Gearing up for growth: how reforming roads policy can aid economic recovery

March 4, 2013

The efficiency of the transport sector has a significant impact on the wider economy. Only housing takes a larger share of household spending, while transport is also a major business cost. Accordingly, transport improvements have the potential to bring significant productivity gains. Faster and cheaper journeys enable greater economies of scale, more trade and increased labour mobility. Efficiency gains in transport are clearly a major driver of economic growth.

In this context, it is difficult to overestimate the economic damage done by the last government. Its approach ignored the fact that around 85 per cent of passenger travel within the UK is by private car, compared with 8 per cent by rail. Roads also carry 65 per cent of freight traffic, while rail only accounts for 9 per cent.

The economic importance of roads is therefore an order of magnitude greater than other modes. And despite the wishes of environmentalists, this is unlikely to change. Serving low-density suburbs and rural areas with frequent train services would be prohibitively expensive. Moreover, many journeys simply take too long on public transport, particularly if they involve multiple destinations. Immense time savings are achieved by the door-to-door convenience of cars, vans and lorries.

New Labour denied the economic logic behind the dominance of road transport. It focused investment on the loss-making rail network and launched a ‘war on the motorist’ designed to push people out of their cars. 

Across the UK road improvements were cancelled, capacity removed, bus and cycling lanes introduced, parking restricted, pavements widened and speed limits reduced. The number of traffic controls exploded.

Councils received central government grants to deter private motoring and incentivise more people to use other modes. Scant regard was given to the economic impact.

As a result Britain’s 35 million drivers faced longer journey times; firms suffered higher transport costs; productivity decreased. Taxpayers also faced growing bills for uneconomic tram lines and often poorly used bus and train services. For several years, rail subsidies exceeded fare revenues.

Such anti-business transport policies were ill-conceived in the boom times, but in the context of prolonged recession their continuation is scandalous. But unfortunately the coalition has so far adopted a similar approach.

New Labour’s transport bureaucracies, such as Transport for London, have remained intact, and little effort has been made to address their ideological hostility to private transport. They continue to deploy harmful measures that place questionable social and environmental objectives above the urgent need for increased economic efficiency.

At the same time, the government is squandering billions on uneconomic rail projects such as Crossrail and High Speed 2, the former costing £16 billion and the latter at least £33 billion. To put this into perspective, the total expenditure on just these two schemes could build approximately 1,500 miles of six-lane motorway, which would realistically carry more than twice the passenger and freight traffic using the entire rail network.

Indeed, the government’s own figures show that road improvements produce far higher economic returns than public transport projects. This is the case despite severe distortions to the transport market caused by discriminatory taxation. While most rail passengers are subsidised by taxpayers and pay no VAT, motorists and hauliers are burdened with the fuel duty supertax, road tax and VAT.

It is difficult to justify such differential treatment. Egalitarian arguments might apply to buses but certainly not to trains. Rail users are on average much wealthier than the general population. A high proportion of passengers are well-paid middle-class commuters from the home counties.

The environmental arguments don’t stack up either. By incentivising passengers to live further and further from their place of work, public transport subsidies encourage lifestyles that are likely to be more carbon-intensive overall. And some forms of public transport are actually less green than motoring. High speed trains use approximately twice as much energy per passenger mile as modern, fuel-efficient cars. Then, of course, there are all the underused bus and train services that use large vehicles to carry just a handful of passengers. The average bus service carries just 9 people.

It is indefensible, from both an economic and environmental perspective, that taxpayers are forced to subsidise bus and train services that provide such miniscule benefits. At the same time, there is no good rationale for continuing to spend taxpayers’ money on measures that deliberately lower the efficiency of the road network, needlessly heaping additional costs on motorists and businesses.

A shift in this approach could rapidly deliver major economic gains. The government should adopt a win-win policy that lowers the tax burden by cutting subsidies to uneconomic public transport services while at the same time freeing road users from unnecessary burdens.

A good start would be cutting off the flow of money to anti-car measures, encouraging local authorities to rip out most of their traffic controls (which create congestion while doing nothing to improve safety). Underused bus and cycle lanes – that waste vast amounts of valuable road space – should also be removed, together with bus and cycle priority measures that cause delays. Parking restrictions should be limited to the few areas where there is a genuine shortage of space.

