excessive interventionand over-regulation – as happened with railprivatisation. Given budget constraints andthe high level of fuel taxation, it would bedifficult to finance new infrastructurethrough either the general budget or bylevying higher petrol and diesel duties. Oneway to surmount these difficulties would beto combine the introduction of road pric-ing with the provision of new infrastruc-ture. Motorists would not then be payingagain for existing infrastructure, but forvital upgrades to the network.

But unfortunately this would involve atime lag, because new infrastructure cantake years to plan and build. The M6 Toll,for example, was first considered in theearly 1980s but opened only in 2003.Paying the tolls would only be followed bybetter infrastructure at a much later date. Iftransport users were charged throughoutthis time without any visible improvementin the infrastructure, road pricing couldwell fail. That is why this report suggeststaking a different route: introducing roadpricing after the necessary upgrades to ourtransport infrastructure have been made.The obvious question, which the nextchapter explores, is how to finance theinvestment in new infrastructure beforethe revenue stream from user charging haseven begun.




2006, op cit.

3Harnessing privatefinance

Historical contextIn the 18th century a mixture of publicand private capital funded the develop-ment of an extensive and integrated net-work of toll roads or turnpikes.43 In the19th century, following the commercialdevelopment of the canals, private compa-nies built a vast railway network, support-ed by Acts of Parliament that enabled thecompulsory purchase of land. During the1920s private consortiums proposed aseries of profit-making toll motorwayslinking London with other big cities, usu-ally with the support of the local authori-ties along the route. By this time, however,the political climate had changed and SirHenry Maybury, the Minister of Tran-sport, objected to “the placing of very imp-ortant road traffic arteries in the hands ofprivate capitalist enterprise, to be operatedfor profit”.44 Britain never did get a private-ly built motorway network but, in theright conditions, private investors wereprepared to fund the development of large-scale infrastructure networks.

As the role of the State grew, in trans-port as in other economic sectors, opportu-nities for private investment became morelimited. The Conservative Government ofthe 1980s tried to increase the role of theprivate sector, albeit within a tightly regu-lated framework. The Queen Elizabeth IIBridge at Dartford, opened in 1991, wasthe first notable modern road scheme to beprivately financed; investors were paid backusing toll revenues. It served as a model forseveral projects launched under the PrivateFinance Initiative (PFI) during the 1990s.

The Private Finance InitiativeThe Government officially introducedthe PFI in 1992. It allows the private sec-tor to finance large projects, such as theconstruction of new hospitals, prisonsand roads. The Government lays downspecifications for each project, and theprivate sector – usually a consortium ofcompanies each specialising in a particu-lar aspect of the scheme – is responsiblefor the construction and operation of theinfrastructure. A defining feature of PFIprojects is the transfer of at least someoperational risk from the public to theprivate sector.45 As Roe and Craigexplain, this distinguishes PFI from themore nebulous public private partner-ships (PPP), such as LondonUnderground, that are effectively backedby government guarantees and caninvolve less transfer of risk to the privatesector. They add: “PPPs also tend to beso complex as to obscure any hope oftransparency, are difficult to monitorand have confused lines of accountabili-ty.”46

The advantages of PFI projects47

� They provide an alternative fundingsource for infrastructure schemes. Inthe short term, more capital projectscan be undertaken for a given level ofpublic expenditure and therefore theycan be brought on stream earlier.Private organisations may also havegreater scope to make use of innovativefinancial instruments and financingtechniques.

20

43. Albert W, ‘The Turnpike

Trusts’, in Aldcroft D and

Freeman M (eds), Transport in

the Industrial Revolution,

Manchester University Press,

1983

44. Plowden W, op cit., p 193

45. Roe R and Craig A,

Reforming the Private Finance

Initiative, Centre for Policy

Studies, 2004

46. Ibid.

47. See for example, Poole F,

Roads and Private Finance,

Research Paper 97/85, House of

Commons Library, 1997

� Private sector skills and expertise arebrought into the planning and execu-tion of projects.

� The involvement of private businessand a competitive tendering processshould lead to better value for moneyand greater economies of scale.

� Risk can be transferred from the publicto the private sector, so that taxpayersdo not have to contribute when costover-runs occur. The level of paymentsfor the specified service is set out in thecontract and cannot be increased as aresult of unforeseen costs. The PFI cantherefore deliver improved price cer-tainty for government departments.

� Incentive structures can ensure theclose integration of service needs withdesign and construction. The design,construction and maintenance compa-nies that comprise PFI consortiumshave an incentive to work closelytogether to protect their long termfinancial interests.

� The company responsible for buildinginfrastructure is generally responsiblefor its continued long-term operation,increasing the incentive for consor-tiums to take a longer term approach todesign and construction, and thereforeto deliver high standards. There are alsostrong financial incentives to completeprojects on time.

Private finance has been mobilised in manysectors, with varied success. A paper pub-lished by the Institute for Public PolicyResearch suggests that although significantvalue-for-money gains are made in road andprison PFIs, the improvements in schooland hospital PFIs are more questionable.48

The National Audit Office (NAO) foundthat the price ultimately paid by the publicsector exceeded the one agreed at contract in22 per cent of PFI construction projects.49

Although this may sound like a high pro-portion, the figure for projects implement-ed within the public sector was 73 per cent.

Moreover, the increases in PFI price aftercontract generally resulted from latechanges being made to the project specifica-tions, such as the re-categorisation of pris-ons to take more dangerous offenders. Suchchanges would undoubtedly have led toprice increases under the traditional pro-curement process too.

According to the NAO, only 24 per centof PFI projects were delivered late, comparedto 70 per cent within conventional publicsector procurement. The delay was morethan two months in only 8 per cent of thePFI projects surveyed. These figures showthat the PFI has delivered substantialimprovements in reliability. It would alsoappear that most public sector project man-agers have been satisfied with the perform-ance of their PFI-built infrastructure.50

Criticisms of PFIDespite empirical evidence that the PFIoffers significant advantages over conven-tional procurement, several difficultieshave been identified.

� Critics suggest that PFI investment hasnot in fact brought about a significantincrease in the level of investment incapital projects and that the real moti-vation for employing private finance isto remove investment from theGovernment’s balance sheet in theshort term, in effect creating a mort-gage on the public sector. Roe andCraig estimated in 2004 that theGovernment was already committed topay over £110 billion for PFI projectsbetween 2003-04 and 2028-29.51


Harnessing private finance

48. Maltby P, ‘Public service

reform in the UK: the PFI experi-

ence’, Institute of Public Policy

Research, 2003 www.ippr.org/

articles/index.asp?id=335

49. PFI: Construction

Performance, Report by the

Comptroller and Auditor

General, National Audit Office,

HC 371 Session 2002-2003, 5th

February 2003

50. Ibid.

51. Roe R and Craig A,

op. cit., p iii

“ Risk can be transferred from the public to the private

sector, so that taxpayers do not have to contribute when

cost over-runs occur”

� The case that the PFI offers better valuefor money has also been questioned.52

The transfer of risk to the private sectormeans that projects have faced higherborrowing costs, as financiers havedemanded a risk premium. In contrast,the Government can borrow at very lowrates since repayment – backed by pow-ers to tax and print money – is all butguaranteed. Yet arguably these low ratescan be achieved only by transferringprojects’ financial risks to taxpayers.Cost over-runs on publicly financedprojects involve either higher tax ratesor extra government borrowing. Thenegative economic impact of suchmeasures, as well as the gains in efficien-cy brought about by the PFI, musttherefore be balanced against higherfinancing costs when assessing the valuefor money offered by PFI schemes.

� The tendering process for PFI contractsis said to be far more protracted thantraditional procurement, inflicting riskand cost on the businesses involved.53

This can deter businesses consideringentering the PFI market and under-mine competition and innovation.There is a danger that a handful oflarge operators, with the resources toenter the expensive bidding process,will come to dominate the market.

� PFI projects have been attacked fortheir lack of flexibility.54 Contracts typ-ically set out detailed specifications fora 20 or 30-year period, thereby limitingthe ability of the public sector to makefuture changes and reducing its scope

for innovation. In defence of detailedcontracts, without them the main ben-efits of the PFI could be lost; uncer-tainty could lead to an increased riskpremium on borrowing and reduce thelong-term incentives for high construc-tion standards.

Arguably, the real trouble has been a mis-match between the long-term planningand investment culture of PFI consortiumsand the often short-term politicised natureof the public sector. In the Second Reviewof the Private Finance Initiative, commis-sioned by the Treasury, Sir Malcolm Batesuncovered systemic deficiencies in themanagement of the PFI process including:a failure to prioritise projects on thegrounds of affordability, service need andcommercial viability; poor preparation ofbids; unrealistic risk allocation in con-tracts; late cancellations due to policychanges; and the appointment of preferredbidders either too early or too late – allleading to excessive bid costs, lengthynegotiations and weak competition.55

According to the review, suppliers werenot impressed with public sector procure-ment in general and felt that “departmentswere still overly risk averse and naïve indealing with them”. There was also “dupli-cated activity, poor use of (and wasted)resources, poor value for money togetherwith uncoordinated and unprofessionaldealing with suppliers”.

The review suggested that there wereparticular skill shortages among localauthority officials, few of whom had solidexperience of leading complex PFI negoti-ations with the private sector or in struc-turing the contractual package underlyingPFI deals and resolving issues of risk allo-cation. “To get real value for money, thepublic sector must acquire and retainfamiliarity with the financial products usedto create PFI funding practices.”

Possible solutions to this skills deficitinclude setting up more specialist PFI


22

52. Ibid., p 7

53. The Future of the Private

Finance Initiative, Social Market

Foundation, 2004, pp 24-25

54. For example, Unison ‘A

Briefing on the Private Finance

Initiative’, 2004 www.unison-

scotland.org.uk/briefings/pfi-

jnov02.html

55. Bates M, Second Review of

the Private Finance Initiative,

HM Treasury, 1999, p 18

“ Arguably, the real trouble has been a mismatch

between the long-term planning and investment culture of

PFI consortiums and the often short-term politicised

nature of the public sector”

units, perhaps based within the main gov-ernment spending departments rather thanthe Treasury, and making greater use ofindependent private sector consultants.

Quoting a Treasury and Cabinet Officereview, Bates wrote that the politicalimportance of many PFI projects hasmeant that officials in both central andlocal government view the procurementprocess as high risk and potentially careerthreatening. The result is responsibilitysharing and decision-making by commit-tee, leading to delays. The institutionaldeficiencies of the public sector, therefore,have contributed to the high costs of thetendering process, which in turn have lim-ited the number of businesses willing toinvest in PFI projects.

Transport and private financeThere is considerable experience of privatefinance within transport. It has been usedin both the construction of roads and ofpublic transport infrastructure.56 The list ofprojects suggests that both PFI and PPPsin general are flexible tools when it comesto the transport sector. PPPs have helpedto fund very large schemes such as themodernisation of London Undergroundlines and small ones such as the provisionof street lighting in local boroughs.Interestingly, they have involved a varietyof public sector partners including theHighways Agency, London Underground,passenger transport executives and localauthorities.

Some projects have been perceived asmore successful than others, both by spe-cialists and the public at large. It is there-fore essential to identify those schemecharacteristics that appear to best facilitatesuccessful private investment. The nextsection examines recent road and publictransport projects that have included a sig-nificant role for private finance, boththrough PFI and more broadly definedPPPs.

Road projectsDBFO road building schemesThe roads constructed as design, build,finance and operate (DBFO) schemesappear to be among the most successfulapplications of the private finance initia-tive. In the basic model, the consortiumconstructs the new road and then receivesrevenues from the Highways Agency, inthe form of shadow tolls for vehicles thatuse it, for the duration of the concession(generally around 30 years). However, incontrast to the situation with a private tollroad, there is a cap on revenues – beyondcertain traffic levels no more shadow tollsare paid. The Highways Agency thereforeavoids the risk that traffic levels will exceedexpectations, while the risk associated withlower than expected traffic levels is borneentirely by the private consortium. Duringthe bidding process and subject to themmeeting certain quality requirements, con-sortiums compete according to the lowestshadow toll rate they will accept from theHighways Agency.

Shadow tolls are used instead of directones because they have negligible adminis-tration costs, do not divert traffic on toparallel minor roads and can easily beapplied to discrete stretches of road, with-out the need for expensive and disruptivetoll booths or the development of alterna-tive charging technology.57

A penalty points system has been usedto encourage DBFO consortiums to pro-vide a good quality service for drivers.Penalties are applied, for example, whenthe road is taken out of service for repairs.



56. See HM Treasury ‘PFI

Signed Projects List’, www.hm-

treasury.gov.uk/media/3/6/pfi_sig

neddeals_110707.xls

57. See Poole F, op. cit.

“ PPPs have helped to fund very large schemes such

as the modernisation of London Underground lines and

small ones such as the provision of street lighting in local

boroughs”

Variability charges, which make deduc-tions to payments when congestion occurs,may also be used instead of conventionalshadow tolls.

DBFO schemes are said to have resultedin significant cost savings – between 14and 22 per cent for the first eight suchprojects (depending on the discount rateused).58 However, critics have pointed tothe lengthy, bureaucratic and expensivebidding process. Also, DBFO consortiumshave a vested interest in ensuring a highlevel of road use in order to extract theirmaximum revenue from the shadow tolls(these incentives have been modified to adegree in contracts) and thus cannot, it isargued, be involved fully in a wider trans-port strategy. Contractual arrangementslargely insulate DBFO schemes fromdirect political interference, though thosecommitted to a more top-down model oftransport policy consider this a disadvan-tage. Consortiums still face a degree ofpolitical risk, however. For example, theintroduction of a national road pricingscheme could significantly affect their rev-enues, as could a variety of local transportmeasures.

The M6 TollWith the exception of a small number oftoll bridges, the M6 Toll was the UK’s firstsection of tolled motorway. Designed toalleviate the increasing congestion on theM6 through Birmingham, it connects M6Junction 4, near the National ExhibitionCentre, to M6 Junction 11A north ofWolverhampton with 43km of three-lanemotorway. This, the busiest section of theM6, was previously carrying up to two-and-a-half times as many vehicles per dayas it was designed for.

A private sector company, MidlandExpressway Ltd (MEL), won the 53-yearconcession to build and operate the M6Toll (allowing three years for constructionand fifty for operation). It was to carry outthe design, construction, financing, opera-

tion and maintenance of the road at itsown cost and risk, without recourse to gov-ernment funds or guarantees. A consor-tium of big contractors (Carillion,McAlpine, Balfour Beatty and AMEC)began work in mid-2002 and the road wasopened one month ahead of schedule, inDecember 2003.

MEL was to recoup its costs by collect-ing tolls, which it was entirely free to set.The only cost to government of the M6Toll road was an £18 million contributiontowards rebuilding part of the connectingM42. The motorway cost £485 million tobuild, although Macquarie InfrastructureGroup, the Australian company thatacquired MEL in 2005, put the total proj-ect cost at £900 million. The discrepancyin part reflected high financing costs at thestart of the project related to the politicalrisk that final permission to build the roadwould not be granted, as well as risk asso-ciated with the untested nature of such aproject in the UK.59

MEL reported an operating profit ofaround £16 million in 2005.60 Total rev-enue was £45 million, with staff and otheroperating costs amounting to £11.4 mil-lion and depreciation of £17.4 million.Taking into account net interest costs ofaround £43 million, this left an overall lossof £26.5 million in 2005 – its first fullfinancial year. At this stage long term debtwas £819 million. Since then tolls havebeen raised, interest repayments have beenreduced through refinancing and a numberof large developments, including distribu-tion centres, have been attracted to thevicinity of the route. It is plausible, there-fore, that the motorway will return a prof-it in the medium term.

Although the M6 Toll, in Macquarie’sown description, remains a “premiumquality road that was delivered on budget,ahead of schedule and with minimum useof taxpayer’s funds”,61 it is still too early tojudge its commercial success. A number offactors have contributed to this outcome.


24

58. Haynes L and Roden N,

‘Commercialising the

Management and Maintenance

of Trunk Roads in the United

Kingdom’, Transportation, 26,

pp 31-54, 1999

59. Private communication

60. Midland Expressway Ltd,

interim financial statements

(unaudited) for the six months

ended 31st December 2005,

www.macquarie.com.au/au/mig/

acrobat/m6toll_financials_end-

dec05.pdf

61. Evidence given by

Macquarie to the Parliamentary

Select Committee on Transport

Road Pricing: The Next Steps,

Seventh Report of Session

2004-5, Volume 1

First there are competing toll-freeroutes, above all the existing M6. Secondly,goods vehicles were originally envisaged tobe a major source of revenue but manyhaulage companies have boycotted the tollroad. Hauliers often charge a fixed rate fora delivery and, given their competitive,low-margin industry, the tolls dent theirprofits – especially where the speed ofdelivery is of low importance.

Thirdly, traffic predictions were over-optimistic: MEL never published its fore-cast traffic volumes, but estimates made bytransport consultants Steer Davies Gleavegroup suggested that about 70,000 vehiclesper day would be using the road within ayear of opening, and 80,000 after threeyears.62 In fact just over three months afteropening, average traffic flows were about47,000 vehicles on a weekday (invariablybusier than weekends), and after a yearthey were still below 50,000 vehicles perweekday.63 Time savings were also over-optimistic. A survey conducted beforecompletion of the road estimated thatusing the new M6 Toll could reduce jour-ney times by up to 45 minutes, howeverthe maximum time saved has been around30 minutes.64 Comparing journey times onthe M6 Toll and on the M6 before theproject opened, average weekday journeytimes are seven minutes shorter south-bound and twelve minutes shorter north-bound. Time savings are not nearly as bigas expected, which may also help to explainwhy traffic has been below the levels fore-cast during the planning stage.

Finally, financing costs were high, bothbecause of the unique nature of the projectand because the consortium had to bearthe planning risk: a significant proportionof the total cost was spent before the con-sortium knew that the project would begranted permission to proceed.

