The benefits of motorway privatisation

When governments try to manage infrastructure the results are usually disastrous. Wasteful investment, bloated bureaucracies and political interference are the frequent consequences of state control.

Government owned motorways are no exception. In most countries they are cursed with chronic congestion and delays. Typically there is overcrowding in some locations and overcapacity in others. The supply of road space is almost completely divorced from consumer demand. This is because motorway networks are supplied using methods that are thinly disguised versions of Soviet central planning. Politicians and senior officials decide where new routes will be built with little regard for the needs of road users.

Typically decisions are heavily influenced by special interests. Local or regional governments, together with large corporations, might argue that they need a new motorway to boost economic development in their local area. They will lobby fiercely for funding from national governments or the European Union. Unfortunately this means that the preferences of consumers and taxpayers are neglected and motorways get built in the wrong places.

As well as building motorways in the wrong places, governments also charge the wrong prices. Toll levels are decided by politicians and bureaucrats rather than based on consumer demand. Indeed, in many countries there are no direct charges whatsoever. Motorways are free at the point of use. There is no price mechanism to allocate road space efficiently and unsurprisingly this leads to chronic inter-urban congestion in high-demand locations, as seen for example in the UK and the Netherlands.

The problems associated with state control make a strong case for privatisation. Private owners do not set prices for political reasons; they set them to maximise revenues by attracting customers. And since drivers – particularly those whose time is valuable – do not want to be delayed by congestion, private motorway owners set toll rates at levels that ensure the free flow of traffic. They also vary tolls to make maximum use of capacity. This has an important additional benefit. By maximising the use of existing infrastructure, privatisation reduces the need to construct expensive new routes.

Toll revenues also provide motorway owners with valuable information about where to invest. If prices are high due to strong demand, it may be worthwhile adding new capacity. However, if prices are low this may be a sign that building new infrastructure would not be profitable. In other words, privatisation restores the link between supply and demand, making motorway investment responsive to the needs of road-users.

Privatisation also opens the door to innovation and entrepreneurship on the motorways. Private owners could, for example, decide to increase speed limits to reduce journey times. Or perhaps they might allow heavier trucks to use their routes. They could also provide a range of additional services for their customers or even decide to make money from developing land alongside interchanges with shops, offices and housing.

By allowing entrepreneurs to experiment and discover new ways of serving their customers, motorway privatisation has the potential to inject much needed dynamism into the transport sector, bringing very substantial efficiency gains. These benefits depend, however, on politicians and state officials renouncing control.

If governments transfer motorways to the private sector but heavily regulate the new owners then most of the benefits will be lost. For example, the regulation of prices could jeopardise attempts to tackle congestion, while speed and weight restrictions could limit the scope for productivity gains.

Many previous privatisation programmes have been undermined by the retention of tight political control. Privatised electricity markets across Europe have been rigged by governments to promote renewable energy, while privatised railways have been forced to operate under complex regulatory structures that have seen costs explode.

These mistakes must be avoided when motorways are transferred to the private sector. The new private owners must be free to experiment and innovate without being stifled by the dead hand of the state.

The rewards from genuine privatisation will be enormous – lower congestion, massive efficiency gains and new investment where it’s most needed. And there is a further benefit that will be particularly welcomed by politicians: the prospect of huge flotation receipts from the sale of motorways to private investors. In an era when public debt is reaching dangerous levels, more and more countries are likely to take advantage of this potential windfall.

September 2012, SSE

Privatisation and pricing are the keys to an efficient roads sector

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