The government should push through increases in speed limits as a matter of urgency. This would quickly translate into significant time savings, bringing a much need productivity boost to the economy, while making little difference to overall road safety.

But the policy needs to go much further than raising the limit to 80mph on small sections of the motorway network. Safe dual carriageways should be included, while some single carriageway locations may also be suitable for 70mph running. In addition, coach and bus limits should be increased to the same speed as cars.

There is a particularly strong economic case for raising limits for goods vehicles – a measure likely to improve safety by preventing the bunching of traffic and reducing overtaking. Perhaps heavier lorries could be permitted, including the multi-trailer road-trains commonplace in Canada and Australia.

Significant economic benefits would also come from a more rational approach to transport investment. Currently public transport projects with low returns are given priority over road schemes with high returns. This is a very poor use of scarce resources if growth is the key priority. A rational transport strategy would prioritise investments with the highest returns, without modal bias.

Looking further ahead, the ownership and management of transport infrastructure should gradually be moved from government to the private sector. Private investors have much stronger incentives to allocate their funds wisely and to provide services that respond to the needs of consumers. They cannot force taxpayers to cover their costs and guarantee the financial risks. While politicians and senior officials are swayed by special interest lobbying, the private sector focuses on commercial viability.

The mismanagement of Britain’s transport infrastructure is therefore a symptom of its politicisation. While policymakers can deliver substantial efficiency gains by applying economic logic to their decisions, the best long-term solution is to transfer control to the private sector.

September 2012, Crossbow

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Do we need to make further spending cuts?

March 4, 2013

The government has behaved recklessly. Assuming a strong recovery with high growth and rising tax revenues, it gambled that relatively modest spending cuts would be enough to fulfil the deficit reduction plan. The latest borrowing figures betray the magnitude of this miscalculation. It seems likely that the deficit will remain dangerously high, and there is a very real risk of the UK losing credibility in the bond markets.

Given the gravity of the situation, a combination of more substantial spending cuts and radical deregulation is the only realistic option for the Chancellor. The former would reduce the deficit directly while the latter would translate rapidly into higher growth. By contrast, a stimulus programme would only increase the risks facing the economy. Additional borrowing would put the deficit further into the danger zone and an even larger state would suffocate private-sector activity.

23 August, City AM

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Cut more, regulate less

March 4, 2013

Relying on growth was always going to be a risky strategy. Yet a healthy recovery, with robust GDP increases of 2%-plus, formed the core of the government’s deficit reduction plan. In this context, the combination of prolonged recession and yesterday’s higher-than-expected borrowing figures is a cause for deep concern. Indeed, there are several reasons to believe that the outlook for the UK economy is bleak and that growth will not be sufficient to play the key role in deficit reduction assumed by the government.

Firstly, the stimulus policies adopted after the onset of recession have hampered the necessary market adjustment process by which resources ‘malinvested’ during the artificial boom are reallocated. In other words, stimulus measures have cushioned the decline in the short term but at the expense of recovery in the longer term. Secondly, the expansion of the state under New Labour will have reduced the long-term growth rate of the economy by crowding out wealth-creating private sector activity. Finally, there are a number of more specific negative factors, including an ageing population (contributing to slowing labour force growth); regulatory pressure on the banking sector; the euro crisis; and the potentially disastrous impact of various green policies on business costs.

Since the government can no longer rely on growth (and the extra tax revenues that flow from it) to bring the deficit down and stimulus measures would be counterproductive, spending cuts are the only realistic policy option. And the likely scale of the tax shortfall resulting from the double-dip recession means that these cuts will have to be very substantial indeed. Many of these cuts can, however, be combined with reform to produce long-term economic benefits, as set out in the recent IEA study, Sharper Axes, Lower Taxes. In particular, spending reductions should be combined with deregulation. Reducing unnecessary burdens on business feeds directly into higher productivity. Strict planning controls, green energy policies and restrictive employment legislation are key restraints on business growth and should be urgent priorities for liberalisation.

22 August 2012, IEA Blog

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The government is off track with its uneconomic transport policy

March 4, 2013

Is electrifying branch lines in Wales a top priority for transport investment? It seems unlikely. But then again the government’s plans to invest £9.4bn in rail infrastructure show scant regard for economics. Cynical political calculation seems to be the driving force.