Notwithstanding the project’s disap-pointing financial performance so far, fur-ther criticisms have focused on the Gover-nment’s lack of regulatory power over the

route. Providing certain standards are met,MEL is able to operate the M6 Toll as anentirely independent stretch of road. TheParliamentary Select Committee onTransport has pointed out that, until 2054,the Government’s policies, such as nation-al road pricing, high occupancy vehiclelanes and active traffic management canonly be applied to the M6 Toll road withthe co-operation of the operators. (Theseissues could be resolved by legislation,renegotiation or compensation, or a com-bination of all three.)

Some have suggested that because MELcurrently has an incentive to maximise rev-enue rather than minimise overall conges-tion, a toll-free route – a shadow tollscheme or even a conventionally procuredmotorway – would have made a far greatercontribution to reducing congestion in theM6 corridor and have produced greateroverall benefits for the economy.

Public transport schemesPrivate finance in public transport schemeshas been more controversial than in roadprojects. It has often been characterised bysevere financial problems and persistentcontractual disputes with the commission-ing bodies. Such projects tend to remaindependent on government subsidies andare therefore vulnerable to political risks;they also have to contend with ideologicalopposition to private sector involvementfrom traditionalist public transport admin-istrations. Important lessons can howeverstill be drawn from recent public transport



62. ‘M6 Toll Birmingham opens

end-2005’, Toll Roads News,

15th July 2003

63. Post Opening Project

Evaluation: M6 Toll One Year

After Study, Highways Agency,

2005

64. Road Pricing: The Next

Steps, Seventh Report of the

Transport Select Committee,

Session 2004-2005

“ DBFO schemes are said to have resulted in

significant cost savings – between 14 and 22 per cent

for the first eight such projects (depending on the

discount rate used)”

projects in terms of funding, contractualarrangements and the limitation of politi-cal risk.

Croydon TramlinkIn 1996 Tramtrack Croydon Ltd (TCL)won a 99-year contract to build and runTramlink (99 years was considered suffi-cient time to enable the private sector toview it as a long-term business rather thana limited period concession). The projectcost £205 million to construct andopened in May 2000. More than half thecapital cost (£125m) was provided as agrant by central government.65 The con-tract was signed by London Transport butin July 2000 its successor body, Transportfor London (TfL) was given responsibili-ty for setting tram and bus fares acrossLondon.

The predicted passenger numbers were20 million a year after 18 months of opera-tion and 25 million a year when the systemreached maturity after five years, but inreality passenger numbers fell about 2 mil-lion short of these figures.66 Having takenon revenue risk the consortium initiallystruggled to cover operating costs, let alonecapital repayments, despite the Govern-ment subsidy for construction costs.

According to TCL one of the main rea-sons for the shortfall in patronage wasTransport for London’s policy of expand-ing bus services in direct competition totram routes.67 The level of bus mileageoperated in Croydon is currently 32 percent higher than at the time when the con-cession was granted, with some routes run-ning directly parallel to trams. Secondly,bus fares on competing routes were origi-nally set at a rate 20-30 per cent lower thantram fares. The company took TfL to courtclaiming that the lower bus fares and com-peting services had lost TCL up to 8 mil-lion passengers and therefore substantialrevenue. The court decided that TCL wasowed compensation. When fares were har-monised in 2004 there was an immediate

12 per cent increase in passengers using thetrams.

TCL made an operating profit of around£2.5 million in the year to March 2005 butits interest payments amounted to £8.3 mil-lion.68 Tramlink now relies heavily on pay-ments from TfL (£5.8 million in 2004-05)to compensate for the introduction of lowerbus fares, competing bus services andOyster cards, as well as to cover conces-sionary fares. The scheme is considered tohave been a far greater financial failurethan the M6 Toll because taxpayers haveeffectively had to subsidise both the con-struction and operation of the route. Morepositively, the use of private financeensured that construction cost over-runsdid not burden the taxpayer. Moreover,the contract was also robust enough todeal with much of the associated politicalrisk and to ensure that insolvency wasavoided.

Nottingham Tram PFIThe Nottingham Express Transit (NET)is a relatively successful light rail tram sys-tem built and operated under the privatefinance initiative. Its promoters, Notting-ham City Council and NottinghamshireCounty Council, awarded the 30.5 yearconcession to a consortium, Arrow LightRail. It took three-and-a-half years toconstruct, and Line 1 opened to passen-gers in March 2004. The service hasproved very popular with both com-muters and shoppers.

Behind the scheme’s relative success is apayment structure that gives NET incen-tives without having to take on a large rev-enue risk that it would be ill-equipped tomanage. The councils pay an ‘availability’fee to the operator for running the serviceagainst performance targets of reliability,punctuality, cleanliness, and good mainte-nance, etc. In addition, thanks to a ceilingon the possible size of the fee, if patronageis much higher than expected the councilswill receive some of the resulting profit.


26

65. www.publications.parlia-

ment.uk/pa/cm199900/cmse-

lect/cmenvtra/153/15306.htm

66. National Audit Office, Public

Transport Review 2004,

www.nao.org.uk/publications/na

o_reports/03-04/0304518.pdf

67. Memorandum by Tramtrack

Croydon Ltd to the

Parliamentary Select Committee

on Transport, 2005, www.publi-

cations.parliament.uk/pa/cm2004

05/cmselect/cmtran/378/378

we06.htm

68. www.bromleytransport.org.

uk/croydon_Tramlink.htm

Also, one of the Nottingham consortiummembers is Nottingham City Transport,which operates the city’s buses. As a resultthe temptation to run bus services in com-petition with the tram, as happened inCroydon, has been eliminated. Instead theservices complement each other, which fitswell with a clear vision of integrated trans-port. Similarly, since the scheme’s promot-ers are also the planning authorities theyhave been able to build complementarypark-and-ride facilities.

There are plans to extend theNottingham Tram Line. The Governmenthas agreed to allocate £437 million in PFIcredits towards the £578m scheme, andconstruction work is expected to start in2010. It is intended that the remainder ofthe funding will be met locally and a pro-posal for a workplace parking levy to helpraise the funds is being explored.69

The Tube PPPIn 2003 three companies, Metronet RailBCV, Metronet Rail SSL and Tube Linesentered into a 30-year infrastructures serv-ices contract with London Undergroundto upgrade the Tube.70 Banks, includingDeutsche Bank, UBS, Abbey Nationaland the Royal Bank of Scotland, provideddebt financing for the project, whichamounted to £2.6 billion in the case of theMetronet contracts.71 This level of privatefinancing far exceeds that for the DBFOroad schemes or the M6 Toll. Under thispublic private partnership, LondonUnderground (LU) retains responsibilityfor overall safety and for operating trainsand stations. Every four weeks LU paysthe infrastructure companies a charge,which is increased or decreased to reflectactual performance and is subject to annu-al indexation.72 The consortiums canimprove their revenues through bonuspayments if performance is better than thePPP benchmark, which tightens progres-sively over the life of the contract.Revenue is reduced if performance falls

below the benchmark and the deductionsfor poor performance are usually twice thesize of the increases for above-benchmarkperformance. The measurement of per-formance is complex and involves not onlythe reliability of Tube train services, butalso the condition of rolling stock and sta-tions.

The PPP was implemented in the face ofstrong opposition from the GreaterLondon Authority and the rail unions. Thetwo Metronet contracts ran into serious dif-ficulties: work fell behind schedule andcosts greatly over-ran. The Metronet con-sortium, whose shareholders are BalfourBeatty, Atkins, EDF Energy, Thames Waterand Bombardier, sought a review of its PPPcontract in an attempt to increase the pay-ments from London Underground. But, inJuly 2007, the independent PPP arbiterChris Bolt decided that LU should payonly a fraction of the sum demanded, andMetronet went into administration.73

London Underground management mayintervene to take over maintenance andrenewal work although, given their long his-tory of substantial cost over-runs on projectsmanaged in-house (for example, the JubileeLine Extension), it is not clear that this willprove more efficient. The fact that the pub-lic sector appears to be duty bound to com-plete the work also raises questions aboutthe extent to which risk was transferred tothe private sector in this PPP.

The Channel TunnelIn 1985 the British and French govern-ments invited bids from the private sector



69. www.nottinghamwpl.com/

70. ‘The Public Private

Partnership’, www.metronetrail.

com/default.asp?sID=10787534

14926

71. See www.ashurst.

com/media-item.aspx?id_

Content=626&expandOfficeList=

true&id_queryContent=&showDe

als=true

72. For the two Metronet con-

tracts these payment totalled

£660 million in 2005. See

‘Metronet under strain as costs

over-run’, Milmo D, The

Guardian, 18th April 2007

73. ‘Tube company Metronet

goes into administration’, The

Times, 18th July 2007

“ The PPP was implemented in the face of strong

opposition from the Greater London Authority and the

rail unions . . . work fell behind schedule and costs

greatly over-ran”

to design, build, finance and operate a linkacross the English Channel. Eurotunnel, aconsortium of banks and constructionfirms, was selected out of nine bidders.The plan involved building a rail tunnelwith a shuttle service for road vehicles.74

The Tunnel was financed privately, most-ly through bank loans, but also with equitycapital from a series of share offers.Unfortunately the project was not a successfor investors. Unforeseen geological difficul-ties delayed completion by a year, leading toadditional interest payments and lost rev-enue. Because the project was technological-ly challenging, it was difficult to draft a suit-able construction contract in advance. Thisled to cumbersome and costly negotiations,as well as conflict, between Eurotunnel andthe contractors TransManche Link. Costswere also inflated by government interfer-ence on health and safety issues.

After completion in 1994, revenuesfailed to live up to forecasts. Passengernumbers were less than half those expectedand freight figures also disappointed. Thecross-Channel ferry companies cut theirprices and competition from budget air-lines began to appear in the late 1990s.

Political risk also played a role, since theconstruction of a state subsidised high-speed rail connection to London was con-siderably delayed – it having finally openedon 14th November 2007 alongside the re-opening of St Pancras Station as St PancrasInternational. Rail traffic was so low that aminimum usage charge agreed by BritishRail and SNCF in 1987 became a vitalcomponent of Eurotunnel’s revenues.75 In1997, the two governments provided sup-port by extending the length of the conces-sion from 55 years to 99 years.

While the Channel Tunnel project facedunique challenges, some of its lessons aremore widely applicable. The existence of aminimum revenue guarantee and theextension of the concession facilitated pri-vate funding at different times, yet werenot enough to compensate investors forpolitical and revenue risks, or contractualdifficulties between Eurotunnel and TML.Although the size of the scheme (around£10 billion) demonstrates the potential forlarge-scale private sector funding of majorinfrastructure projects, its difficulties haveundoubtedly left the market more cautiousof taking on large revenue risks.


28

74. Gourvish T, The Official

History of Britain and the

Channel Tunnel, Routledge,

2006

75. See Myddelton D, They

Meant Well, Government Project

Disasters, IEA, 2007

76. See ‘Trying to squeeze us

out of rush-hour car seats’,

Western Mail, 11th October

2006

The Cardiff proposals

Although yet to be implemented, a proposed scheme in Cardiff to tackle growing traffic and conges-tion is particularly relevant to this report. Cardiff City Council has established a transport partner-ship comprising the local authority, Capita Symonds and Carillion with a remit to improve localtransport infrastructure. It plans to introduce road pricing in the form of a congestion charge dur-ing the morning peak, possibly from 7am to 10am. Surplus revenues (after operating costs) willfinance the planned investment. However, the charge will not begin until the infrastructure improve-ments are in place or at least at an advanced stage of development. Private finance will therefore bedeployed to fund the up-front expenditure, amounting perhaps to £425 million, and future toll rev-enues will repay the debt.76

Capita Symonds will operate the system, while Carillion will manage the construction contracts. Itis therefore likely that the revenue risk will be borne by the banks involved and the local authority.

The Cardiff proposal demonstrates the potential for using future road pricing revenues for imme-diate investment. The involvement of a city authority, banks and leading firms suggests that suchprojects are perceived as a practical and viable option. If the amounts involved were rolled out prorata across the country then the impact would be very significant.

Building on successExperience of private finance in transporthas undoubtedly been variable. A numberof highly successful schemes, particularlynew roads, can be contrasted with moremixed outcomes concentrated in the pub-lic transport sector. The latter are charac-terised by poor financial returns, commer-cial failure and the need for additional tax-payer subsidies. While the specific naturesof individual projects make it problematicto reach general conclusions about the cri-teria for success, the following factorsshould be considered before schemes basedon future road pricing revenues are imple-mented.

Revenue variabilityTraffic predictions for the M6 Toll demon-strate that forecasting future revenues canbe problematic. Although traffic volumeshave risen roughly in line with economicgrowth over several decades there can beno guarantee that this trend will continue.A new oil crisis, perhaps caused by politi-cal instability in the Persian Gulf region,could dramatically increase motoring costsand lead to a concomitant fall in toll rev-enues. However the long-term price elas-ticity of traffic is relatively low and after aperiod of adjustment following steep pricerises, the upward trend tends to resume.77

While there may be advantages for thetaxpayer in reducing government’s expo-sure to financial risk, this must be balancedagainst the higher borrowing costs consor-tiums face when there is uncertainty aboutfuture revenues. One solution is that gov-ernments provide a minimum revenueguarantee. Should toll receipts fall belowan agreed level, the State (whether at local,regional or national level) would top upthe project’s income. Such an agreementcould also reduce the element of politicalrisk (explored below) since there would bean in-built financial disincentive for gov-ernment to enact policies that mightundermine a scheme’s viability.

Political risksThe introduction of a road pricing schemecould be abandoned due to public opposi-tion; a fiscal crisis could lead to increases infuel duty that reduced traffic flows andtherefore toll revenues; a hostile localauthority could decide to subsidise compet-ing bus services alongside a privatelyfinanced tram route – these are just three ofthe many possibilities that must beaddressed when contracts are being drawnup and investment planned. At the sametime, the public sector (the Department forTransport, local authorities or other agen-cies) risks losing policy flexibility if con-tracts severely limit its ability to act. Suchconflicts of interest are inevitable, of course,given that risk must be limited to attractinvestment at commercially viable rates.

The positive aspects of contractualrestraints on government action shouldalso be mentioned. They may act as a pow-erful deterrent to the somewhat arbitraryand short-term changes in direction thathave been a frequent feature of Britishtransport policy, and therefore contributeto the long-term stability that wouldattract large-scale investment for upgrad-ing the infrastructure.78 They can also limitthe influence of special interests over gov-ernment transport policy.79

Political risk may be reduced when rev-enue variability is outside the direct con-trol of government – for example, in theDBFO schemes revenues were dependenton shadow tolls rather than direct govern-ment subsidies. In contrast, the collapse of



77. Glaister S and Graham D,

Pricing Our Roads: Vision and

Reality, IEA, 2004, p 53. The

authors have estimated the elas-

ticity of car traffic with respect to

fuel price at -0.35; that is, if fuel

prices rise by 10% then car traf-

fic will, after a period of adjust-

ment, fall by 3.5%.

78. See Dudley G and

Richardson J, Why Does Policy

Change? Lessons from British

Transport Policy 1945-99,

Routledge, 2003

79. Wellings R,

‘Environmentalism, Public

Choice and the Railways’, in

The Railways, the Market and

the Government, IEA, 2006

“ While there may be advantages for the taxpayer in

reducing government’s exposure to financial risk, this

must be balanced against the higher borrowing costs

consortiums face when there is uncertainty about future

revenues”

Railtrack demonstrates that investmentscan be extremely risky when the financialviability of an enterprise is heavily depend-ent on direct government support. Clearlysuch considerations should inform thedesign of schemes that seek to make use offuture road pricing revenues.

Technology costsLarge-scale private investment may alsorequire some limitation of the technologi-cal risks of road pricing projects. The pos-sibility of cost over-runs and delays, as seenrecently in the German lorry charging sys-tem, as well as numerous government ITprojects, could deter potential investors.The deployment of relatively modest,tried-and-tested technologies may helpreassure private sector participants, thoughmore sophisticated systems could offer agreater range of services for travellers.Assuming that the Government continuesto intervene in the transport sector, andthat this limits the development of appro-priate technologies through normal marketdiscovery processes, one possibility wouldbe for the public sector to assume respon-sibility for a high proportion of the tech-nological risks facing investors. This wouldbe particularly appropriate for schemeswhere the public sector retains a large ele-ment of control.

Potential upsidesInvestors have to be clear about the costand revenue risks associated with roadpricing projects. However, private financecould also be attracted to schemes by thepossibility of making additional revenuesbeyond those derived directly fromtolling. If tracking devices (black boxes)were fitted in customers’ vehicles, serviceproviders could offer satellite navigation,smart breakdown services and vehiclemonitoring (for mechanical defects, forexample) as part of the deal.

Another possibility would be for thedevelopment of land to form part of a proj-

ect. Historically profits from propertydevelopment have often made a significantcontribution to the viability of privatelyfunded transport infrastructure and indeedexpected appreciations in land values haveoften been the driving force behind theconstruction of new routes. For example,Olympia and York, the developers ofCanary Wharf, were prepared to fund theconstruction of a new Tube line betweenthe Isle of Dogs and Waterloo.80 As part ofa scheme to upgrade a particular route, aconsortium could be given planning per-mission to build a new housing estate andretail units at a new intersection or station.The expected development gains couldreduce the risks facing investors by provid-ing extra profits and a new source of trafficfor additional revenues. Although govern-ment planning objectives might mean thatthis option was rejected in many localities,it nevertheless offers the prospect of greaterprivate sector funding of improved trans-port infrastructure, as well as increasing thesupply of housing.

A favourable investment climateTo upgrade the UK’s transport infrastruc-ture will require a large increase in privatesector investment in land transport.Fortunately, the success of numerous PFIprojects in the transport sector and thelong history of private sector funding ofcommunications networks suggest thatthese objectives are achievable under theright regulatory framework; one in whichthe private sector has the maximumopportunity to innovate and take advan-tage of additional profit opportunities.These objectives could be achieved by:

� Using minimum payment guaranteesand longer concessions (for example,99 instead of 30 years) to limit risk andattract a wider range of privateinvestors (including risk-averse pensionfunds) at lower interest rates.


