Wednesday, 20 June 2012

UK government announces feasibility study into highway privatisation options

In March 2012, British Prime Minister David Cameron announced that the Government is interested in greater private investment in England's national highway network.  Arising from that more recently has been an announcement by the Secretary of State for Transport, Justine Greening on both the Government's response to an earlier review it commissioned about the Highways Agency and the commissioning of a feasibility study into options for attracting greater private sector participation in the highways sector.

Bear in mind all of this is for England, not the United Kingdom as a whole, as responsibility for highways in Wales, Scotland and Northern Ireland was transferred to the devolved governments in those "countries" (as they are called, although there are not sovereign states).

So what bearing does this have on road pricing?

For now, not much.

The Cook Review of the Highways Agency, commissioned in late 2010 as part of the drive for greater cost efficiency by the Government, recommended a series of measures to improve the performance, efficiency, strategic direction and accountability of the organisation, including steps to commercialise its operations.

The Government response to the Cook Review of the Highways Agency is here and largely embraces measures that can be implemented in the shorter term, including having a strategic view of the future of the network, such as considering how tolling may be a viable option to help fund some improvements.

However, the more significant governance reform options proposed by Cook have been deferred in favour of the wider scoped review that is now underway.  This feasibility study on road reform is focused on how the highway network should be governed, the role of the private sector and new sources of finance, and whether it can more resemble a regulated utility, such as water, electricity or gas (not the railways!).  The terms of reference are here.

Of interest to those in the road pricing field, it makes it clear that government policy is not to allow tolls to be introduced on existing roads that are part of the strategic network (the Highways Agency network).   However, tolls can be introduced on new capacity.  New capacity can mean both new roads, and new lanes (which can mean a new crossing parallel to an existing bridge or tunnel, or new lanes on a highway).  

This would appear to limit scope somewhat, but the Government is interested in options for how it treats existing motoring taxation and how that can be leveraged to encourage private investment.  In short, if the private sector is to buy, lease or otherwise invest in England's highways, and cannot toll existing capacity, it would need to be assured of payments from the state in the form of shadow tolls, availability payments and the like.

It is thought that instead of relying on government budgeting processes and conventional contracts, that perhaps some ringfencing or hypothecation of a proportion of existing motoring taxes would provide a more direct link between use of the road network and payment for the capital consumed in using the road network.  In the UK, motor vehicles currently pay two main taxes - Vehicle Excise Duty (effectively an ownership tax, levied according to both vehicle size and emission class) and fuel excise duty.   Taxation receipts from both are several times in excess of the total expenditure on roads, so to apportion a set proportion of revenue from either or both sources to such payments would largely be an accounting exercise.  The proposed future heavy vehicle vignette could be included in the mix. 

The UK Treasury vehemently opposes any form of hypothecation of any taxes, in part because it restricts the flexibility of government to do as it wishes with future revenues, in part because of fear it will generate an avalanche of claims for new hypothecated taxes, but also because of experience in the 1930s when a motor tax fund became awash with revenues the government was unwilling to spend on roads (suggesting that either the money should have been spent on roads, or the tax was too high).   Overseas examples of hypothecation range from the highly successful (New Zealand) to the questionable (Japan).

The debate on this needs to be had, because the primary reason there are motoring taxes is to serve as a proxy for direct charging of road users.  If highways were privately owned or even publicly owned utilities operating like electricity, telecommunications or water companies, they would charge their customers directly.   Taxing ownership of vehicles and fuel could then only be justified to account for environmental externalities, which would increase transparency around justification for the levels of such taxes.

I see this as being a precursor to the inevitable debate in the medium term about the sustainability of fuel tax when up against ever increasing fuel efficiency of vehicles and those vehicles not powered by petrol or diesel.  Ultimately, revenue levels and equity issues will dictate the need to consider a shift to road pricing in some form.

What does this all mean?

1.   In the short term, not much.  The Highways Agency will be undertaking some minor reforms and scoping out where it thinks tolls could be used to fund new capacity.  Forthcoming route strategies should help inform where the Government sees the need for new roads, new lanes and other improvements.

2.   The feasibility study into road reform is being undertaken by the Treasury and Department for Transport.  Hopefully it will look into models introduced in other countries, such as Austria, South Africa and advanced in New Zealand (but thwarted by politics).  I expect it to support a commercialised Highways Agency with more autonomy, but it would take considerable bureaucratic altruism to wish to relinquish Departmental oversight of the Highways Agency or Treasury's rock solid opposition to hypothecated motoring taxes.

3.   Some major new highway projects are likely to be offered to the private sector as finance-build-own-operate schemes, a few with a toll component to it (obvious examples are the A14 upgrades and the next crossing parallel to the Dartford Crossings). 

4.   Some existing stretches of motorway may be leased to the private sector to have long term responsibility for, primarily focusing on maintenance and relatively minor upgrades.

5.    Vehicle Excise Duty may be partly hypothecated, but only if the Prime Minister and Chancellor of the Exchequer have the courage to reject Treasury's opposition and take advice on how to make it work.

6.    There may be one or two new toll roads on the English highway network in the next few years, but pressure will come from private investors to consider ways to swap existing motoring taxes for tolls.

This also leaves open the theoretical possibility of toll lanes/HOT lanes that are for new capacity, although my view is that the scope for this is almost zero, because for toll lanes to be viable, existing capacity has to be regularly and heavily congested.

Of course, none of this affects the rights of local authorities to introduce congestion charging schemes on their own networks, as they are permitted to do so by legislation that was enabled a decade or so ago by the previous government.   I see there being a similar scope to get local authorities to commercialise their highway networks and do very much the same thing, particularly in major urban conurbations such as London and Manchester.

1 comment:

  1. Hi Scott. You raise some very interesting points in this post.

    Best wishes, Alex.