Regional interests have long complained that London receives a disproportionate share of transport spending. Now the provinces will get their pet projects: the north of England gains more services through the much-hyped Northern Hub; the East Midlands benefit from the electrification of the Midland Main Line; and so on.

But most of these schemes are difficult to justify from an economic perspective. In commercial terms they are loss-making and require substantial taxpayer support. Indeed, it seems likely that, as the number of train services increases, additional operating subsidies will be required. Taxpayers already pay around £5bn per year towards the railways.
The government has claimed that much of the cost will be recouped from higher passenger numbers and efficiency gains. This is doubtful. There are numerous examples of rail planners forecasting passenger growth that failed to materialise. And while efficiency gains are possible, they will be difficult to deliver given the complex artificial structure imposed on the industry.

Then there is the argument that rail improvements deliver wider regeneration benefits, boosting growth. This is also questionable. There is little evidence of economic resurgence in many of the provincial towns already enjoying fast rail links, such as Doncaster, Darlington or Wigan.

Worse still, new rail projects often become magnets for expensive taxpayer-funded regeneration schemes, promoted by local political elites. The government has spent billions along the route of High Speed 1, for example. Such regeneration efforts are counterproductive. If favoured areas improve, others tend to decline, due to the redistribution of taxpayers’ money.

The railways are a classic example of a politically distorted market. There is huge variation in the level of subsidy to different parts of the network. London commuter routes generally receive little funding from government, in marked contrast to rural provincial routes that are almost entirely dependent on handouts. This system means passengers on more profitable lines (including in and around London) may end up cross-subsidising those on loss-making ones. At the same time, those choosing to drive instead of travelling by train face very high rates of taxation through the imposition of both VAT and fuel duty – a clear instance of unfair competition.

Many of these distortions are deliberate. New Labour pursued policies to force people out of their cars and on to the trains. A combination of strict planning policies and regeneration subsidies was used to push economic activity into congested city centres and around public transport hubs. At the same time, measures were introduced that artificially raised the costs of commuting by car and road investment was slashed. As peak-time trains became more and more crowded, the pressure increased for investment in new capacity, even though demand had been artificially inflated by various government interventions.

In this context, the government should be extremely cautious about investing in rail. Rather than risking billions of pounds of taxpayers’ money, it should focus on creating a level playing field in transport so that investment can be based on genuine patterns of demand.

Phasing out taxpayer subsidies to uneconomic lines should be a key priority. Another important step would be to introduce more flexibility for train operators to tackle overcrowding without the need for expensive new track infrastructure, for example by providing more frequent services and extra rolling stock. Further action is also needed on planning controls. Businesses should be free to operate in uncongested, out-of-town locations, even if this means fewer people using public transport.

A radically different policy on investment is needed. Ideally it should be left to the private sector, which would only undertake rail schemes that were commercially viable. However, in the absence of a larger role for private investors, the government should take a far more rigorous economic approach to new infrastructure.

17 July 2012, City AM

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We should not renationalise the railways

March 4, 2013

Privatisation is often blamed for the shortcomings of Britain’s railways. This is unfair. Genuine privatisation never happened. Nominal ownership may have been transferred to the private sector, but the government remains firmly in control.

Renationalisation would only exacerbate this problem. Politicians and bureaucrats would still make the key decisions on rail – such as today’s announcement that £9.4 billion is to be invested in various loss-making projects. But there would be even less attention given to commercial considerations and even fewer opportunities for entrepreneurship and innovation in the industry.

A far better option would be to move towards proper privatisation. Taxpayer subsidies could be phased out; loss-making lines could be closed; and investment could be restricted to those projects that were profitable. And perhaps most importantly, full privatisation would allow the merger of track and train, ending the disastrous fragmentation of the railways.

Fragmentation is not a market outcome – politicians and officials imposed an artificial structure on the industry. Historically, railways have nearly always been vertically integrated. But the government, influenced by EU policies on open access, has largely ignored this lesson. Different firms now manage the infrastructure, run the trains and own the rolling stock. There is also a complex system of regulatory oversight. This complexity has contributed to an explosion of costs. Following privatisation, subsidies from taxpayers have tripled to about £5 billion a year.

A complex structure is not the only problem facing the sector. The government also makes it extremely difficult for private companies to deliver efficiency gains. It actually became harder to close loss-making lines after privatisation, while service levels are largely determined politically, through the franchising system, rather than on commercial grounds.