30

80. Harrison F, op. cit.

� Only passing revenue risk to the privatesector when political risk is sufficientlylow and when the private sector can beexpected to have sufficient informationabout future passenger levels.

� Removing regulatory obstacles to theplanning and construction of privatelyowned and operated transport infrastruc-ture. Road pricing is likely to transformthe viability of such projects, which canbe undertaken at no cost to the taxpayer.

� Wherever possible choosing PFI con-tracts rather than less tightly definedand more complex PPP arrangements.Although PFI schemes may involvetransferring a higher proportion ofconstruction and revenue risks to theprivate sector, they also reduce thepotential for costly conflict and politi-cal interference, to the benefit of bothconsortiums and taxpayers.

� Ensuring that private sector involve-ment takes place in a supportive politi-cal environment. Policymakers shouldhave a direct interest in the success ofschemes and the private sector shouldnot have to operate in an environmentof ideologically driven opposition.Contracts and regulatory structuresshould make sure that incentives for theprivate companies and public sectoractors are aligned to avoid the kind ofconflict that has plagued projects such asCroydon Tramlink and the Tube PPP.

Finally, local and national government mayhave to forgo a degree of short-term policycontrol in order to reduce the revenue risksassociated with political instability. A suit-able institutional framework is therefore anessential requirement for a large-scale pri-vate sector contribution.



4The institutionalframework

If we want to use private finance to upgradeour transport infrastructure and introduceroad pricing at a later stage, this willrequire a suitable institutional framework.This chapter therefore examines whetherthe institutions currently governing thetransport sector are appropriate (devolvedstructures in Scotland, Wales andNorthern Ireland are excluded). It alsoexplores alternative arrangements andstructures that could best limit the risksfacing investors and improve efficiency.

The current systemTo limit political risks a degree of institu-tional stability is necessary, but transport hasbeen subjected to a great deal of politicalchange in the recent past. The complexity oftransport governance and its lack – in someareas at least – of clear lines of responsibili-ty deter potential private investors.

The TreasuryAt the centre, some readers may be sur-prised to hear, is not the Department forTransport but the Treasury, which sets therates of fuel duty and vehicle excise duty aswell as levels of government expenditureon transport over the financial year. Ineffect, the strategic decisions on transportpolicy are taken here. But this is not with-out problems because the Treasury hasother interests apart from implementing aneffective transport policy.

The Treasury’s pivotal role has con-tributed to the misallocation of resourcesin the sector. In particular, transport

investment has often been subject to sub-stantial cuts in response to short-termfinancial crises. It has been argued, forexample, that the dramatic reduction inthe road programme during the early tomid-1990s (as well as the introduction ofthe fuel duty escalator) had as much to dowith high levels of government borrowingas a new-found emphasis on environmen-tal objectives.81

Transport is a less salient issue thaneither health or education because theeffects of reductions and cuts in investmentare not immediately apparent – unlike, say,cuts to welfare benefits. The historicalrecord certainly suggests that short-termpolitical expediency has often overriddenarguments about transport’s long-termcontribution to the economy in the formof higher tax revenues resulting fromincreased economic growth. In 1998David Newbery, Professor of AppliedEconomics at Cambridge University,wrote: “Investment in relieving congestionis controlled by Her Majesty’s Treasury,operating tight cash limits and steadilyreducing the real resources available. Roadtransport among all other sectors has beensingled out for tax increases to meet ouragreed targets on global warming, and theGovernment appears to be wedded to apolicy of rationing transport by congestionand reducing road investments to reducetraffic growth.”82

While the investment situation mayhave improved marginally since this waswritten – tax increases have been held backand longer-term funding settlements intro-

32

81. See Dudley G and

Richardson J, op. cit.

82. Newbery D, ‘Fair and effi-

cient pricing and the finance of

roads’, 53rd Henry Spurrier

Memorial Lecture, given at the

Royal Society of the Arts, 5th

May 1998, p 2

duced83 – it is clear that the fundamentalinstitutional problems remain. Central-isation of power in the Treasury increasedunder Gordon Brown’s chancellorship;although it remains to be seen whether thiswill change now that he is Prime Minister.

A strong case can be made that theTreasury’s broad control over transportpolicy has been detrimental to long-termand efficient investment and, if continuedinto an era of road pricing, will deter pri-vate sector investment. On the other hand,Treasury oversight has prevented at leastsome wasteful expenditure by other agen-cies, such as local authorities. This valuablefunction could however be performedunder alternative institutional arrange-ments.

The Department for TransportThe Department for Transport overseesthe transport sector in England and alsoundertakes high-level policy developmentand strategic planning; more routine func-tions have been hived off to other agen-cies.84 In the post-war period the depart-ment was accused of having too close arelationship with the road lobby and dis-playing bias in favour of roads and againstpublic transport.85 As with all governmentdepartments, there is a danger that concen-trated special interests will gain influenceat the expense of the wider public.86 As atthe Treasury, a bureaucratic culture maystifle innovation and entrepreneurship.Moreover, the centralisation of powerwithin the department means that policycannot be as precisely tailored to local con-ditions as it would be if local governmenthad more autonomy.

There have been several dramatic policyshifts within the core institutions of trans-port governance in the past 15 years;including the cuts in the road programmein the mid-1990s, the decision to forceRailtrack into administration in 2002 andthe recent abandonment of the lorry charg-ing scheme. Such a record reinforces the

need to consider alternative institutionaloptions for improving the attractiveness oftransport infrastructure to private finance.

Other agenciesThe Highways Agency,87 which was hivedoff from the Department of Transport in1994, is responsible for the construction,maintenance and (since 2006) manage-ment of motorways and trunk roads; localauthorities are responsible for the remain-der of roads. With its experience co-oper-ating with the private sector through theprocurement process, the HighwaysAgency could potentially play a key roleboth in harnessing private finance andimplementing road pricing schemes. Otherroutine functions are carried out byRevenue and Customs (collection of fuelduty) and the DVLA (collection of VEDand registration of road vehicles).

Network Rail,88 a not-for-profit compa-ny, manages railway tracks and stations,and the DfT has been responsible for plan-ning and franchising since the abolition ofthe Strategic Rail Authority in 2005.Private companies, such as Virgin andNational Express, operate rail servicesthrough complex franchising arrange-ments. The role of the rail sector in roadpricing schemes would be dependent onwhether it was decided to use part of thefuture revenue stream to fund improve-ments to rail infrastructure. Although therail lobby could press for this, there are alsoways in which it might harm the rail indus-try. Using charges to cut congestion is like-ly to make driving more attractive to busi-ness travellers in particular; and conges-tion-based tolls could deter drivers fromcatching trains at mainline town centre sta-tions. Any institutional framework needsto recognise the often symbiotic relation-ship between road and rail travel.

Local and regional bodiesTransport for London89 manages London’sbuses, the Underground, the Docklands


The institutional framework

83. For example, a five-year set-

tlement with Transport for

London, www.tfl.gov.uk/corpo-

rate/about-tfl/investorrela-

tions/4717.aspx

84. For an overview of the

Department for Transport’s

responsibilities see

www.dft.gov.uk/about/how/

85. Hamer M, Wheels Within

Wheels: A Study of the Road

Lobby, Routledge & Kegan Paul,

1987; and Henshaw D, The

Great Railway Conspiracy,

Leading Edge, 1991

86. Olson M, The Logic of

Collective Action: Public Goods

and the Theory of Groups,

Oxford University Press, 1965;

Niskanen W, Bureaucracy and

Representative Government,

Aldine, 1971; Dunleavy P,

Democracy, Bureaucracy and

Public Choice: Economic

Explanations in Political Science,

Harvester, 1965

87. See: www.highways.gov.uk/

aboutus/about.aspx

88. See: www.networkrail.co.uk/

aspx/111.aspx

89. See: www.tfl.gov.uk/corpo-

rate/about-tfl/4510.aspx

Light Railway, some overground railwaysand London trams, as well as a 400-milenetwork of main roads, all the capital’straffic lights and the congestion chargingscheme. It is responsible for implementingthe Mayor’s transport strategy for London.One possible institutional model, whichmight be particularly popular with thosekeen to promote an “integrated” transportpolicy, is to create equivalents to TfL inother parts of the UK. However, it isdebatable whether TfL has led to more effi-cient transport provision in the capital.Although the level of central governmentsubsidy to London’s public transport hasincreased substantially, it is far from clearthat proportionate improvements in serv-ices have occurred (see box). Any assess-ment is complicated by the role of theTreasury and DfT in setting the frameworkwithin which TfL must operate. For exam-ple, the Tube’s public private partnershipcontracts – pushed through by the

Treasury despite the Mayor’s objections –have limited TfL’s control over theimprovement to the Underground. Theoften strained relationships and frequentlegal disputes between TfL and the privatesector (see Chapter 3) suggest that rollingout London’s institutional structure to therest of the country may not be the bestoption for limiting political risk andattracting private investment.

Local authorities outside London areresponsible for local transport plans, five-year strategies for the development oflocal integrated transport, supported by aprogramme of transport measures. Theysubmit bids to central government forthe necessary funding (local authoritytransport spending is largely fundedthrough central government subsidiesand in general only a small fraction israised through local taxes). The TransportAct 2000 provided a legal basis for coun-cils to set up local charging schemes,


34

90. For example, Evening

Standard, 23rd July 2007, p 7

91. Michael Gove MP, Public Bill

Committee, Greater London

Authority Bill, 11th January

2007, Clause 18

92. Lloyd A, ‘Borough Transport

Spending Priorities and

Relationships with TfL’, ALG

Transport and Environment

Committee, Agenda Item 7,

2006, p 4

93. Robert Neill MP, Public Bill

Committee, Greater London

Authority Bill, 11th January

2007, Clause 18

The performance of Transport for London

The draft Local Transport Bill 2007 suggests that the Government is keen to promote the creationof mini-TfLs in other cities by strengthening the role of existing passenger transport authorities orcreating new ones in cities without them, like Bristol.

TfL’s record for economic efficiency is mixed. While the number of bus passenger journeys hasincreased by more than a quarter since 2000-01, an impressive result, taxpayer-funded bus subsidieshave in fact trebled. Bus fares have been kept relatively cheap and concessionary fares greatly extend-ed, including free travel for under-18s, although the economic rationale for these policies is doubt-ful. Some accuse TfL of being institutionally “anti-car” and deliberately designing road schemes tomake driving intolerable so that more people use public transport.90 Such bias is evident in the deci-sion to direct a high proportion of congestion charge revenues to bus subsidies. In defence of thisdecision, such expenditure is more rational in densely populated London than other cities.

There have also been concerns about the composition of the TfL board, appointed by the Mayor,which is accused of lacking political and geographical balance.91 The Association of LondonGovernment, representing the boroughs, has also criticised TfL for “excessive bureaucracy”.92 Othercommon criticisms include failure to adequately consult local people and councils and lack ofaccountability.93

Large increases in Treasury financial support, as well as significant private investment through theTube PPP, make it difficult to accurately assess TfL’s performance. However, it is important that theGovernment takes on board these criticisms before rolling out a TfL-type model to other citiesthrough strengthening the powers of passenger transport authorities.

while the recent introduction of theTransport Innovation Fund will providesubstantial resources from central gov-ernment to support the introduction oflocal road charging schemes as part of apackage of local measures to tackle con-gestion.94 These policies suggest that theGovernment is planning to give localcouncils a pivotal role in the introductionof road pricing.

In the metropolitan counties outsideLondon (West Midlands, GreaterManchester, Merseyside, South Yorkshire,West Yorkshire and Tyne and Wear)responsibilities for transport are sharedwith supervisory passenger transportauthorities (PTAs) and associated passen-ger transport executives (PTEs), whichsecure services on behalf of the PTAs.95

These bodies currently plan and procurelocal public transport services. However,the draft Local Transport Bill 2007 envis-ages that their role will soon be extended toinclude the implementation of road pric-ing schemes in partnership with localcouncils.96

Their record suggests that extending thepowers of PTAs and PTEs is misguided.Between their creation in the TransportAct 1968 and bus deregulation in 1986,“the PTEs became in effect, municipaltransport committees, with all the prob-lems of public choice theory attached.They tended also to develop into over-staffed bureaucracies.”97 A continueddecline in public transport use, related toPTE planners’ failure to match services toconsumer demand, coincided with rapidincreases in taxpayer subsidies. As econom-ic theory predicts, this central planningmodel of transport provision, with limitedaccountability, led to wasteful expenditureand expanding bureaucracy.

Government policy also seems to sup-port giving a greater role to larger region-al bodies in England. The Planning andCompulsory Purchase Act of 2004 stipu-lates that the Government Offices for each

region in England must, in consultationwith the DfT, Highways Agency andNetwork Rail, produce a regional trans-port strategy to influence local transportplans. Many of the criticisms of PTAs andPTEs are also applicable to regional agen-cies which, lacking democratic checks,may be even more susceptible to bureau-cratic growth and special interest cap-ture.98

The European UnionIt seems likely that in the medium term theEuropean Union will play a greater role indetermining the precise evolution of trans-port governance. In some member coun-tries the EU has funded a high proportionof transport spending to promote regionaldevelopment objectives. The directive oninteroperability of charging systems(2004/52/EU) may also limit the range ofcharging options and administrative struc-tures possible in the UK:

“is directive requires in principle thatelectronic road charging and toll systemsshould be both technically and contractual-ly interoperable i.e. that there should be aEurope-wide mechanism to ensure that allcharge operators exchange information sothat users of a range of tolling and charg-ing services across Europe can register witha single service provider of their choice anduse a single on-board unit to access allcharging schemes within the EU.”99

It is also possible that the EU will intervenein the setting of transport tax rates, per-haps harmonising fuel duties. The



94. For details see:

www.dft.gov.uk/pgr/regional/tif/tr

ansportinnovationfund?page=9#

a1047

95. See: www.pteg.net/About

pteg/01-ptes.htm


The Draft Local Transport Bill,

Volume 2: Strengthening Local

Delivery, The Stationery Office,

2007, pp 43-53

97. Hibbs J, Transport Policy:

The Myth of Integrated Planning,

IEA, 2000, p 68

98. See, for example:

www.gos.gov.uk/goyh/transp/rts/

?a=42496


Feasibility Study of Road Pricing

in the UK, 2004, Ch 5

“ A continued decline in public transport use, related

to PTE planners’ failure to match services to consumer

demand, coincided with rapid increases in taxpayer

subsidies”

European dimension creates another layerof political risk for potential transportinvestors, although there could be counter-vailing advantages in terms of reduced dis-cretion for the Treasury.

Institutions and road pricingIntroducing road pricing within the cur-rent institutional framework would cer-tainly be possible. However, dependingpartly on the technology deployed, newbodies may be needed to perform func-tions such as billing and enforcement.

For example, should charging be operat-ed through fitting on-board satellite navi-gation technology units to vehicles, thenan administrative structure would need tobe developed to gather the data and billcustomers. Travel information could beprocessed and invoices sent to registeredowners or a pre-paid Oyster-style smart-card system could be used. The latterwould probably require a network of out-lets where toll credit could be topped up.Enforcement would also be necessary todeal with non-payment, both to ensurethat non-paying vehicles were preventedfrom using tolled roads and to recoverdebts. Fraud prevention measures mightalso be required.

The administrative requirements of anyroad pricing scheme(s) would also dependon the system of taxation (discussed indetail in the next chapter). For example, ifvehicle excise duty and/or fuel duty wereabolished then this would change the roleof both the DVLA and Revenue andCustoms. The former’s role could bereduced to vehicle registration matters,while the latter could be limited to collect-ing value added tax on tolls.

Local, regional or national?A fundamental political question is at whatlevel of government road pricing should beintroduced. The choice will be influenced

by the technology available at the time ofimplementation. As Glaister and Grahamhave discussed, for large parts of the UK,particularly uncongested rural areas wheretravel also has a relatively low environmen-tal impact, the administrative costs ofcharging may exceed the revenues and ben-efits.100 Since congestion is concentrated inthe largest cities and particular inter-urbantransport corridors, it is clear from an eco-nomic perspective that the greatest benefitswill come from introducing pricing inthese locations. Rolling out charging toother areas will depend on administrativeand technological improvements reducingthe marginal costs involved.

The following section examines a rangeof different options, from small local proj-ects to nationwide schemes, with regard totheir suitability for attracting privatefinance and improving the economic effi-ciency of the transport sector.

Private toll roadsPotentially the most devolved solution,private toll roads are also the most radical– and the least likely to gain politicalacceptance. This would involve entrustingcontrol of roads, at least many trunk roadsand motorways (residential roads would befar more problematic), to private owners.New toll roads could be privately devel-oped, while existing major routes could besold off to companies that would thenintroduce pricing (the receipts of such asale could be used to fund public transportinvestment or returned to the public insome other way). Alternatively, differentroutes could be floated on the stock mar-ket, either individually (for example, M1plc) or in packages.

This kind of free-market solution wouldhave many advantages. In the absence ofbureaucratic involvement and politicalinterference, the widespread misallocationof resources could be avoided. The privatesector could also be expected to innovate inorder to make the maximum return on its


36


op. cit., pp 96-97

road assets, perhaps by introducing high-technology traffic management systems(see Chapter 6). Different methods ofcharging could also be trialled, and meth-ods could be adapted to local circum-stances. For example, conventional tollbooths may be badly suited to certainroutes. Thus any gradual extension of roadpricing would be informed by a wealth ofpractical experience.

Although competition among differentmodes of transport does exist – air, rail,pipeline and shipping for example – theprivatisation of large parts of the strategicroad network may well necessitate regula-tion to avoid potential abuse of monopolypower and to cap prices. The creation of anindependent road regulator would be oneoption; alternatively an artificial industrystructure could be imposed on the networkto ensure a certain level of competition.For example, regulation could ensure thatthe M1 and A1 were owned by differentcompanies. There would, however, besome corridors without suitable alternativehighways to ensure competition. One dan-ger is that some traffic would divert to“free” government-owned roads once tollswere introduced. Although the option touse free (but slower) roads would providesome competition to keep tolls down,their use might well have a negativeimpact on accident rates and ultimately,congestion could be displaced rather thancured.

Of course, in a properly functioningmarket the existence of “excessive” profitsattracts competitors into a market: rivalroad firms would build rival routes. Theland market would also adapt to push eco-nomic activity away from expensive roads.Expectation of such effects (as well as theneed to optimise revenues) would alsokeep toll rates in check. Nevertheless, fullyfunctioning competition would require afreely functioning land market and a fastand responsive system for the constructionof new schemes. Planning procedures can

delay new roads for decades and involve ahigh degree of political risk and largetransaction costs. The recommendationsof the Barker Report, if put into practice,would speed up road projects, but thewholesale liberalisation of the planningsystem is almost certainly a bridge toofar.101 A utility-regulation-style structure ismore likely to be feasible in the mediumterm.

Local authoritiesAnother possible institutional structurewould give local authorities a pivotal rolein the administration of road pricing.Indeed, this framework could work in tan-dem with privately-owned motorways andtrunk routes if councils kept responsibilityfor the remainder of the road network.Alternatively, local authorities could be givencontrol of those trunk roads within theirboundaries, as has happened in London withthe Greater London Authority (administeredthrough Transport for London).

As long as councils were given sufficientlatitude by central government, localschemes tailored precisely to local condi-tions could be groundbreaking (see Table4.1). The democratic process, allowingunpopular administrators to be voted out,may well remove the perceived need forcompetition regulation. At the same time,inter-borough competition would restrainlocal authorities from charging excessiveprices: businesses might relocate if tollswere set too high.

Unfortunately, the current system oflocal government finance would under-



101. Barker K, Barker Review of

Land Use Planning, Final Report

– Recommendations, The

Stationery Office, 2006

“ The recommendations of the Barker Report, if put

into practice, would speed up road projects, but the

wholesale liberalisation of the planning system is almost

certainly a bridge too far”

mine many of these possible incentivestructures. More than three-quarters ofcouncil income derives from central gov-ernment grants rather than local counciltax and business rate receipts. There mayeven be benefits from relative economicdecline, as it brings with it the prospect ofgrandiose, status-enhancing Treasury-funded regeneration schemes.

Moreover, the ability of local democracyto act as a check on council transport poli-cies is also questionable. Transport is justone of many political issues and may not bedecisive for voters. At the same time, localelections are held only every four years –enough time for policies to inflict signifi-

cant economic damage. Local democracymay also be undermined by the often inces-tuous relationship between council officialsand local media outlets (they often rely onlocal government advertising for a largepart of their revenue). There is a generaldanger that the self-interest of local coun-cillors and officials could triumph over eco-nomic efficiency.

The current funding regime createsperverse incentives that prevent boroughsfrom both benefiting financially frompolicies that encourage economic growthand losing financially when their policiesharm the local economy. The widespreadintroduction of local authority adminis-


38

Competition between areas promotes innovation

and efficiency and prevents local areas from

being able to impose excessive charges.

The local democratic process reduces the need

for a regulator.

There may be less need for expensive technologi-

cal solutions.

Local schemes do not require any centralised

data collection.

Solutions can be tailored to specific local condi-

tions by policymakers with local knowledge.

The existence of market frictions means that some

monopoly pricing will persist and some localities

will be priced more attractively than others.

The local democratic process is far from perfect

in practice because:

• of low election turn-outs;

• elections are only every 4 years and may be

determined by other issues;

• of the self-interest of local councillors;

• of the tendency for central government to

meddle in local government;

• local government finance is over-dependent

on central government which creates perverse

incentives.

Reduced economies of scale for technological

solutions.

Charging schemes might not be compatible across

the country (although EU regulations address this).

Boundary problems whereby through-traffic

(which doesn’t have an opportunity to vote in the

area) is penalised. Trunk roads could however be

kept in the hands of a national body, or prices

regulated so such discrimination is disallowed.

Table 4.1: The advantages and disadvantages of localism

Advantages of a devolved approach Disadvantages of a devolved approach

tered road pricing schemes would bemore likely to bring about economic effi-ciency gains, therefore, if they were intro-duced alongside fundamental reforms tolocal government financing.102 Oneoption would be to remove education andwelfare spending from councils, with theremainder of local authority expenditurebeing funded entirely through local taxreceipts (there could even be flexibility onthe kind of local taxes used).

Boundary effects: One particular problemfor local authority based schemes is theexistence of boundary problems.Congestion could be displaced to routesjust outside a borough and, since adminis-trative boundaries are largely artificial, cer-tain individuals could be excluded fromresidents’ discounts arbitrarily as a result ofsmall variations in boundary locations.The existence of significant through trafficcould tempt local councils to toll certainroutes at very high rates in order to exploittravellers with no local vote (a problemwith the turnpike trusts in the 18th centu-ry). This provides a strong argument forkeeping trunk routes outside local author-ity control and possibly increasing the pro-portion of roads classified as trunk routes.

Then there are the “second round”effects associated with boundaries. If a toll-free authority were adjacent to a chargingborough then businesses and housingcould be attracted to the toll-free area. Atthe same time, local decision-makerswould have to balance the economic bene-fits from such relocation with the econom-ic costs from increased congestion. In eco-nomic terms, such inter-borough competi-tion would result in a more efficient use oftransport capacity and land. However,these freedoms could conflict with theobjectives of government planning policies(urban regeneration, the development ofbrownfield sites etc.). Thus the desire toprevent the relocation of economic activityas a result of local road pricing could actu-

ally lead to even tighter planning controls,with significant economic costs.

Modal issues: If road pricing is placed in thehands of local authorities then there is anargument that other modes of transport,such as local rail services, should also comeunder local jurisdiction. This institutionalstructure would enable better co-ordinationbetween road pricing schemes and publictransport schemes. Certainly the gradualexpansion of Transport for London’s respon-sibilities to include some overground rail-ways, as well as major roads, indicates thatthese arguments have gained favour withingovernment.

There is a possibility, as discussed inChapter 2, that high peak-time road tollscould displace commuters on to publictransport. If the railways were to remainlargely subsidised by the Treasury, the costsof local decisions could end up beingimposed on taxpayers everywhere; encourag-ing councils to introduce schemes that wereeconomically damaging at a national level.The possibility that local decisions couldaffect central government expenditure and,potentially, revenue from fuel duty, wouldcreate incentives for the Treasury to imposecontrols on local regimes. This in turnwould limit the scope for innovation and thetailoring of schemes to specific conditions.

Regional bodiesSome of the difficulties associated with localadministration could be avoided through theinvolvement of regional bodies. These agen-



102. See Travers T and Esposito

L, I’m a Local Councillor, Get me

out of Here! Policy Exchange,

2004 and Nothing to Lose but

your Chains, Policy Exchange,

2004

“ The widespread introduction of local authority

administered road pricing schemes would be more likely

to bring about economic efficiency gains . . . if they were

introduced alongside fundamental reforms to local

government financing”

cies could operate charging on trunk roadsand motorways, while setting a frameworkwithin which local authorities could imple-ment their own schemes according to localconditions. In this way, some of the bound-ary problems discussed above could be avoid-ed. The regional institutions could also begiven responsibility for local rail subsidiesand franchising in order to avoid local costsbeing loaded on to taxpayers nationally, and,hopefully, to improve co-ordination betweendifferent modes.

There are, however, profound problemswith the regional solution. Would the agen-cies be unelected quangos or would a newlayer of democratically elected governmentbe required? Either of these options is poten-tially unpopular, both with voters – who, in2004, rejected plans to create a regionalassembly for the North East of England –and travellers.103 It is also extremely difficultto calculate the optimal scale of regional gov-ernance for the administration of road pric-ing. Should institutions be based aroundparticular conurbations or travel-to-workareas or the current Government Offices forthe Regions?

The best solutions for economic effi-ciency may create apparently artificialregions that clash with the traditional iden-tities and allegiances of the public, under-mining their legitimacy and the decisionsthey make. The creation of new counties,such as Humberside and Teesside, in 1974was deeply unpopular with local residents,who felt attached to Lincolnshire,Yorkshire and Durham.

Turnout in local elections is already lowand residents may feel little connectionwith artificial regions such as the EastMidlands, so the degree to which the dem-ocratic process could provide a check onthe behaviour of regional officials is ques-tionable. The increased scale of operationscould reduce competition between areas,whereas a decentralisation agenda wouldpromote economic efficiency in localauthority schemes. A perceived absence ofdemocratic accountability, combined withconcerns about bureaucratic incentives andthe lack of competition inherent in thismodel, could give central government thejustification for strong supervision ofregional authorities. There is therefore adanger that an expensive new administra-tive structure would be imposed with fewbenefits. However, the Government hasgradually extended the powers of bodiessuch as TfL, the PTAs and the GovernmentOffices for the Regions, which suggests thatit is keen to develop a tier of transport insti-tutions between the DfT and local councils.

Targeting congestion hotspotsAn alternative to creating a number ofregional agencies would be to focus onintroducing pricing in the worst conges-tion hotspots. In order to gain a high pro-portion of the economic gains from pric-ing it may only be necessary to imposecharging on a relatively small fraction ofthe road network. As Glaister and Grahamwrite: “As a charging scheme is extendedprogressively to less dense areas the admin-istrative costs are likely to rise while thetraffic affected and the economically effi-cient prices that road users should pay –and hence the revenue – are likely to risemuch less rapidly.”104 It would of course beeasier to win public support for a morelimited proposal, and the experiencegained could improve the efficiency of sub-sequent schemes.

The schemes would have to be carefullystructured to avoid the displacement of


40

103. See: www.news.bbc.co.

uk/1/hi/uk_politics/3984387.stm


op cit., p 94

“ In order to gain a high proportion of the economic

gains from pricing it may only be necessary to impose

charging on a relatively small fraction of the road network

. . . it would of course be easier to win public support for

a more limited proposal”

traffic on to alternative routes. One solu-tion would be to introduce pricing for anentire transport corridor. On the routefrom London to the North West throughthe West Midlands, for example, it maynot be sufficient just to toll the M6 to con-trol congestion – the A5, the A50 and sev-eral more minor roads may also need to beincluded.

This institutional framework could beintroduced gradually, starting with theworst bottlenecks on the network. In thisway, administrative and technologicalcosts, which may be relatively high at first,would be comfortably exceeded by the eco-nomic benefits of charging. But findingthe right administrative structure for pric-ing only heavily congested areas will not beeasy. Scheme boundaries may have to cutacross several different local authorities andresidents in some areas could feel unfairlypenalised for congestion that they perceiveas being the result of decades of govern-ment under-investment and mismanage-ment.

Notwithstanding such problems, anumber of institutional options would beavailable. Pricing authorities could be setup as partnerships between the local coun-cils involved, although arguments over theweight of representation given to eachpartner and undesirable incentive struc-tures – for example, to overchargethrough-traffic – could arise. There is alsothe usual danger that, without carefullydrawn-up rules, these authorities would beunable to limit political risk and wouldbecome dominated by special interest pol-itics.

Alternatively, separate governmentquangos or private companies could becreated to administer each scheme – with-in a framework set by the DfT. A moreradical solution would be to auction eachpricing concession to the private sector,raising substantial funds for infrastructureinvestment in the process. The privateoperators could be subject to independent

regulation on the lines of the privatisedutility companies (see below).

National administrationAlthough targeting congestion hotspots, atleast initially, has many economic andpolitical advantages, the idea of a national-ly administered scheme appears to haveconsiderable support among policymakers.Of course, a national administrationwould also be capable of phasing in pricingby focusing on the most congested areas,rather than deploying a politically risky“big bang” approach. Given the severity ofcongestion in the UK, there is a strong casefor rapidly implementing schemes in theworst affected locations using existingtechnology.

The DfT has sketched out certain com-ponents for a possible national institution-al framework. However, one potential crit-icism is that the models discussed tend tobe contingent on relatively high-technolo-gy options, such as satellite vehicle trackingand automatic number plate recognition,when worthwhile pricing schemes could bequickly introduced using tried-and-testedtechnology such as toll booths. For exam-ple, the DfT’s UK business modeldescribes the organisations and relation-ships necessary to operate an electronicroad charging scheme.105

The Communications Gateway Entitywould handle communications with track-ing devices installed in vehicles, whichwould forward location records to the OnRoad Services Providers. The latter’s respon-sibility would be the installation and oper-ation of the roadside infrastructure and ITsystems needed to detect and identify vehi-cles for charging (perhaps using automaticnumber plate recognition technology, aswith the London congestion charge).Payment Services Providers would registercustomers, issue bills and collect payment.

The model also envisages the creation ofan independent Data Clearing Operator,which would collect data from the On





in the UK, 2004

www.dft.gov.uk/pgr/roads/road-

pricing/feasibilitystudy/studyre-

port/feasibilitystudyofroad-

pricin4002

Road Services Providers and pass the infor-mation to the Payment Services Providers.In theory this would protect the anonymi-ty of users, since the billing componentwould be detached from the trackingcomponent. However, many citizensworry about the State gaining access todata on their movements and it is notclear that such a system would be able todeny data access to the police or securityservices.

The model aims to “provide a viable andcompetitive market for the provision andoperation of road user charging systemsand services, with the long-term objectiveof providing these cost effectively”.106 Theproposed structure may have beendesigned with the EU framework in mind(see above), just as an EU directive influ-enced the structure chosen for the privati-sation of British Rail, with central govern-ment rather than market forces determin-ing the level of vertical integration. On therailways this raised transaction costs andincreased the amount of government sub-sidy required. There is a danger that some-thing similar could happen on the roadnetwork, with disputes over the responsi-bility for billing errors or journey delays,for example.

The level of competition will tend to berestricted to the provision of support serv-ices rather than what really affects the eco-nomic efficiency of any scheme – toll lev-els and infrastructure provision. Policy-makers currently seem in favour of centralgovernment continuing to control thesevital elements, albeit in consultation withother stakeholders such as local authorities,

PTAs and regional bodies. And, of course,the continuing institutional dominance ofthe Treasury and the Department forTransport would bring with it politicalrisks that could deter private investment innew infrastructure. Yet, despite these prob-lems there would seem, still, to be plenty ofopportunities for the involvement of pri-vate finance.

A role for mobile phone companies: Since theprivate sector would carry out billing andenforcement – in the same way that Capitahas operated (and IBM will fromNovember 2009) the London congestioncharge – one possibility would be formobile phone companies to play a role.These firms have demonstrable expertise atprocessing huge volumes of informationand tend to be trusted by customers.Indeed it would be possible to introducedata protection legislation that preventedthe State from obtaining access to informa-tion held about people’s movements – anoption that could ease the public’s fearsabout being tracked.

A number of different models are possi-ble. The companies could compete byoffering different tariffs to customers, orpre-paid, pay-as-you-go systems, with fur-ther anonymity benefits. Mobile phonecompanies could bid against one anotherfor a particular billing concession. In addi-tion to an agreed margin on operatingcosts, they could benefit from additionalprofit streams derived from offering arange of services to travellers beyond thecore billing function – real-time trafficdata, weather forecasts, internet access oreven satellite television. Thus the auction-ing or franchising of billing services could bean additional source of private funds fortransport investment, although the practical-ities would clearly be dependent on whetherpricing was local, regional or national.

UK investment in transport is low, atleast when judged by international com-parison. These new sources of funds could


42

106. Ibid.

“ Mobile phone companies could compete by offering

different tariffs to customers, or pre-paid, pay-as-you-go

systems, with further anonymity benefits”

make a substantial difference to the quali-ty of transport provision and promotewidespread public acceptance of pricing.Continuing central government control,on the other hand, will fuel suspicion andundermine economic efficiency. Moredevolved options have already been dis-cussed, but it is also worthwhile consider-ing a national level alternative for the insti-tutional framework.

Network Road/Roadtrack: The fundamen-tal deficiencies of government manage-ment in transport have been recognisedby Newbery.107 He equates these deficien-cies with those of other ‘nationalisedindustries’ that were privatised in the1980s. They suffered from low productiv-ity, poor allocation of investment and lowreturns on capital. Different special inter-ests pursued different goals, leading topolicy compromise and inefficiency. Thesolution was to privatise the industriesand subject them to regulation, particu-larly in cases, such as water, where theywere perceived to be “natural” monopo-lies.

Newbery therefore suggests applyingthis model to the road network, throughthe creation of a new company that he callsRoadtrack (by analogy with Railtrack),although perhaps a more appropriate titleat the time of writing in 2007, would beNetwork Road. This corporation would befree to raise capital by borrowing and therewould clearly be scope for various publicprivate partnership arrangements. As withthe utilities, it would be regulated by anindependent body, Ofroad, responsible forsetting standards and monitoring perform-ance. Ofroad would agree the level of roaduser charges, planned dividend or interestpayments, capital expenditure or forecastoperating expenditures.

According to Newbery: “A regulatedRoadtrack would have the advantage thatit would be able to secure funding to allowthe efficient planning of investment, whilst

reassuring motorists that the future level ofroad charges would not be increased mere-ly in order to finance additional roads.”108

To avoid the danger that the Treasury con-tinued to insist on influencing the invest-ment budget because the companyremained in the public sector, Newberyadvocates clear regulatory independenceand parliamentary scrutiny.

The unhappy experience of Railtrack hasdamaged the case for involving the privatesector in transport generally, yet there is noreason to believe that the same difficultieswould be replicated on the road networkwhere the possibilities for contestability, flex-ibility and competition are so much greater.The artificial institutional structure of therailways has often made it difficult to sepa-rate the responsibilities of train operatorsand Network Rail – leading to a lack ofaccountability and expensive transactioncosts. However with roads, responsibility forvehicles lies with individuals.

Of course, there are further issues thatwould need resolving. For example, wouldNetwork Road manage all roads or justtrunk roads and motorways? If the latteroption were chosen the organisation couldevolve from the Highways Agency. Would itbe organised nationally or at a regional level?Notwithstanding these choices, it is clearthat the utility regulation model has beencompatible with large-scale private invest-ment in infrastructure upgrades. For exam-ple, since privatisation tens of billions ofpounds of capital investment have beenforthcoming in the water industry, primarilyto meet EU regulations.