The government also maintains price controls, including on key London commuter routes. Private firms are therefore severely limited in their ability to tackle congestion through more flexible fare levels. But they still get blamed for the resulting overcrowding. Worse still, the congestion creates pressure for investment in new capacity – placing a still greater burden on taxpayers.

While private involvement has brought some improvements, for example to marketing, the scope for entrepreneurship remains extremely limited. Indeed, when firms have tried to develop new privately-funded rail infrastructure, they have faced obstacle after obstacle from transport bureaucracies unwilling to cede control.

Rail investment is currently determined in a process not too dissimilar to Soviet central planning, and directed largely to meet political objectives rather than economic ones. As we see today, huge sums are spent on loss-making projects that make no commercial sense, with costs loaded on to taxpayers.

Perhaps the fundamental problem is the strength of the rail lobby, bolstered in some areas by the disproportionate political influence of wealthy rail commuters. Concentrated special interests have been able to extract huge amounts from taxpayers by capturing policy. Renationalisation is unlikely to break the cosy relationship between the rail lobby and policymakers; it will simply lead to more of the same.

16 July 2012, Huffington Post UK

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Privatisation and pricing are the keys to an efficient roads sector

March 4, 2013

Economic crises often lead to big policy changes. Heavily indebted governments seek new funding sources and growth becomes a top priority.

The current slowdown is already having a large impact on transport policy. Cuts in public spending have led to the cancellation of many schemes. Yet investment in transport is desperately needed to bolster economic recovery.

The British government appears to have found a solution. The Prime Minister recently announced plans for the private sector to build and operate new trunk roads and motorways. Under one option being considered, the construction of new capacity would be funded by tolls paid by drivers, while existing roads would be leased by private firms who would receive ‘shadow tolls’ paid by the government. The Treasury would save hundreds of millions per year by no longer funding new road schemes and could also receive a short-term windfall by selling off leases for existing routes.

But the plans fall a long way short of full privatisation. The schemes will be subject to very stringent government supervision, probably along the lines of heavily regulated utility industries such as water. Sadly, this means the entrepreneurship and innovation that makes the genuine private sector so dynamic will be suffocated. The benefits will be a tiny fraction of the gains that a more radical programme of road privatisation would bring. And these benefits are far beyond those that would be achieved by introducing a government-run road pricing system.

Perhaps the most noticeable impact would be a reduction in congestion, which is estimated to cost the UK economy about £20 billion per annum. Private road owners could introduce variable pricing to make sure their customers avoided delays. They would also have strong incentives to make the most efficient use of existing infrastructure. Lower off-peak tolls would help spread traffic more evenly and help ensure that drivers with a low value of time did not impose expensive delays on those with a high value of time.

It is instructive to contrast the incentives facing private road owners with those of governments implementing road pricing schemes. Politicians and bureaucrats would face strong pressure from special interests to exempt favoured groups (for example, black cabs are exempt from the London Congestion Charge). Toll rates would be set for political reasons rather than to maximise profits by providing a good service to drivers. This can be seen on public transport, where fare levels are often determined with little or no regard for congestion levels. Tolls could also be used as an additional form of taxation, for example to fund bus or tram schemes. Redistribution to other transport modes was a key element of both the London Congestion Charge and the proposed Manchester road-pricing scheme.

In all likelihood, government controlled road pricing would end up costing the economy dearly. It would almost certainly be imposed on top of existing taxes such as fuel duty. Existing distortions to the transport market would therefore be magnified. In practical terms this would mean more peak-time commuters being forced onto already overcrowded public transport links, with their regulated fares and massive state subsidies. Political pressure would grow for more state spending on expensive train, tram and bus infrastructure.

A further danger comes from administration costs. Whereas private business have strong incentives to minimise running costs in order to maximise profits, government officials are incentivised to increase bureaucracy to raise their budgets and expand their remit. It is quite conceivable that some kind of complex road pricing system could end up being as expensive and disastrous as other big government IT projects. Admin costs could easily destroy a large part of the benefits of road pricing.

Perhaps the biggest danger of all, however, is that road pricing would become a key part of the government’s green agenda. It could be used as a command and control mechanism to drive motorists off the road to help meet ambitious climate change targets. The economic costs – reduced labour mobility, less competition and specialisation, smaller economies of scale – could well be subsumed by environmentalist objectives.