107. Newbery D, op. cit.

108. Ibid., p 10

“ The unhappy experience of Railtrack has damaged the

case for involving the private sector in transport generally,

yet there is no reason to believe that the same difficulties

would be replicated on the road network . . . responsibility

for vehicles lies with individuals”

The Network Road model would alsobe compatible with competition amongservice providers for the operation of pric-ing systems. Indeed, as with the telecom-munications sector, where the formermonopoly BT was subject to regulation,private infrastructure companies couldbuild (or buy) their own roads to providecompetition. Since “public” roads wouldno longer be free at the point of use, thiswould be a practical and economicallyviable prospect, especially because the util-ity regulation framework could limit therevenue risks associated with the directpolitical control of transport prices.

A still more radical option would be toprivatise Network Road, thereby raisingcapital on future pricing revenues.Flotation receipts could be earmarked forinfrastructure investment or, vehicle own-ers could be given free shares in the com-pany to reflect in part their historic fiscalcontribution and to increase public sup-port.

An opportunity for reformThe introduction of road pricing repre-sents a unique opportunity to improvesubstantially the institutional governanceof UK transport.

While a wide range of institutionalstructures are compatible with the intro-duction of road pricing and the concomi-tant deployment of private finance toimprove Britain’s transport infrastructure,certain frameworks look more likely topromote efficient long-term investment intransport infrastructure than others.

Road pricing could transform theprospects for private sector involvement inthe transport sector, whether through PFIinfrastructure projects, construction of pri-vately-owned toll roads, flotation of partsof the network or auctioning concessionsto service providers. These developmentswould improve infrastructure provision atno cost to the taxpayer as well as introduc-

ing competition, innovation and entrepre-neurship. As such, a facilitative institution-al arrangement should be sought.

Accordingly, government plans toadminister urban pricing schemes throughpassenger transport authorities and execu-tives require careful scrutiny. The historyof PTE-run bus services and the perform-ance of Transport for London indicate thatthis model risks bureaucratic growth, inef-ficient expenditure, capture by specialinterests, lack of accountability and largerises in taxpayer subsidies. Private investorsin transport schemes may face ideologicalopposition and attempts to underminetheir revenue stream. Matters could begreatly improved by ensuring a greaterdegree of political balance in PTAs andPTEs, as well as Transport for London.PTAs could include representatives of localbusinesses and the TfL board could bemade up of borough representatives ratherthan being appointed by the Mayor.

The probability of local schemesenhancing economic efficiency will beincreased if the introduction of road pric-ing is combined with reform of local gov-ernment finance such that a far lower pro-portion of spending is funded throughcentral government grants. Competitionfor local tax revenues may be the best wayto reduce wasteful expenditure and preventpolicy capture by special interests.Uncertainties over local tax structures couldintroduce additional risks, so it would bepreferable if reforms were implementedbefore private investment was sought.

Since congestion is concentrated in themajor cities and certain inter-urban bottle-necks it is difficult to envisage a useful rolefor English regional authorities in trans-port governance. It is not clear how theirinvolvement would enhance the efficiencyof either borough or PTA/PTE-based con-gestion-targeting or national schemes. Asimpler framework could reduce adminis-trative costs and make political risks moretransparent to potential investors.


44

Combined with their apparent lack ofpublic support and accountability, there istherefore a strong case for reviewing theinvolvement of the Government Officesfor the English Regions in transport policy,as well as examining other ways in whichgovernance could be streamlined.

Road pricing offers the opportunity ofdetaching transport investment fromTreasury control. An institutional frame-work that insulated the sector from thepolitical risks associated with the currentdegree of central direction would create afavourable climate for long-term infra-structure investment by the private sector.The Government has made progress bycreating a legal framework that allows localinstitutions to keep road pricing revenuesand decide how they are spent. But it alsoneeds to address this issue with regard tointer-urban roads. Policymakers must con-

sider converting the Highways Agency intoan independent body (Roadtrack/NetworkRoad) with responsibility for administer-ing motorways and trunk roads. An evolu-tionary process would ensure that the neworganisation benefited from the HA’sexpertise in PFI procurement in order toraise funds for investment. Once wide-spread road pricing was introduced, theagency would set tolls under the supervi-sion of an independent regulator whoensured fair competition with competingprivate entrants to the road market andsupervised contractual relationships withprivate service providers.

However, changes to the system oftransport governance, though vital, maynot on their own be enough to persuadeprivate finance to invest in our transportinfrastructure. The system of transport tax-ation also needs examining.



5Taxation andInvestment

IntroductionThe outcomes of road pricing will beaffected considerably by the fiscal frame-work within which schemes operate. Othermotoring taxes (VED, fuel tax etc)imposed alongside road user charges mayundermine the viability of pricing projectsby reducing total consumer demand andabsorbing resources that might otherwisebe going to pay for investment.

Given the severity of the congestionproblem on the UK network, and theknowledge that from a practical perspectivenew infrastructure can be slow to come onstream, there might be significant economicgains from commencing schemes as soon aspractically possible, without waiting for leg-islative changes to motoring taxation. Thischapter examines Britain’s current taxregime for land transport and assesses howcompatible it is with the need to raise sub-stantial funds for infrastructure upgrades.

Schemes’ dependence on long-term roadpricing revenues also makes developments infuture policy highly relevant. In particular,possible tax increases and charges related toclimate change and other environmentalimpacts must be assessed for their likelyimpact on both road pricing revenues andthe investment climate for transport proj-ects. How can economic efficiency be recon-ciled with environmental objectives and howmight potential fiscal reforms affect the via-bility of future revenue-based schemes?

Current taxesRoad users currently pay fuel duty andvehicle excise duty in addition to univer-

sal taxes such as VAT. In the financial year2004-05 revenues from fuel duty andVED raised £32 billion (see Chapter 1),while expenditure on the road networkwas approximately £8 billion. However, asignificant proportion of this £8 billion isnot used for the direct benefit ofmotorists. Instead it is spent addressingthe externalities motorists impose onpedestrians, cyclists and bus passengersand on discouraging drivers from usingparticular routes through traffic calmingmeasures. The £24 billion annual surplusof receipts over expenditure would be suf-ficient to construct at least 1,200 miles ofsix-lane motorway, enough to double thesize of the motorway network in just twoyears.109 If all government transportexpenditure is included the annual sur-plus does drop significantly to around£14 billion; but this sum would still bealmost sufficient to build Crossrail.110

Given an appropriate fiscal framework,substantial funds could therefore be avail-able for investment in improving infra-structure.

Road users also pay additional chargessuch as workplace parking levies, parkingfees and fines and face significant expendi-ture resulting from government and EUregulation on such matters as vehicle stan-dards, MOT tests and vehicle import quo-tas. Although difficult to quantify exactly,these amounts could, if deregulation freedthem up for spending elsewhere, be con-sidered as a potential source of additionalrevenue for investment.

46

109. Average construction costs

for a six-lane motorway have

been estimated at £6.46 million

a km in 2003 prices, giving the

staggering figure of 2,300 miles

per year. See Archer C and

Glaister S, Investing in Roads:

Pricing, Costs and New

Capacity, Imperial College

London, 2006

110. The total cost of Crossrail

was put at between £15 billion

and £16 billion in 2005.

See:‘Funding concerns keep

Crossrail project in the sidings’,

The Times, 7th May 2007

There is an economic argument forimposing apparently high charges on driv-ing. Fuel duty and VED are said to con-tribute to economic efficiency by reflectingthe wider external costs of road use, such asaccidents and environmental damage,including that associated with climatechange. Attempts are often made to correctsuch market failure by imposing a tax at arate that reflects the social cost of an activ-ity, though some market failures resultfrom government intervention.111 Thus theTreasury has justified increases in fuel dutyfor the role they play in “discouraging un-necessary journeys, encouraging fuel effi-cient cars, and … reducing emissions ofcarbon dioxide”.112

However, during the fuel protests of2000 Tony Blair seemed to provide a dif-ferent rationale: “We could, of course, cutmore off the fuel duty if we reversed theextra investment we have announced onschools, hospitals, transport and the police.Government is about choices,” he said.113

Revenues are used for general expenditurerather than to compensate directly thoseindividuals affected by the external effectsof road travel or to pay for environmentalimprovements.

As the transport economist John Hibbsput it: “Private carriages were taxed froman early date, and in 1775 a duty of onehalfpenny per mile was imposed on thestage coaches. There is no difference inprinciple between taxes on travel and thetaxation of alcohol and tobacco – or, intheir day, the window tax and tea duty.Where demand is highly inelastic, govern-ments will impose taxes (and ‘escalate’them).”114

Yet the contribution of fuel duty tototal government receipts has been fallingin relative terms, from 6.3 per cent of nettax and national insurance receipts in thefinancial year 2000-01 to 5.1 per cent in2005-06.115 In part this reflected thescrapping of the fuel duty escalator (intro-duced in 1993) in the 1999 Pre-Budget

Report. The fuel protests of 2000 proba-bly increased the reluctance of theChancellor to raise rates, particularly inthe context of historically high oil prices.Moreover, drivers switching from petrolto diesel engines, which provide greaterfuel efficiency and therefore result inlower consumption, have also reducedfuel duty receipts.116

Sceptical voices have suggested that thelevelling-off of revenues from motoringtaxes, along with the possibility of electricvehicles, have been key elements in theGovernment’s desire to introduce roadpricing. Additionally, as discussed inChapter 2, there are strong efficiency argu-ments for replacing the blunt instrumentsof fuel duty and VED. Yet setting efficientroad prices is no easy task, particularly ifthe State wishes to limit the role of marketmechanisms and wants to balance efficien-cy with environmental and egalitarianobjectives as well as the preferences of theelectorate. Difficult decisions will have tobe made on transport taxation, includingto what extent pricing revenues shouldreplace fuel duty and VED, and whetheradditional revenue should be sought frompricing to fund investment.

Revenue neutralityPublic opinion surveys indicate that sup-port for road pricing would increase if thenew charges were matched by broadlyequivalent reductions in fuel duty and/orVED.117 In this scenario the guiding princi-ple would be revenue neutrality, in thesense that the amount of revenue taken by


Taxation and investment

111. See Rothbard M, For a New

Liberty: The Libertarian

Manifesto, revised edition, Fox

and Wilkes, 1994

112. Financial Statement and

Budget Report, March 1998,

www.archive.treasury.gov.uk/bud

get/1998/chap5.htm

113. Interview with the BBC, 5th

November 2000:

www.news.bbc.co.uk/1/hi/uk/10

07786.stm

114. Hibbs J, op. cit., p 107

115. Calculated from the

Treasury Public Finances

Databank, 21st August 2007

116. Road User Charging: A

Road Map, Social Market

Foundation, 2007

117. See, for example, RAC

Foundation, 2006, op. cit.

“ Revenues are used for general expenditure rather than

to compensate directly those individuals affected by the

external effects of road travel or to pay for environmental

improvements”

the Treasury would remain constant.However, there is clearly a differencebetween revenue neutrality for the Trea-sury and fiscal neutrality for road users.This divergence arises because road pricingcould involve significant set-up andadministration costs, particularly if anationwide scheme were adopted. If theseamounted to £5 billion per year, for exam-ple, this would be equivalent to a 9p rise infuel duty (assuming a constant level ofroad use) or a 15 per cent increase in theoverall level of motoring taxation.118 Suchincreases in running costs would make itpolitically more difficult to raise addition-al sums for private investment throughroad pricing.

Yet if a project-based approach weretaken initially – targeting the worst conges-tion hotspots – administration costs wouldmost likely be insignificant in relation tooverall road-user taxation. At the sametime, radical reform of transport taxeswould be very difficult when only smallparts of the network were priced and theremainder remained free at the point ofuse. Some form of fuel duty rebate systemmight be possible on priced routes, butrealistically, whatever the strength of theeconomic argument, the sheer magnitudeof fuel duty receipts means that theTreasury is unlikely to be willing to relin-quish them in the short to medium term.It is therefore worthwhile considering sce-narios where revenue additionality isachieved. For example, fuel duty and VEDreceipts could be held broadly constant inreal terms, while additional revenues weresought from road users to pay for runningcosts and extra investment of new schemes.Both the M6 Toll and the London conges-tion charge are examples of such a model,since users pay the charge on top of fuelduty and VED.

Although the level of infrastructureimprovement would be limited under rev-enue additionality compared with otheroptions,119 it could still encourage much

useful investment. Indeed, as long as the sav-ings from reduced congestion outweigh therunning costs of schemes there will be aneconomic benefit (the pitfalls discussed inChapter 2 would need to be addressed).Road users as a whole will be better off for aslong as the running costs plus the additionalcharges amount to less than their savingsfrom reduced congestion. A substantial eco-nomic surplus should still be available forinvestment in infrastructure improvements.

Investment potential� The M6 Toll scheme financed infra-

structure investment of £485 millionusing future toll revenues. The totalproject cost was put at about £900 mil-lion. The standard toll for cars in 2007was a relatively modest £4.

� The London congestion charge pro-duced total revenues of £213 million in2006-07 and, due to high operatingcosts, net revenues of £123 million.120

This revenue stream could have beenused to raise capital for investment, topart-fund the Crossrail project forexample. A more efficient congestioncharge with far lower operating costsmight have produced sufficient net rev-enues to raise £2 to £3 billion of invest-ment. (A precise figure is not given as itwould depend on unknowns such asinterest rates and repayment schedules.)

� The proposed Cardiff scheme,although yet to be finalised, may raise£426 million for infrastructure invest-ment based on future revenues from a£4 charge for cars entering each of twocordons between 7 and 10 am on week-days. This is a substantial capital sumfor a medium-size city.

� The planned scheme for Manchester,which will charge cars up to £5 a day, isexpected to bring in net revenues of£118 million per annum. The futurerevenue stream will be used to borrow£2 billion to pay for capital investmentin expanding the Metrolink network,


48

118. For running cost estimates

see: Department of Transport,


in the UK, Annex J, Costs, 2004

www.dft.gov.uk/pgr/roads/road-

pricing/feasibilitystudy/studyre-

port/annexjcosts

119. For example, a road-fund

style hypothecation of tax rev-

enues.

120. Transport for London

Central London Congestion

Charging – Impacts Monitoring

Fifth Annual Report, 2007

www.tfl.gov.uk

as well as a number of other publictransport projects. Central governmentwill also provide a further £1 billionthrough the Transport Innovation Fund.

Projects focusing on particular congestionbottlenecks certainly appear to be financial-ly viable. For example, a 10p per vehicle-kmcharge on a six-lane motorway priced to runclose to capacity could in a year raise around

£1.5 million per km with a six-hour peaktime weekday scheme.121 This sum would bemore than sufficient to pay for widening toeight lanes or, indeed, to construct a brandnew six-lane motorway in parallel.122

If pricing were subsequently extended tointer-urban routes then very small addi-tional charges could raise significant fund-ing (see Table 5.1). For example, a 1p a kmcharge for cars and light vans (just £1.60



121. Calculation: 10,000 vehi-

cles/hour x 6 hrs x 253 working

weekdays x 10p = £1.52 million.

122. See for example, Archer C

and Glaister S, op. cit., p 17,

Imperial College, London, 2006.

The capital cost of motorway

widening by one lane in each

direction is estimated at £6.69

million per km – a very similar

cost to constructing a brand

new six-lane motorway.

123. Figures calculated using

data from Department of

Transport, Transport Statistics

Great Britain, 2006, Chapter 7.

In practice rates charged should

vary across different parts of the

network to address congestion.

Different rates would also affect

traffic levels and therefore

impact on overall revenue,

depending on the elasticity of

demand.

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

Goods vehicle charge (pence per km)

1 2 5 10 15 20 30 50

1 1.6 1.8 2.3 3.2 4.1 5.0 6.8 10.4

2 3.0 3.2 3.7 4.6 5.5 6.4 8.2 11.8

3 4.4 4.6 5.1 6.0 6.9 7.8 9.6 13.2

4 5.8 6.0 6.5 7.4 8.3 9.2 11.0 14.6

5 7.2 7.4 8.0 8.9 9.8 10.7 12.7 16.1

6 8.6 8.8 9.4 10.3 11.2 12.1 13.9 17.5

7 10.1 10.2 10.8 11.7 12.6 13.5 15.3 18.9

8 11.5 11.6 12.2 13.1 14.0 14.9 16.7 20.3

9 12.9 13.1 13.6 14.5 15.4 16.3 18.1 21.7

10 14.3 14.5 15.0 15.9 16.8 17.7 19.5 23.1

Motorways and trunk roads (£ billion)

Carandlightvancharge

(pence

perkm

)

Goods vehicle charge (pence per km)

1 2 5 10 15 20 30 50

1 4.9 5.2 6.1 7.5 9.0 10.4 13.3 19.1

2 9.5 9.8 10.7 12.1 13.6 15.0 17.9 23.7

3 14.1 14.4 15.3 16.7 18.2 19.6 22.5 28.3

4 18.7 19.0 19.9 21.3 22.8 24.2 27.1 32.9

5 23.3 23.6 24.5 25.9 27.4 28.8 31.7 37.5

6 27.9 28.2 29.1 30.5 32.0 33.4 36.3 42.1

7 32.5 32.8 33.7 31.5 36.6 38.0 40.9 46.7

8 37.1 37.4 38.3 39.7 41.2 42.6 45.5 51.3

9 41.7 42.0 42.9 44.3 45.8 47.2 50.1 55.9

10 46.3 46.6 47.5 48.9 50.4 51.8 54.7 60.5

All roads (£ billion)

Carandlightvancharge

(pence

perkm)

for a 100-mile journey), and a 5p per kmcharge for goods vehicles using trunk roadsand motorways (perhaps operated byNetwork Road) would produce grossannual revenues of £2.25 billion – enoughto treble current annual infrastructureinvestment levels on these parts of the net-work.124 Alternatively, such a revenuestream, which could grow over time asprices and/or traffic increased, could becapitalised to provide very substantial sumsfor transport investment (perhaps in theregion of £30 billion).