In this context, it is understandable that many motorists and road-user groups are vociferously opposed to the introduction of pricing. The key to the successful implementation of road pricing is therefore to take the politics out – which in practice means transferring control from government to private owners and local communities. Moreover, the dynamism of the entrepreneurial private sector would quickly deliver benefits to motorists, helping to address their doubts about pricing.

The largest benefits would come from a more commercial approach to investment. Profit-seeking entrepreneurs would tend to build new roads in areas of high demand. They would also consider factors such as construction costs and the possibility of additional returns from land development along the route. In this way, a private road market would tailor new routes to the preferences of customers. This contrasts markedly with state provision of infrastructure.

Governments tend to put politics first and economics second. Decisions on new roads tend to be made for political reasons rather than to maximise returns – although cost-benefit analyses do at least weed out some of the worst schemes. Environmental groups might succeed in stopping a scheme even when its economic benefits are substantial. Local councils might lobby for a new link to promote regeneration in their area. One of the worst examples of politicisation is the Humber Bridge, which opened in 1981. This loss-making project was the direct result of a blatant election bribe by the Minister of Transport during the 1966 Hull North by-election.

As a result of politicised decision making, patterns of road provision may bear little relation to patterns of consumer demand. There may be gaping holes in the network, such as the absence of a direct motorway link between Manchester and Sheffield. At the same time, many rural links are underused with vast overcapacity while urban routes – particularly in the South-East of England – are overcrowded.

Private ownership can bring much needed economic rationality to road investment. The introduction of pricing would provide valuable information for road entrepreneurs about where expanding capacity would be most profitable. And private road-builders would be far less susceptible than politicians and bureaucrats to interest groups looking for special privileges at taxpayers’ expense.

Then there is the issue of innovation. Under state control, roads are subject to one-size-fits-all regulations that stifle new ideas and hamper efficiency gains. With private roads, owners could be free to devise rules that were appropriate for both their customers and their infrastructure.

On safe stretches of motorway, speed limits could be increased, delivering significant time savings. Some of the largest benefits would accrue to low-income travellers using coaches, which are currently limited to 100 kph within the European Union. Removing that limit could deliver a revolution in low-cost travel.

Weight restrictions on goods vehicles are another area that could benefit from the flexibility of private road markets. Huge productivity gains would be possible by raising the maximum weight and indeed by allowing the multi-trailer ‘road trains’ seen in countries such as Australia and Canada. Private road owners would, of course, have to trade-off the benefits with the costs associated with increased wear and tear, the impact on other road customers and so on.

Although the UK government is focusing on motorways and trunk roads, it should not neglect the benefits of privatising local roads. In some parts of the world, including Sweden, many local roads are owned and maintained by private road associations, whose members are residents and businesses. In many developing countries such as Brazil and South Africa, large private communities administer roads and other infrastructure, effectively taking on the role of local government.

Private ownership means road infrastructure can be far more responsive to local needs. For example, there is evidence that Swedish road associations are far more efficient at maintaining roads than governments. Since local residents own the infrastructure, faults such as potholes are reported quickly and repaired – before more serious damage takes place that would be far more expensive to fix.

In areas plagued by high crime rates and anti-social behaviour, private ownership enables residents to restrict access to their streets. Indeed, in some African cities, locals have even gone as far as illegally taking control of streets by erecting barriers without the permission of local authorities. This is viewed by residents as one of the most effective ways of securing their neighbourhoods.
 
Communities can also determine rules on parking and speed limits that suit their particular circumstances. For example, residents of a street containing young familes might decide to impose a very low speed limit for safety reasons. 

The privatisation of local roads therefore seems very much in tune with UK plans to hand back power to communities, whether through the localism or ‘Big Society’ agendas. The British government will therefore miss a golden opportunity if it places severe restrictions on private road owners. Instead, it should be freeing the road sector from deadening state control. Once unleashed, entrepreneurial creativity and local knowledge will deliver enormous social and economic gains.

20 May 2012, InfraNews

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London 2012: don’t forget the economic costs

March 4, 2013

The hype is building as London prepares to host “the greatest show on earth”. The government has urged everyone to come together to support the games, while dissenting views have been deemed unacceptable and unpatriotic. But no amount of political pressure can hide the fact that the 2012 Olympics are an economic failure. The claimed benefits are largely bogus, while the costs to taxpayers are immense.