Applied to all roads as part of a nationalscheme, the above charges of 1p and 5pcould produce £6 billion per annum gross,enough perhaps to double current invest-ment in all road infrastructure or to raise avery substantial capital sum. Indeed withpotential investment capital running intotens of billions it could be necessary tostagger funding to take account of possiblelimits to the amount of private capitalavailable to be invested in transport infra-structure as well as possible capacity con-straints in the construction industry. Thusthe introduction of even relatively smallroad-user charges could revolutionise thelevel of transport investment in the UK.The model based on future revenueappears to be feasible within the currentfiscal framework. Indeed there is furtherreason (explored in the paragraph below)to believe that schemes will have a positiveoverall effect on government finances.

The economic dividendIf projects based on future revenue success-fully eliminated a significant proportion ofcongestion, as well as other economic loss-es from inadequate roads and infrastruc-ture, then the economic benefits would besubstantial. If, for example, time savingsworth £10 billion per annum wereachieved, then the resulting additional eco-nomic activity would produce extra rev-enue for the Treasury. Assuming an overalltax rate of 40-50%, based on recent histor-

ical levels, it can be seen that the sumsaccruing to the Exchequer would be signif-icant. Since dramatic reductions in conges-tion would also reduce opportunity costsand increase productivity, boosting eco-nomic growth, the extra revenue in themedium term could be even greater. If thepublic can be made aware of the dynamiceffects of road pricing, this should increasesupport for the measure – especially if theextra revenue could, in time, be used tofacilitate cuts in fuel duty and VED.

The carbon problemKeeping road user charging levels down isa political necessity if road pricing is togain public acceptance. But it will make itharder to meet EU targets for a 20 per centreduction in 1990 levels of carbon emis-sions by 2020. If fuel processing is includ-ed, road transport accounts for a quarter ofUK emissions, a significant share, so policy-makers may wish to raise fuel duty furtherand vary vehicle excise duty to encouragegreater fuel efficiency and lower emissions.

Notwithstanding the potential unpopu-larity of such measures, a key difficultywould be setting an appropriate tax rate.According to Stern: “The academic literatureprovides a wide range of estimates of thesocial cost of carbon, spanning three ordersof magnitude … from less than $0/tCO2 toover $400/tCO2 [in 2000 prices]. This isobviously an extremely broad range and assuch makes a policy driven by pricing basedon an estimate of the social cost of carbondifficult to apply.”125

Clearly calculations such as this arelargely speculative, since they must make alarge number of assumptions about futuredevelopments as well as individuals’ sub-jective valuations. Nevertheless, the esti-mates contained within the Stern Reviewcan be used to illustrate the level of taxesthat could be applied if the principles ofPigovian welfare economics (whereby neg-ative externalities are taxed) were accepted.


50

124. Based on 2005 data pre-

sented in Department for

Transport, Transport Statistics

Great Britain, 2006. It is

assumed that the effect of such

a small charge on demand

would be negligible, that running

costs would be low relative to

toll receipts, and that pricing

revenues would be additional to

existing investment in new infra-

structure. See Glaister S and

Graham D, op. cit., for estimates

of the effect of pricing on traffic

levels.

125. Stern Review on the

Economics of Climate Change,

The Stationery Office, 2006,

p 125, www.hm-treasury.gov.uk

Stern suggests that the current socialcost of carbon could be around $85/tCO2

(in 2000 prices), which would equate toabout 11 pence for a litre of petrol126 (or ifan equivalent levy were imposed through apricing scheme, perhaps around 1p pervehicle kilometre for a typical car). Ofcourse, current fuel duties in the UK areseveral times higher than this figure, mean-ing the economic case for further rises maybe questionable, depending on one’s viewof other external costs.127 Moreover, itshould be noted that Stern’s estimate is farhigher than the mean figure that varioussurveys of studies have produced. Thus,even charges based on high estimates of thesocial costs of climate change are unlikelyto affect significantly the viability ofschemes based on future road pricing rev-enues.

Longer-term optionsOf course, once road pricing had beenwidely introduced policymakers would befaced with the decision as to whether toabolish fuel duty and VED and replacethem with a levy on tolls. The amount offuel duty paid currently is very closelyrelated to the amount of CO2 produced bya journey (except on certain modes of pub-lic transport which receive a fuel dutyrebate from the Government), but roadprices would necessarily be linked closelyto congestion and not emissions. Indeed,unlike the current fiscal framework of fuelduty and differentiated VED, pricingbased largely on congestion will not chargemore polluting cars significantly more thanother vehicles, because their effect on traf-fic speeds is the same. Congestion pricingcould also lead to a substantial decline inthe cost of road use in areas outside themajor cities and a relatively small numberof inter-urban bottlenecks.128 Thus it ispossible that in the absence of fuel duty orsome kind of carbon levy, widespread roadpricing will lead to increases in overall CO2

emissions.

In the light of government policy on cli-mate change there could be strong pressureto include a charge for carbon emissions aspart of any future fiscal framework for roadpricing. This might comprise a continua-tion of fuel duty at a lower rate or somekind of flat rate charge per mile driven or,building on recent changes, vehicle exciseduty bands based on the average CO2

emissions of different models of vehicle.However, compared to fuel taxes, the lattertwo options are poor proxies for theamount of carbon released.129

Thus as a method of tackling carbonemissions, fuel duty has a number ofadvantages. Fuel use is highly correlatedwith CO2 emissions and the tax is cheapto collect. Moreover this form of taxationwould be compatible with the phasedintroduction of road pricing or the intro-duction of tolls only in congestionhotspots. In contrast, the integration ofcarbon charges into road prices could cre-ate unnecessary complexity, for exampleby creating the requirement to charge dif-ferent amounts for different vehicleengine sizes and different speeds of travel.Such pricing could detract from the eco-nomic efficiency of schemes by bothincreasing running costs and reducingprice responsiveness to congestion. And itwould almost certainly have to be intro-duced on a national scale to capture allCO2 producing journeys, thereby severelylimiting the options available for intro-ducing pricing.

The greatest danger with fuel duty isthat, falling under Treasury control, the



126. Spark P, ‘Discussion of the

Stern Review’, Cambridge

Energy, 2006, www.cam-

bridgeenergy.com/archive/2006-

11-10/cef10Nov2006spark.pdf

127. To provide perspective, fuel

tax on a litre of petrol in the UK

(exclusive of VAT) is currently

around 50p, the price at the

pump is £1.


op. cit.

129. CO2 released per mile

depends inter alia on the kind of

vehicle, the way it is driven,

speed and conditions. VED is

the same for a vehicle that is

barely used as for one that is

used regularly.

“ Thus as a method of tackling carbon emissions, fuel

duty has a number of advantages . . . In contrast, the

integration of carbon charges into road prices could

create unnecessary complexity”

temptation will remain to increase the taxto pay for general expenditure. A more effi-cient policy would be to subsume fuel dutywithin an overall carbon tax that wasapplied equally to all economic sectors.The method of tax collection could remainthe same, but the carbon content of thefuel would determine the rate. In this waythe Treasury would be prevented from tar-geting the transport sector as a special rev-enue source since any rises would also haveto be applied equally to domestic fuel (ahigh-salience political issue). A furtheradvantage would be that the carbon taxwould help ensure cuts in emissions tookplace in the most cost-effective sectors,perhaps for example at power stationsrather than in transport. There is thereforea strong economic case for equalising thetaxation of different CO2 sources.

The Government however favours a dif-ferent option. Its UK Climate ChangeProgramme of 2006 proposes emissionstrading systems for surface transport andenvisages including road transport in theEU emissions trading scheme (ETS), pos-sibly from 2013.130 While tradable individ-ual allowances for motorists have beenconsidered, the costs of regulating verylarge numbers of people make it more like-ly that fuel producers will be given theresponsibility for obtaining CO2 allow-ances to cover the emissions resulting fromthe fuel they sell. The additional costswould be passed on to road users in pricerises for petrol and diesel.

While this kind of cap and trade systemshould help ensure that emissions are cut inthe most cost-effective economic sectors,according to the DfT: “Inclusion of roadtransport in EU ETS could … sit alongsideother forms of direct intervention such asfuel duty.”131 Thus it seems likely that thecosts of emissions trading would be addedon top of fuel taxes, which would under-mine one of the fundamental bases of effi-cient cap and trade schemes – that differentsources of emissions are treated equally.

A separate issue is that, in the absence ofaccurate data on the costs and benefits ofclimate change, setting the level of the capis an arbitrary political decision that couldharm economic competitiveness while hav-ing little effect on environmental impacts.The same kind of knowledge problems willalso face policymakers when they attemptto set fuel duty rates or environmentallevies based on other external impacts ofroad use.

Other externality chargesOne of the rationales behind maintainingfuel duty in addition to either a carbon taxor the participation of transport within theEU emissions trading scheme, is that roadusers are also responsible for the produc-tion of other externalities apart from con-gestion and CO2 emissions.

Attempts to measure the external costsof UK road transport, although method-ologically questionable, do tend to agreethat by far the largest cost associated withroad use is congestion. Because this partic-ular externality would be largely removedby road pricing (even with a relativelysmall number of schemes focusing on themajor cities and inter-urban bottlenecks),it would be hard to justify – on economicefficiency grounds – the kind of large risesin taxation that could jeopardise futureroad pricing revenues. Sansom et al. com-ment: “If more differentiated road charg-ing mechanisms were introduced, the casefor increasing fuel duties as an, albeit weak,tool for improving economic efficiencywould be diluted.”132

There are also impacts such as noise andlocalised air pollution (see Table 5.2).Unfortunately it is extremely difficult toquantify these effects and decide an appro-priate levy since, to some extent, they havealready been internalised by land andproperty markets and furthermore, theunderlying causes are difficult to separateout.


52

130. ‘Road Transport and the EU

Emissions Trading Scheme’,

Department for Transport

Discussion Paper,

www.dft.gov.uk/pgr/sustainable/c

limatechange/euemistrascheme

131. Ibid., p 8

132. Sansom T, Nash C, Mackie

P, Shires J and Watkiss P,

Surface Transport Costs and

Charges: Great Britain 1998,

Institute for Transport Studies,

2001

When new roads are built or existingroads widened, nearby property owners arecompensated for the loss in value due tonoise and other forms of pollution.Subsequent buyers can expect to pay lessfor properties negatively affected by roads,so to some extent the noise and air pollu-tion they experience is voluntary and hasbeen accounted for in the property market.Although property owners are not com-pensated for increases in traffic on existingroads, it seems likely that in recent yearscleaner and quieter engines, as well as qui-eter road surfaces, have reduced the associ-ated external effects. Certainly local airpollution levels have fallen substantiallyover the past 20 years, yet this has not beenreflected by any reductions in the rate offuel duty.134

Moreover, when governments and theireconomists treat noise and local air pollu-tion levels as simply the result of road usethey fail to consider all the underlyingcauses. For example, strict planning regula-tions have prevented British cities fromadapting to cars. Whatever their prefer-ences, most home owners are prohibitedfrom living in quieter locations with clean-er air (as well as less congestion) becausegovernment policies force them to live incramped cities, in many places still heavilyreliant on unsuitable Victorian streets.Indeed, new housing developments con-tinue to be built next to major roads andmotorways, although there is no shortage

of agricultural land for development.135

Should road users pay for the side-effectsof these planning policies?

So when national or local policymakershave to set an environmental levy, whetherthrough the continued use of fuel duty oras a variable charge added to road tolls,there is a powerful argument for takingaccount of the influences of governmentplanning policy and compensation alreadypaid via the land market.

Accident costsAnother possible justification for highroad-user taxes or price levies is to pay forthe social costs of road accidents. With over3,000 deaths in 2005 and many more seri-ous injuries, these are very significant.However, it is not clear to what extent thereare genuine net economic costs beyondthose already covered by road users’ insur-ance premiums. Indeed, previous calcula-tions have failed to take adequate accountof the impact on government finances offatalities, for example, in terms of savingson long-term pensions, NHS and welfarebenefits.136 Setting an accident levy on roadprices that reflected real externalities couldbe impossible given the difficulties associat-ed with obtaining accurate data on theextent to which costs have already beeninternalised through insurance.137

Accordingly, while the human cost ofaccidents is extremely high, there is nostrong economic rationale for imposing agovernment accident levy in addition toroad tolls. Interestingly however, as dis-cussed in Chapter 2, the integration of roadpricing and insurance payments could pro-vide strong incentives for improved safety.Better technology (for example, airbags) isalso contributing to a reduction in casual-ties. Thus accident costs should not be areason for imposing large additional levies.

Capital costsSome contend that road users should payfor the capital cost of the road network; the



133. Original estimates from

Sansom et al., op cit.

134. See: The Strategy Unit, op.

cit., p 58-58

135. Evans A and Hartwich O,

Unaffordable Housing: Fables

and Myths, Policy Exchange,

2005

136. Although it would be moral-

ly questionable for the govern-

ment actually to compensate

insurance companies for savings

in pension payments, healthcare

costs etc. due to road fatalities.

137. Sansom et al., op. cit..

They state that ‘No information

exists on aggregate injury and

death related payments by

insurance companies to road

accident victims’, p 77

Table 5.2: Fully allocatedenvironmental costs of UKroad transport in 1998(central estimate, adjustedto 2007 prices)133

Climate change £1,793m

Air pollution £4,028m

Noise £2,965m

TOTAL £8,786m

interest forgone on its net asset value.Newbery has calculated a capital value of£120 billion for the road network at 1998prices. At a discount rate of 6 per cent thiswould mean road users paying £7.2 billionper year.138

Many road users may feel that they havealready paid for these capital costs throughwhat they perceive as excessive motoringtaxes. Clearly the accuracy of this view-point depends on whether it is acceptedthat historical revenues have more thancovered the external costs of road trans-port and to what extent these costs havebeen the consequence of governmentintervention in transport and land mar-kets rather than the result of motoring perse. Thus the methodological difficulties ofcalculating social costs complicate thedecision of what road users should justlypay towards capital costs.

A further consideration is whether roadusers should pay all the capital costs orwhether property owners should pay a pro-portion, perhaps through local taxes. Forexample, many rural roads and urban resi-dential streets are constructed primarily toprovide access to properties and tolls couldprobably never cover capital and runningcosts. The cross-subsidy of such infrastruc-ture would hardly be equitable. Yet in prac-tice it will be difficult to decide how tosplit charges between property owners androad users, although given the right insti-tutional framework pricing could at leastprovide better data on the distribution ofcosts and revenues over the network.

If it is accepted that such charges shouldbe levied in full, policymakers would face

the valuation problem discussed above.Estimating the value of infrastructure out-side the market system is extremely prob-lematic. Nevertheless, the introduction ofpricing should elicit far better informationabout the capital value of different parts ofthe road network, since valuations canthen be informed by revenue yields. Thenotion that road users should cover capitalcharges does not therefore support thecontinuation of fuel duty and VED afterthe widespread introduction of road pric-ing. Indeed, these taxes would in all likeli-hood decrease asset values by reducingpotential tolling revenues and distortingthe allocation of resources among differenteconomic sectors. Capital costs thus pro-vide a further strong argument for a coher-ent approach to transport taxation andtaxes in the wider economy.

Allocating investmentOnce the imminent introduction of roadpricing guarantees a future revenue stream,the decision then arises as to where invest-ment should be allocated. A key questionwill be to what extent investment shouldbe based on investors’ assessments aboutconsumer demand and profitability (i.e.guided by market mechanisms) and towhat extent it should be directed by localor national level policymakers.

At one end of the spectrum could beprivate toll roads, for which the infrastruc-ture is funded by the purchases of con-sumers gaining direct utility from it. At theother end of the spectrum could be some-thing like the current system of transportfunding, with user charges (and fuel duty,VED etc.) going into a general pot to bespent on the welfare state as well as differ-ent transport projects at the discretion ofthe Treasury and DfT.

In the middle are schemes such as theLondon congestion charge, where the netrevenues are spent on transport, in this casemostly on subsidising bus services. Yet the


54

138. Newbury, op. cit., p 23

“ Many road users may feel that they have already paid

for these capital costs through what they perceive as

excessive motoring taxes”

London scheme has more in common withthe central planning model than the mar-ket-based model of transport investment.The congestion charge revenue is notbeing used directly to provide services forthe travellers that pay it, for example, byinvesting in measures to improve trafficspeeds in central London, such as buildingflyovers and widening roads.

There are both economic and politicalproblems with centralised schemes.Economically the price signals frommotorists paying congestion charges arenot translated into investment decisions,and therefore potential gains in allocativeefficiency are lost. Outside London, wherethere tend to be proportionately fewerpublic transport users and less comprehen-sive public transport networks, the eco-nomic case for earmarking road pricingrevenues for, say, local bus services or tramnetworks, may also be far weaker.Motorists will outnumber public transportusers in many localities, so that such anallocation of revenues is likely to raiseopposition to road pricing schemes. Theapparently successful implementation ofthe cordon toll ring around Oslo inNorway depended on a large fraction ofrevenues being earmarked for roadimprovements.139 Motorists thus felt thatthey would benefit directly from the intro-duction of charging.

The bias against cars that arguably existsin some local and national administrations(see Chapter 2) raises the danger that rev-enue will be earmarked for wasteful proj-ects, which fail to produce a commercialreturn on the capital invested (threateningthe involvement of the private finance) anddo little to improve the economic efficien-cy and international competitiveness of thetransport sector. We can also expect localauthorities to spend revenues to benefit localresidents, especially in swing wards wherevotes count most, in order to maintainpolitical support, rather than focusing onproviding services for travellers in general.140

To avoid waste, central governmentcould, of course, regulate both the modalmix of investment and require that projectsmeet certain financial criteria. But thiscould prevent local bodies tailoring schemesto local circumstances, while bolstering cen-tral control and Treasury interference inbudgetary decisions. Thus the best optionmay be to reform local government financeso that councils experience the full econom-ic consequences of their transport policydecisions, as discussed in Chapter 4.