Indeed, even East Londoners — supposedly major beneficiaries of the largesse — are often sceptical about the games. Residents have put up with years of disruption, with closed roads, traffic jams, dirt and noise. Pretty Victorian terraces have been overshadowed, first by construction cranes, now by the concrete blocks of the Olympic Village.

Urban planning always reflects the ideologies of the time. The architecture of London 2012 would not look too out of place on the outskirts of Moscow or Bucharest. This is not an environment that grew organically through voluntary transactions and freedom of choice; it is the embodiment of brutal, authoritarian central planning.

Major sporting events have often been associated with coercion and the threat of violence. It is estimated that 700,000 people were forced from their homes in the lead up to the 1988 Seoul Olympics; Beijing 2008 saw as many as 1.5 million relocated; the recent World Cup in South Africa was scarred by mass evictions of poor residents and informal businesses; riot police and bulldozers are clearing people off land in Rio de Janeiro for the 2016 Games.

The forcible removal of businesses and residents from London’s Olympic Park is seldom mentioned. An estimated 350 firms, employing several thousand workers, were thrown out. Some did not survive the move. Others suffered massive losses after relocating to less convenient or more costly sites.

Mass compulsory purchase of land also denied owners the profits from redevelopment. Had private owners been granted permission to redevelop their industrial sites as residential or office space, the land would have been worth perhaps ten times what they received in compensation. To add insult to injury, firms had to wait several years to obtain money owed to them.

The destruction of local businesses is just one way in which the Olympics are damaging the economy. Indeed, the frequent claims in the media that the games will provide an economic boost are blatant propaganda that defy economic logic and a wealth of empirical evidence on the impact of major sporting events.

Any perceived benefits must be set against the huge cost of the event. Projected at £2.4 billion at the bidding stage, the final government funding package will exceed £9 billion. Overall expenditure — including all the security, transport costs and so on — is likely to be significantly higher.

To put it into perspective, the London 2012 budget would be enough to reduce the basic rate of income tax by 2p in the pound (for one year) or to take hundred of thousands of low-paid workers out of income tax altogether. Inevitably the games are diverting resources from far more productive uses. Investment and consumption in the wider economy will decline as a result. This also casts serious doubt on job creation claims. For every job created by the games, it is likely that more than one job is lost in the wider economy as resources are redistributed. And unlike alternative investments, the event won’t contribute to increased living standards by raising productivity. In fact, it will destroy wealth, particularly given the long-term costs of maintaining the Olympic Park.

Even the notion that the games will encourage tourism is questionable. Tourists who would otherwise have visited Britain will avoid doing so this year, fearful of overcrowding, disruption and inflated prices. The theatres of London’s West End are particularly worried about the impact. Evidence from similar major sporting events suggests overall visitor numbers in 2012 may be disappointing.

Then there are the arguments that the games will bring regeneration to east London, which according to some indicators, remains one of the poorest parts of the UK. Undoubtedly transferring billions of pounds to this area will provide a short-term economic boost. And all that money is also likely to encourage additional private investment in the locality.

Nevertheless, it is important to recognise that plans for the development of the Stratford Rail Lands – now the major part of the Olympic Park – long pre-date the bid for the games. As early as the mid-1990s proposals were in the pipeline for the development of a commercial centre to rival Canary Wharf, based around the proposed station on the Channel Tunnel Rail Link. Indeed, it could be argued that the allocation of large amounts of land to sport has prevented more valuable uses such as shops, offices and apartments.

Moreover, public funding means resources are being sucked out of other areas to pay for it. This means regeneration in Stratford will lead to degeneration elsewhere – and that includes other parts of east London.

Areas can be regenerated but people can’t. Stratford may improve as higher socio-economic groups move in — as happened with earlier gentrifications in Notting Hill and Islington. But higher rents mean it will no longer be as attractive to the low-skilled immigrants that have populated the district in recent decades. Local councils will also have strong incentives to house problem households some distance from the Olympic Park. They may even succeed in relocating existing council tenants to exploit the profits from redevelopment.

As Stratford rises up, other districts will go downhill as poorer groups are displaced. This is already happening. Barking, four miles to the east, is probably the most shocking example. Previously respectable working class areas on the fringes of Essex are gradually being overwhelmed by the crime and squalor of the inner city, partly as a result of gentrification elsewhere and partly due to unstoppable demographic trends.