Similar decisions would have to be takenat national level should pricing be intro-duced on motorways and trunk roads.Should a share of revenues be earmarkedfor cross-subsidising the rail network, forexample, even though those paying the tollswould not necessarily benefit from suchexpenditure? The economic case for suchan allocation of resources seems extremelyweak, particularly since after the introduc-tion of pricing and the equalisation of envi-ronmental taxation travellers would be wellequipped to make rational choices.However, this kind of expenditure modelwould have particular appeal to certaininfluential fractions of the electorate, suchas rail commuters in the Home Counties.

Fortunately the gains from congestionpricing are likely to be sufficient for signif-icant improvements in economic efficiencyto be achieved even if a large fraction ofrevenues is detached from consumerdemand and spent for political reasons.Accordingly some economists have focusedon models that bolster political support forpricing by widely distributing revenues



139. See Langmyrh T, ‘Learning

from Road Pricing Experience:

Introducing a Second-

Generation Road Pricing

System’, Planning Theory and

Practice, 2, 1, pp 67-80, 2001

140. See, Tricker R, Fereday D,

Pickup L, Norheim B, Bekken J-

T, Shepherd S, Laird J, Nash C

and Suchorzewski W, Revenue

Use from Transport Pricing:

Report on the Implementation of

Urban Case Studies, Deliverable

5, ISIS, 2006

“ The apparently successful implementation of the

cordon toll ring around Oslo in Norway depended on a

large fraction of revenues being earmarked for road

improvements”

among the general population. Goodwinhas suggested applying what he terms “therule of three”.141 A third of the expenditurecould be used for the development andmaintenance of new road infrastructure,where the investment would be cost-effec-tive; a third for public transport; and athird for reducing the general tax burden.According to Small, since efficient pricingcan produce “more than enough revenue tofully compensate all losses” it should bepossible to attract political support from awide range of interests with a package oftransport improvements and tax cuts.142

The timetable for introducing road pric-ing will affect expenditure decisions andthus the feasibility of various spendingpackages. The economic case for using ahigh proportion of future revenues fortransport investment is likely to be greatestearly on, with the first schemes targetingthe very worst congestion hotspots. Later,as tolling becomes more widespread, addi-tional transport investment may not be ascost effective in terms of the extra revenuesproduced. At this stage finding other waysof disbursing toll surpluses could be moreimportant. However, in some urban areashigh costs may mean that cost-effectivetransport investment is not possible on ascale sufficient to absorb revenues, even inthe early stages of road pricing. In thesecircumstances, the reform of local financediscussed in Chapter 4 could ensure thattoll receipts were nonetheless used to pro-mote economic growth, for example, byreducing business rates.

ConclusionExisting and planned schemes, togetherwith hypothetical charging models, suggestthat under revenue additionality minimaluser charges could produce very substantialfunds for investment. Thus in the short tomedium term, within the current fiscalframework, the introduction of road pric-ing does have the potential to improve the

UK’s economic competitiveness by bothreducing congestion and providing newfunds for investment.

In the longer term, road pricing, even ifrestricted to just those areas severely affectedby congestion, presents an opportunity toreform radically the current system of trans-port taxation and expenditure. Pricingwould undermine the already weak econom-ic case for continuing to use fuel duty andvehicle excise duty; both crude methods ofaddressing the external impact of road use.

However, a new levy on fuel might beappropriate should policymakers wish toaddress the carbon emissions of the roadtransport sector, whether through a carbontax or the inclusion of road transport in theEU emissions trading scheme. Such a pol-icy should be applied equally across all eco-nomic sectors to ensure that emissionsreductions are achieved in the most effi-cient way. Additional climate change relat-ed initiatives, particularly those targetingindividual sectors such as road transport,would damage the economic efficiency ofeither a carbon tax or a cap-and-tradescheme, and therefore should be avoided.

Eventually policymakers may also wantto introduce an environmental levy onroad prices to reflect impacts such as noiseand local air pollution. In setting rates,they should attempt to account for theeffects of planning policies in exacerbatingenvironmental consequences and theextent to which environmental quality hasbeen internalised in the land market.Further research in this area, perhapsincorporating non-welfare economicsapproaches, could help policymakers setefficient rates. Nevertheless, the magnitudeof current road user taxes, combined withthe small additional charges needed tofund substantial infrastructure improve-ments and the low price elasticity of traffic,mean that even levies based on high esti-mates of external costs are extremelyunlikely to undermine the viability offuture revenue-based projects.


56

141. Goodwin P, ‘The Rule of

Three: A Possible Solution to the

Political Problem of Competing

Objectives for Road Pricing’,

Traffic Engineering and Control,

29, 10, pp 495-497, 1989

142. Small K, ‘Using the

Revenues from Congestion

Pricing’, Transportation, 19,

pp 359-381, 1992

6Additional policyoptions

Complementing road pricing withother measuresUsing future road pricing revenues to fundinfrastructure improvements is not theonly available option for addressing con-gestion and other inefficiencies in thetransport sector. Since the construction ofadditional “hard” transport infrastructureis generally a time-consuming process, pri-vate finance deals based on future revenuescould be used for other strategies, such asbetter traffic management, that promise toimprove conditions in a shorter time-frame. Rapid and noticeable improve-ments for travellers will be essential inmaintaining political support for both pri-vate sector involvement and subsequentuser-charging.

The following measures, broadly cate-gorised into active traffic management,demand management and capacityenhancement, are not alternatives to roadpricing, but complementary ways of usingroad pricing revenues.

Active Traffic ManagementA number of methods offer the prospect ofreducing congestion through making bet-ter use of existing capacity. Active TrafficManagement (ATM) can be thought of asa tool-box of technologies and proceduresfor use on their own or in combination.Britain’s first pilot ATM scheme, devel-oped by Serco, was launched on a particu-larly busy 17km section of the M42 out-side Birmingham. The Governmentannounced the project in July 2001, con-

struction began in the winter of 2004 andit was rolled out in three phases over thefollowing two years.

New lighting, gantries, electronic andstatic signing, emergency roadside tele-phones and refuge areas, CCTV and advi-sory speed limits were commissioned first.Then the area was designated a “controlledmotorway”, introducing mandatory vari-able speed limits on the M42. Finally, thehard shoulder was converted so that it canbe used as an extra running lane duringpeak periods or accidents, thereby provid-ing additional capacity.

The road is controlled by traffic officerswho are able to monitor the road via CCTV.Electronic signs over the motorway candirect motorists to drive on the hard shoul-der at busy times. When this measure is inuse a 50mph sign is displayed above the hardshoulder to indicate that it can be used and,for safety reasons, a maximum 50mph speedlimit is also displayed above the other laneson the carriageway. Lower speeds can alsoreduce congestion by decreasing the gapbetween vehicles and improving traffic flow.Drivers in trouble can pull into the emer-gency refuge areas located at half kilometre


“ Active traffic management, demand management and

capacity enhancement, are not alternatives to road

pricing, but complementary ways of using road pricing

revenues”

intervals next to the hard shoulder andequipped with emergency telephones.Regular lanes can also be opened and closedfrom the control room by displaying a red Xon the electronic lane signals above the car-riageway. This is particularly useful whenthere is an incident which requires fast accessby emergency services.

Initial evidence suggests that thescheme has been successful at increasingthe reliability of journey times, improvingsafety, and keeping motorists betterinformed. Accordingly the HighwaysAgency is currently studying the detailedbusiness case for these schemes.143 The costof the M42 pilot has been estimated at£40 million for the infrastructure and£3.2 million per year for operating costs.144

Thus this ATM project appears to offersignificant cost benefits over widening,which would have been particularlyexpensive on this edge-of-city locationrequiring complex intersections. The totaleconomic benefits have been estimated tobe in the region of five times the amountspent on the project.145

Other forms of active traffic manage-ment currently under trial in England aremotorway access management146 and theemployment of dedicated HighwaysAgency traffic officers.147 After the pilots, itseems likely that economies of scale couldbe achieved if ATM were rolled out tomore locations; and the time taken fromapproval to implementation could bereduced significantly. The introduction ofATM provides an excellent option for PFIschemes based on future road pricing rev-enues, both as a stand-alone project and incombination with other capacity improve-ments, such as road widening. The situa-tion is more complex for multi-use urbanstreets with conflicting interests – this is anarea for further research and pilot projects.

Lorry overtaking restrictionsThe introduction of overtaking restrictionsfor heavy goods vehicles is another form of

traffic management that promises toimprove flows on motorways and dual-car-riageways. Limited restrictions on trucksovertaking have long been employed onGerman autobahns, particularly onstretches with only two lanes in each direc-tion. When lorries try to overtake oneanother, especially on hills, they can slowtraffic down for several miles; the resultingbunching of faster cars also leads to acci-dents.

The Highways Agency has begun trial-ing lorry overtaking restrictions on shortsections of the A1(M) in Co Durham andthe A14 in Northamptonshire. Providingthese pilots are successful there will be astrong case for rolling out this inexpensivemeasure to other sections of the networkthat are particularly affected, such as thefour-lane sections of the M11 and theM20. These kinds of restrictions could alsobe applied as part of more comprehensivePFI-funded ATM schemes, although theirwidespread introduction might be opposedby the road haulage industry.

High occupancy lanesCarpool or high-occupancy vehicle(HOV) lanes are reserved for passengervehicles carrying at least two people. Theyare intended to encourage car sharing,thereby reducing the number of vehiclesfor a given number of travellers. The lanesare created using the hard shoulder, bywidening roads or reassigning an existinglane. High-occupancy toll (HOT) lanessimply charge single-occupant vehicles ifthey chose to use HOV lanes. Tolls are col-lected either electronically, by mannedbooths or using automatic number platerecognition. HOT lanes utilise wastedcapacity on HOV lanes and may also beused to raise revenue for investment in newcapacity.

The first high-occupancy toll lane wasintroduced on a state route in OrangeCounty, California in 1995, and was fol-lowed by a number of others in both the


58

143. www.publications.

parliament.uk/pa/cm200607/cmh

ansrd/cm070508/text/70508w00

04.htm

144. www.publications.

parliament.uk/pa/cm200203/cmh

ansrd/vo030318/text/30318w01.

htm

145. www.highways.gov.uk

/knowledge/1334.aspx

146. www.highways.gov.uk

/knowledge/9150.aspx

147. www.highways.gov.uk/

knowledge/601.aspx

US and Canada. The new lanes have elim-inated delay for those who pay to use themand evening peak time delays for vehiclesin the mixed lanes have also beenreduced.148

There are persuasive economic argu-ments against simple high-occupancy vehi-cle lanes: the lanes may waste valuableroad capacity when underused. High-occupancy toll lanes use capacity betterand raise revenue. A third alternativewould be to introduce simple toll lanes oncongested sections of highway. Both high-occupancy and single-occupancy vehicleswould be charged the same rate, thoughthe tolls would be more affordable for carsharers.

In the UK, where peak time congestiondelays can be very severe, it may be possi-ble to charge relatively high prices for theuse of free-flowing lanes. Accordingly,future toll lane revenues could fund widen-ing schemes such as those being undertak-en on parts of the M1 and M25. Comparedwith other road pricing schemes, such proj-ects are likely to be politically popular sincethey are voluntary, users of both the freeand tolled lanes experience time savingsand taxpayers must no longer fund invest-ment. Clearly such schemes could form oneelement of more comprehensive privatelyfinanced ATM projects.

There may also be urban locationswhere premium lanes could be introduced.In some locations cars could be allowed todrive in under-utilised bus lanes for thepayment of a fee. Since enforcement basedon automatic number plate recognitiontechnology is often already in place thiscould be a very inexpensive way to makebetter use of existing capacity on urbanroads and raise additional revenue forinvestment. Bus lane charges would alsoenable private finance to fund both thewidening of roads for new bus/toll lanesand enforcement/tolling infrastructure.There has been talk of allowing high-occu-pancy vehicles to use the M4 bus lane. This

idea could be extended to allow single-occupancy vehicles to pay to use the lanetoo – a move that may well prove popularpolitically.

Demand managementAnother range of policies is designed toreduce demand for car travel both toreduce congestion and the environmentalimpact of driving. These measures focus onplanning controls and regulating the geo-graphical pattern of economic activity aswell as transport itself. Policymakersdeploy them in an attempt to co-ordinatethe competing demands of economic effi-ciency, equity and environmental protec-tion.

Parking restrictionsLocal authorities frequently use parkingcharges to discourage commuters fromdriving to work (to reduce peak-time con-gestion), while setting rates for shorterstays low enough not to put off shoppersfrom driving to town centres. Thus manymunicipal car parks are characterised bysharp increases in charges beyond a four-hour stay. Another strategy is to introduceresidential parking permits in areas aroundrailway stations and town centres. The for-mer discourages commuters from under-taking part of their journey by car; the lat-ter deters driving to work. The LondonBorough of Richmond has recentlyincreased the scope of permit policy bycharging higher fees for residents owninglarge 4x4 cars which, it is argued, have aparticularly negative environmentalimpact.


Additional policy options

148. Sullivan E, ‘Evaluating the

Impacts of the SR 91 Variable

Toll Express Lane Facility’, 1998.

Cited in Dahlgren J, High

Occupancy/ Toll Lanes: Where

Should They Be Implemented?’,

Transport Research Part A 36,

pp 239-255, 2002

“ In some locations cars could be allowed to drive in

under-utilised bus lanes for the payment of a fee . . .

There has been talk of allowing high-occupancy vehicles

to use the M4 bus lane”

Under the Transport Act 2000 councilsmay also impose workplace parking levies,although so far none has done so. Com-panies also pay additional business rates forparking spaces. These policy options againtarget peak-time car commuters.

Although parking policies can targetparticular classes of road users in anattempt to lessen congestion, they areclearly less efficient than well-organisedroad pricing schemes, which can differen-tiate according to the distance travelledand traffic levels. Rather than allowing thebalance of supply and demand to deter-mine prices, many local authorities treattheir parking spaces more like public goodsand so ultimately spaces are allocated onthe basis of queuing. There is no technicalreason to treat parking as anything otherthan a purely private good; it being bothrival and excludable, but too often theinternal efficiency of parking allocationranks secondary to its use in achievingother objectives. Research has shown thatcruising for a street-parking space is com-mon in congested traffic because somepeople prefer to queue than pay to use a carpark. Shoup estimated from a review of 16studies in 11 cities worldwide that on aver-age 30 per cent of traffic in central businessdistricts is looking for a parking space,with the average search time being justover eight minutes.149 A further drawbackof parking restrictions is that they do littleto reduce through traffic. In fact, by dis-couraging parking and thus freeing uproad capacity it may even encouragethrough-traffic on to urban routes.

However, parking policies can, like pric-

ing, have the positive effect of encouragingbusinesses to relocate away from the mostcongested areas, thereby making better useof spare transport capacity. They do how-ever raise concerns about the fate of tradi-tional town centre locations. Furthermore,as a fixed cost of travel, parking fees are alower proportional burden on those mak-ing longer trips, and may as a result beregressive since higher income groups tendto live further away from inner cities.

Given these problems and their ques-tionable overall economic efficiency, one ofthe advantages of urban road pricing is thatit would eliminate the perceived need forcomplex and unpopular parking policies,an aspect of road user charging that couldhelp win public support were it given suf-ficient emphasis.

Planning controlsDeterring car travel and encouraging pub-lic transport have been key components ofspatial planning policies, particularly sincethe mid-1990s.150 Out-of-town develop-ments have been discouraged; the empha-sis has been on developing compact citiesto limit travel-to-work distances and createurban densities that promote the viabilityof bus and train services. The redevelop-ment of brownfield sites within cities,rather than greenfield sites on the periph-ery has been an important part of the pol-icy. More directly, some local councils haverestricted the number of parking places onnew developments to discourage car own-ership.

While the aims of these policies mayhave been laudable, their economic costhas been very high. New dwellings inBritain are among the smallest in thedeveloped world. In fact they are probablysmaller now than they were in the 1930s,when the country was only a quarter asrich. A lack of land supply has also con-tributed to the high cost of homes and thecurrent affordability crisis.

In the commercial sector, planning


60

149. Shoup D, The High Cost of

Free Parking, American Planning

Association, Planners Press,

2005

150. Department of the

Environment Planning Policy

Guidance 13: Transport, The

Stationery Office, 2004

“ Many local authorities treat their parking spaces more

like public goods and so ultimately spaces are allocated

on the basis of queuing”

restrictions have increased the cost offloor space and may therefore have con-tributed to the decline of manufacturing.There is also evidence that the controlshave contributed to higher retail prices inthe UK compared with other EU coun-tries.151

The impact on congestion and the envi-ronment is also questionable. Rather thansignificantly increasing use of public trans-port, compact cities have arguably concen-trated car traffic into a smaller space,increasing levels of congestion and pollu-tion.152

While limiting car dependence is onlyone of the aims of planners alongside con-servation of the countryside, urban con-tainment and inner-city regeneration, itmust take at least some responsibility forthe large negative effects planning policyhas had on housing and business. Sinceroad pricing is capable of efficiently anddirectly addressing the environmentalimpacts of transport there is a strong casefor reviewing the future role of land-useregulation in this area.

Quotas and rationingIn other countries policymakers have gonebeyond indirect measures and introducedsystems that ration car ownership. InSingapore, in addition to congestioncharging that limits vehicle use, variousmotoring taxes are imposed in order toreduce vehicle ownership. Singapore’s vehi-cle quota system is used to limit annualgrowth in vehicle numbers to 3 per cent.Certificates of Entitlement – which permita new vehicle to be driven for ten years –are rationed and auctioned off to the high-est bidders every fortnight. The price paidis called the quota premium. As of June2007 the quota premium was S$16,181for a car under 1600cc and S$19,802 for acar above 1600cc (S$1 ≈ £0.33). In addi-tion, in 2007 custom duty on importedcars is currently 20 per cent of open mar-ket value (OMV); goods and service tax is

5 per cent of value at import; additionalregistration fee is 110 per cent of OMV,and one-time registration fee is S$140.Thus a 1360cc Peugeot 206 with OMVS$14,870 would actually cost S$51,414 toput on the road.153

Unfortunately there is a perverse incen-tive problem associated with imposing hightaxes on vehicle ownership; having paid somuch for a vehicle, owners are encouragedto use them more. In 2003-04 averageannual car use in Singapore was 20,171kmper car compared with only 11,500km percar in London.154 Clearly road pricing ismore effective at tackling congestion thanownership charges that are imposedwhether vehicles are being driven or not.Measures that limit car ownership may alsodeny those on relatively low incomes theemployment and leisure opportunities asso-ciated with motoring, thereby increasingsocial polarisation.