Government is playing a disingenuous role here. Significant sums are being spent on so-called regeneration projects in the Thames Gateway. But many of these initiatives are bringing decline. In contrast to Stratford, a high proportion of the new housing constructed has been for social tenants – in effect, a means of dumping families on benefits in outer east London.

There are advantages for our political elites of course. Displacing the poor to the peripheral parts of cities helps keep social problems out of sight. And highly visible renewal schemes such as the Olympic Park can create the illusion of prosperity, even though their high costs are, in reality, speeding up Britain’s rapid relative decline.

If the money wasted on London 2012 had been invested productively or used to cut taxes, it could have made a significant contribution to a much-needed recovery. As it is, the games will be a lasting burden on a near-bankrupt country. Unfortunately it is now too late to cancel the Olympics, but there is at least an opportunity to learn lessons. This economic failure should never be repeated. Never again should jobs and living standards be sacrificed for the pride of sportsmen and the vanity of politicians.

17 May 2012, London Society Journal

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Road privatisation can deliver huge benefits – but only if government gets out of the way

March 4, 2013

The British government is finally recognising the strong link between transport infrastructure and economic growth. The Budget set out plans for a national road strategy while earlier this week the Prime Minister announced that motorways and trunk roads could be operated by the private sector.

The new proposals represent a significant shift in policy. Since the early 1990s public transport has been prioritised by successive governments. Huge subsidies have been given to buses, trams and trains. Expenditure on roads has focused on deterring car use through traffic calming, new controls and priority lanes for buses and bicycles. But despite these measures, private cars still carry 85% of passenger traffic. In most areas public transport carries a tiny minority of travellers (with the important exception of travel to and from central London).

In practice public transport simply does not have the capability to move more than a small fraction of passengers and goods around the UK. Economic activity is too dispersed and buses and trains don’t offer the flexibility and convenience of cars and lorries. Moreover, public transport requires massive taxpayer subsidies – totalling over £10 billion per annum. It is inconceivable that a heavily indebted government could increase this burden much further.

Improvements to the road network offer far better value for money and need not cost the taxpayer a penny. Unlike many rail projects (High Speed 2 is a typical example), road schemes can be self-financing with construction and operating costs funded by tolls. This makes roads an ideal investment for the private sector. Without the need for government subsidies, the political risks are much smaller than with public transport. David Cameron is therefore right to see the huge potential for greater private sector involvement in the core road network.

The benefits of privatisation are potentially enormous. Private operators would depend on toll revenues for their profits and they would have very strong incentives to provide a good service to customers. Congestion – which currently costs the UK economy about £20 billion per year – could be eliminated by flexible pricing, with off-peak users offered bargain rates. Safety could be improved dramatically as operators sought to avoid costly delays from accidents. Perhaps most importantly, investment in new capacity would reflect consumer demand rather than political priorities. In marked contrast to the current system, new roads would be built where they were needed most.

Privatisation would also bring entrepreneurship and innovation to the road network. This is how really big efficiency gains become possible. For example, private operators could increase weight and size limits on goods vehicles. Imagine the productivity gains in the distribution sector if each lorry could carry say 50% more cargo. Speed limits could also be increased where safe to do so, leading to massive time savings and lower business costs. All manner of improvements would be possible as entrepreneurs sought to maximise the returns from their infrastructure.

But none of these benefits will be possible if government regulates the roads too tightly. Private firms need flexibility if they are to innovate. And this is where the current plans fall short.

The Prime Minister talked of private companies leasing roads instead of owning them outright. And he said that pricing would only be permitted on new capacity; it would be prohibited on existing infrastructure. Operators would also be subject to strict rules set by a regulator, in a similar framework to the water industry. There won’t be much scope for entrepreneurship and innovation under such arrangements. The benefits from such a limited form of privatisation are likely to be small.

There is also a danger that private operators will be subject to the kind of complex contractual arrangements seen on Britain’s railways. Rail subsidies have roughly trebled in real terms since privatisation, largely as a result of high ‘transaction costs’ resulting from the artificial fragmentation of the industry.

The government must be careful not to repeat this mistake on the roads. In the longer term, it should also move to remove distortions to transport markets by moderating fuel duty and phasing out subsidies. Road privatisation can deliver huge economic benefits – but only if government gets out of the way.

22 March 2012, Reuters

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