Mexico City uses a system, motivatedinitially by environmental concerns,called hoy no circula (known abroad as“one day without a car”).155 Every week-day vehicles having either of the day’s twohoy no circula numbers as the last digiton their registration plates are bannedfrom driving; the aim being to cut car useon weekdays by 20 per cent. But better-off households have got around the sys-tem by buying extra cars; thereby reduc-ing the programme’s effectiveness. It iscertainly a very crude method of tacklingcongestion because it does not discrimi-nate between motorists with differenttime values.



151. Evans A and Hartwich O,

2005, op. cit.

152. See: O’Toole R, The Best

Laid Plans, Cato Institute, 2007

153. Cost S$ for cars registered

in July 2007, www.onemotor-

ing.com.sg/publish/onemotor-

ing/en/lta_information_guide-

lines/buy_a_new_vehicle/car_cos

t.MainPar.0047.File.tmp/Car_Cos

t_Update.pdf

154. TfL and Singapore Land

Transport Statistics, cited in

World Cities Report,

Commission for Integrated

Transport, March 2005

www.cfit.gov.uk/docs/2005/worl

dcities/index.htm

155. See: www.mexicocity.

com.mx/nocircula.html

“ Since road pricing is capable of efficiently and directly

addressing the environmental impacts of transport there is

a strong case for reviewing the future role of land-use reg-

ulation in this area”

Capacity enhancementAn alternative is to try to satisfy demandby increasing the capacity of infrastructure.In many countries funding is achievedthrough some form of hypothecation, sothat a proportion of road-user tax receiptsare earmarked for transport projects.156 Inthe absence of both road pricing and aneutral tax system, allocating investmentefficiently is difficult. Typically plannerstend to underestimate the demand for roadspace and capacity increases are inadequateto tackle congestion.157 On the other hand,many public transport schemes, such as theChannel Tunnel and numerous tram proj-ects, overestimate demand for their servic-es, leading to wasteful investment.158

Road buildingThe obvious solution to congestion is tobuild more roads and widen existing ones.The Roads for Prosperity programme adopt-ed this approach in the early 1990s, whichsaw a substantial increase in the rate ofroad investment.159 However, new con-struction met with stiff opposition fromenvironmentalists who engaged in directaction to prevent schemes such as the M3extension at Twyford Down.160 TheDepartment of the Environment alsoundermined the policy from within theGovernment with support from theTreasury (there was a high budget deficit atthe time). The programme was abandonedin the mid-1990s and road buildingslowed to a virtual halt. And perhapsbecause of the environmental protests, theGovernment now prefers to widen existingroads rather than construct brand newones, even though the former is a far moreexpensive way of adding new capacity.161

Environmental concerns around build-ing more road capacity could be addressedby increasing compensation payments toaffected residents (as in France) and payingthem at the start of the constructionprocess, which would restrict the opportu-nities for radical environmentalists to form

powerful alliances with local residents. Asmentioned in Chapter 5, a better way totackle carbon emissions would be to intro-duce an economy-wide carbon tax.

One argument often deployed againstnew road space is that demand is so greatthat the new capacity will quickly fill upwith traffic.162 “Induced” traffic, as it istermed, is the consequence of the historicalmismatch between the supply and demandof roads. It is the result of central control ofinvestment and the lack of economic infor-mation in the absence of pricing. User-charging promises both to eliminate con-gestion caused by induced traffic and guideinvestment in infrastructure upgrades sothat it matches demand for road spacemore closely.

Road pricing may therefore make roadbuilding a more attractive option, by end-ing the need for taxpayers to fund invest-ment, including an environmental charge,eliminating induced traffic problems andfacilitating a far more efficient allocation ofinvestment. However, opportunities forthe construction of new capacity are likelyto be severely limited within many urbanareas. Pricing will mean that the economicviability of such schemes, which mayinvolve the compulsory purchase of hun-dreds of homes (as with the M11-Hackneylink road), or expensive bridging and tun-nelling (for example the Limehouse link inDocklands), can be more accuratelyassessed. Bus projects or spatial dispersalcould often bring greater economic bene-fits in large cities.

Public transport improvementsAnother approach to addressing conges-tion problems is to increase investment inpublic transport, to improve quality ofservice and decrease overcrowding prob-lems. Such improvements would encour-age more people to use buses, trains andtrams rather than cars in order to reducecongestion and the environmental impactof travel. Broadly speaking, this has been


62

156. Nakagawa D and

Matsunaka R, Funding Transport

Systems: A Comparison Among

Developed Countries, Pergamon,

1997

157. See Congleton R and

Bennett R, “On the political econ-

omy of state highway expendi-

tures: some evidence of the rela-

tive performance of alternative

public choice models”, Public

Choice, 84, pp 1-24, 1995

158. See Babalik E, op cit.

159. Department of Transport,

Roads for Prosperity, HMSO,

1989

160. Bryant B, Twyford Down:

Roads, Campaigning and

Environmental Law, E and FN

Spon, 1996

161. Archer C and Glaister S,

op. cit.

162. Department of Transport,

SACTRA report, HMSO, 1995

the Government’s strategy in recent years,together with supportive measures such asthe parking restrictions discussed above.Unfortunately, since public transport issubsidised, the cost to taxpayers has beenvery high: the annual subsidy of buses,trains and trams, which account for a smallfraction of passenger travel, is in the regionof £10 billion. But passengers could be lostif the subsidy is reduced and higher farescharged.

Government, at local and national level,has also encouraged public transport usethrough concessionary fares, for example,for the under-18s and over-60s. However,these mean that a high proportion of jour-neys (on buses in particular) are of limitedeconomic value. A further problem is thatsubsidised rail journeys encourage long-distance commuting and therefore carbon-intensive lifestyles; commuters, living inrural areas, will use trains to get to workbut cars for leisure and shopping trips. Railcommuters are also wealthier than average,meaning that the current level of subsidy isquestionable on environmental, economicand egalitarian grounds.163 It is an exampleof “churning” within the tax system,returning money to middle-class taxpayersthrough subsidies when it would be moreefficient to reduce taxes and have them payfor services directly.

The extent to which car journeys can besubstituted is also questionable. A highproportion of bus and train journeys ter-minate in the centres of large conurba-tions, particularly Central London. Publictransport may not be viable in areas withmedium to low population densities and italso tends to be unsuitable for journeysfrom suburb to suburb and for tripsinvolving multiple destinations. Extendingprovision to such an extent that significantcuts in car usage were achieved may there-fore be prohibitively expensive.

Widespread road pricing should givepublic transport a competitive advantagein large congested conurbations. Invest-

ment in these modes based on future roadpricing revenues will be most appropriatein these locations. However, where publictransport expenditure is wasteful ofresources road pricing will further weakenthe case for continued subsidy by under-mining justifications that it is contributingto congestion relief and environmentalprotection.

ConclusionWhile some of the policies discussed canease congestion, they are generally verycrude tools compared to road pricing.Many have negative economic side-effects,which may undermine their cost-effective-ness. In contrast, road user charges tacklecongestion directly and can be set at levelsthat both eliminate delays and allow opti-mal use of road capacity.

However, in some instances additionalstrategies may make road pricing moreeffective. In particular, Active TrafficManagement offers the prospect ofincreasing capacity at relatively low cost.Together with minor changes such as lorryovertaking bans and bus lane tolling,implementing wider ATM promises toreduce congestion relatively quickly. Insome locations, however, even use ofcharges and ATM combined may not besufficient to address the high demand forroad space. Depending on the costs ofconstruction, road building would then bea viable option. The decision would beguided by prices and the financial returnon new roads could be calculated moreaccurately. Given supportive fiscal and



163. The Strategy Unit, op. cit.,

p 19

“ where public transport expenditure is wasteful of

resources road pricing will further weaken the case for

continued subsidy by undermining justifications that it is

contributing to congestion relief and environmental

protection”

institutional frameworks, investmentshould closely match demand, leading to amore efficient allocation of infrastructureexpenditure. At the same time, the pricingof environmental costs would encourageroad builders to minimise the impact ofprojects, perhaps by choosing routes thatavoided housing or using ATM systems tolimit external effects (for example, by cut-ting speed limits through urban areas atnight).

The privately financed improvement ofinfrastructure must therefore involvemore options than simply building newroads and railways. It should also includea series of complementary measures toreduce congestion in the short termbefore road pricing is introduced. Such astrategy could play a critical role in main-taining political support for continuedprivate sector involvement in transportprojects.


64

7Conclusions andrecommendations

On international comparisons of transportcapacity and congestion the UK comesclose to the bottom of the tables. Theseproblems threaten British business andfuture economic growth. Fortunately, notonly can road pricing alleviate the coun-try’s endemic congestion, but it can alsoprovide a new source of funding for amajor upgrade of the transport network.

We have demonstrated that the additionof relatively small infrastructure chargescan provide sufficient resources to increasecurrent investment levels substantially. Yetroad pricing remains unpopular and manymotorists are suspicious that it will end upbeing yet another tax on driving. We pro-pose, therefore, that projects should bebegun before road pricing is introduced.Travellers would then see clear evidence ofthe direct benefits of road user chargingand understand that a significant share offuture revenues was being spent on trans-port rather than absorbed by the Treasuryfor general expenditure. The maintenanceof public support, or at least acceptance,will be essential if the economic benefits ofwidespread road pricing are to be obtained.

The Private Finance Initiative has beenshown to be a suitable method of fundingimprovements and could build upon thesuccess of the design, build, finance andoperate road schemes undertaken in recentyears. As Chapter 3 explains, there isstrong evidence that, under the right con-tractual conditions, the PFI offers goodvalue for money in transport procurement.Other funding methods should not, how-ever, be precluded. In some projects, more

complex public private partnerships maybe appropriate, while the future introduc-tion of widespread pricing should bring amore commercial approach through theconstruction of privately owned and oper-ated toll roads. Wherever possible, howev-er, complex schemes with a high level ofpolitical intervention, such as the LondonUnderground PPP, should be avoided. Wealso recommend that government, espe-cially local authorities, makes greater use ofprivate sector expertise in PFI procurementto ensure better value for money and fewercontractual difficulties.

A strong preference for local, regional ornational pricing schemes has not been stat-ed in this report. This is because an evolu-tionary approach may be the best option.A “big-bang” introduction of a nationalsystem may introduce unnecessarily largepolitical and technological risks that willact as a deterrent to private sector involve-ment. It could also delay the implementa-tion of valuable smaller projects that cantarget the worst congestion bottlenecks.Adequate technology already exists todeploy our future revenue model in suchschemes. Given the severity of Britain’scongestion problems, a series of such proj-ects should be begun without delay – forexample, the introduction of active trafficmanagement at a number of traffichotspots.

While the deployment of future pricingrevenues promises to improve conditionsfor transport users, there are dangers.Decisions on how to spend the fundscould become overly politicised and influ-


enced by institutional bias in favour ofpublic transport. Exemptions could begranted to certain user classes, extra regen-eration funding sought, planning controlstightened and taxpayer subsidies increasedas car commuters are displaced on toalready overcrowded trains and buses – allsuch consequences could undermine thecost effectiveness of pricing. Investment ininfrastructure is likely to be economicallyefficient only if it retains a strong relation-ship to consumer demand. Thus, whereverfeasible, a significant share of road-userrevenues should be spent on road improve-ments, especially since a high proportionof car journeys cannot practically beundertaken by public transport. However,this is not to say that a share of toll receiptscannot be spent on bus and train projects– this may be particularly appropriate inthe largest conurbations where roadcapacity improvements are not cost effec-tive. Nevertheless, there is a strong argu-ment that public transport users shouldpay a larger share of the costs of their jour-neys to ensure that more accurate compar-isons can be made with priced roads whenboth investment and travel decisions aretaken.

Expenditure decisions are, of course,dependent on the institutional frameworkgoverning transport. As Chapter 4 explains,the continued central control of infrastruc-ture investment constitutes an additionallayer of unwelcome political risk for poten-tial private investors. The Government hasalready introduced an element of decentral-

isation by allowing local authorities toimplement charging schemes and spendrevenues how they wish. This report sug-gests decentralisation should go further.Localism – making local spending depend-ent on local revenues – can help to ensurepricing receipts are spent wisely. It wouldprovide a strong incentive for transportpolicies that boosted economic growthrather than satisfied special interests.

There is also a strong case that an inde-pendent body should govern the trunkroads and motorways before the introduc-tion of pricing on these routes. This meas-ure could create a stable environment forinvestment, in marked contrast to therapid shifts in policy and expenditure thathave characterised DfT and Treasury con-trol in recent times. Thus the introduc-tion of widespread road pricing offers aunique opportunity for wholesale reformof transport governance both at local andnational level. However, it should benoted that institutional change is not anecessary requirement for funding infra-structure improvements through thedeployment of private finance. Thismodel can still be implemented within thecurrent structure of governance, albeit lessefficiently.

The introduction of road pricing alsoraises fundamental questions about trans-port’s fiscal framework, as discussed inChapter 5. By internalising congestion andenvironmental costs, user-charging under-mines the case for imposing special taxeson motorists such as fuel duty and vehicleexcise duty. Yet if road pricing is intro-duced gradually, it will complicate the taxsituation: particularly busy parts of thenetwork may be priced, while the remain-der remains free at the point of use. At thesame time, the sheer scale of motoring tax-ation would make it difficult for theGovernment to find alternative sources ofrevenue or cuts in public expenditure. Thesituation is improved, however, by thedynamic economic benefits of road pric-


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“ Localism – making local spending dependent on local

revenues – can help to ensure pricing receipts are spent

wisely. It would provide a strong incentive for transport

policies that boosted economic growth rather than satis-

fied special interests”

ing, even if it is applied only to those loca-tions suffering persistent congestion prob-lems. The Treasury will receive a substan-tial tax boost from the increased economicgrowth resulting from reduced congestionand from capacity improvements resultingfrom increased infrastructure investment.There is therefore a compelling argumentthat increments in fuel duty and VEDshould be restrained if a number of charg-ing schemes were introduced in some ofthe busiest locations.

One argument for raising the fiscal bur-den is to meet the Government’s targets forUK carbon emissions. However, it hasbeen demonstrated that current road usertaxes far exceed even the very high esti-mates of the social costs of a ton of carboncontained within the Stern report. It alsoseems likely that the most cost-effectiveemissions reductions will be found in sec-tors other than transport. We therefore rec-ommend that in the medium term theGovernment seeks to equalise the taxationof different emissions sources. If policy-makers are intent on meeting their tar-gets, then this strategy will see that this isdone in the most economically efficientmanner.

The same overall strategy should beemployed to deal with the other environ-mental impacts of transport, such as noiseand local air pollution. As with climatechange, methodological difficulties make itextremely problematic to quantify envi-ronmental costs and apply an appropriatecharge on vehicle use. Further research isneeded to address the fundamental limita-tions of current valuation techniques andto enable external costs to be efficientlyinternalised by means other than arbitrarypoliticised tax rates. Nevertheless, the rela-tively small charge necessary to fund infra-structure upgrades means that even harsh-er fiscal conditions and/or high environ-mental charges are unlikely to underminethe viability of projects based on futurepricing receipts.

A greater danger may be political oppo-sition to private sector involvement ininfrastructure projects. The recent prob-lems of Metronet and the LondonUnderground PPP have made it evenmore difficult to promote private invest-ment in transport projects – to both pub-lic sector policymakers and potential pri-vate sector partners. However, the invest-ment model proposed in this report isvery different.

First, the kind of investment required toupgrade the infrastructure is unlikely to beforthcoming from the Treasury. Objectorsmust therefore demonstrate how theywould fund it by alternative means.Secondly, since investor returns will comefrom future tolls from users, unlike theLondon Underground PPP and manyother projects, the accusation cannot bemade that taxpayers’ money is being usedto fuel private profits or that public spend-ing is somehow being mortgaged. Thirdly,the inclusion of minimum revenue guar-antees within contracts should reassureinvestors on political risk. They would actas a very strong disincentive to officialswishing to undermine a scheme’s financialviability by introducing subsidised publictransport in competition, for example.Indeed, there are numerous ways of limit-ing private sector risk through contractand the UK is able to draw on a high levelof specialist expertise and experience ofPFI and PPP projects. Thus the future rev-enue-based projects advocated here can


Conclusions and recommendations

“ It has been demonstrated that current road user taxes

far exceed even the very high estimates of the social

costs of a ton of carbon contained within the Stern report

. . . We therefore recommend that in the medium term the

Government seeks to equalise the taxation of different

emissions sources”

avoid the difficulties that have beset asmall number of recent schemes.

The economic costs of congestion andinadequate infrastructure are too severe forthe Government to continue a policy ofprevarication and delay. The upgrading ofthe country’s transport networks cannot,and need not, wait another 20 or 30 years.Our proposal to finance improvementsprivately using future road pricing receiptspromises to quickly deliver substantialbenefits to travellers. We have shown thatthis model is both flexible and robust; it

can succeed within different fiscal andinstitutional frameworks and requires onlysmall additional road-user payments tohave a positive impact. The introductionof road pricing gives Britain a uniqueopportunity to obtain the high qualityinfrastructure that befits one of the world’swealthiest countries. It will take politicalcourage to implement but the benefits willbe many and enduring. With so muchroom for improvement and a robust andup-front solution available, it would befoolish to delay.


68

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