Tomorrow's WayManaging roads in free society

ByJohn Hibbs and Gabriel Roth

Adam Smith InstituteLondon

1992

CONTENTS

1. Introduction

2. Improving highway administration and ownership

3. Charging for highway use and investing for improvement

4. Private provision of roads

5. The role of government

6. Recommendations for action: short term

7. Recommendations for action: long term

8. Conclusions and summary

BIBLIOGRAPHICAL INFORMATION

Published in the UK in 1992 by ASI (Research) Ltd, 23 Great Smith Street,London SW1P 3BL (071-2224995).

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Good roads ... by diminishing the expense of carriage, put the remote parts of thecountry more nearly upon a level with those in the neighbourhood of the town.They are upon that account the greatest of all improvements. They encourage thecultivation of remote ... They are advantageous to the town, by breaking downthe monopoly of the country in its neighbourhood. They are advantageous evento the part of the country. Though they introduce some rival commodities intothe old market, they open many new markets to its produce. . Monopoly, besidesis a great enemy to good management.

Adam SmithWealth of Nations (Book 1, Chapter XI, Part 1)

ABOUT THE AUTHORS

JOHN HIBBS is Emeritus Professor of Transport Management at BirminghamPolytechnic Business School, and has specialized in the economics andorganization of road passenger transport since he was Rees Jeffreys ResearchStudent at the LSE in 1954-55. His monographs Transport for Passengers (1963,2nd. Edition) People and Transport (1973) and Transport without Politics...?(1982) played a significant part in the deregulation and privatization of theBritish bus and coach industries in 1980 and 1985. In the latter work heemphasized the need for a market in the road infrastructure as a sine qua non fora market in transport operation. He is a member of the Chartered Institute ofTransport working party on road-use pricing.

GABRIEL ROTH is a consulting civil engineer and transport economist who hasspecialized in the economics of highways since 1956 when, as Rees JeffreysFellow, he studied the economic benefits of highway improvement at the UKRoad Research Laboratory (now the Transport and Road Research Laboratory).In 1962-63 he served on the UK Ministry of Transport panel on road pricing, andin 1967 moved to Washington DC to serve in the World Bank, which he left in1986 on the publication of his World Bank book The Private Provision of PublicServices in Developing Countries. His earlier publications include A Self-Financing Road System (1966), Paying for Roads: The Economics of TrafficCongestion (1967), and (with Eamonn Butler) Private Road Ahead: Ways ofProviding Better Roads Sooner (1982).

ACKNOWLEDGEMENTSThe authors gladly acknowledge the comments of David Starkie on an earlierdraft of - the paper, while stressing that its arguments and conclusions areentirely their own.

Thanks are due to the Reason Foundation of Santa Monica, California, forpermission to use material previously published in Policy Insight No 125(November 1990), 'Perestroika for US Highways'.

1. INTRODUCTION

The present system and its problems

There are 356,518 kilometres of surfaced roads in Great Britain, amounting to asubstantial area of land which stands at no value in any books, and is thus quiteoutside the Property market.

The country has been well served by its highways since the turnpike systemdeveloped them in the 18th century, making them the envy of Europe andAmerica. The past thirty years have seen the construction of motorways and theimprovement of trunk roads, on a scale comparable to the building of the mainline railways, and over much the same length of time. Yet the system as we nowhave it is beset with major problems.

* Congestion now affects the arterial routes as much as it does the use of urbanand suburban roads. The volume of traffic on motorways has more than doubledover the ten years to 1989; on other interurban roads it has increased by morethan two-thirds; and on urban roads - where congestion was already most severe- it has gone up by a quarter. The waste of resources must make thedispassionate observer despair; and yet it is tolerated by commuters crawlingthrough rush-hour queues, and by the freight transport and distributionindustry, where firms simply pass on to their customers the costs of motorwayovercrowding.

* Road transport is widely seen as anti-social, despite the advances in personalliberty conferred by the private car on people of all social levels, and the fact thatthe British industrial economy is ill-suited to the carriage of goods by rail. Theproblem of lorries and cars shattering the peace of quiet towns and villages hasbeen reinforced in recent years by wider environmental concerns about the effectof vehicle emissions on the global environment. The resultant controversy isfurther fuelled by poor management in the rail-freight sector and by years ofreduced investment in commuter rail services, leaving the impression thatgovernment transport policy is ‘pro road’. Yet in the absence of any marketdiscipline, no objective measurement of what 'ought' to be the optimum use offunds is available.

* Politicization makes transport investment even less rational. As it is, all fundsfor investment in the infrastructure, whether road or rail, are allocated by thepolitical process, so that everyone concerned has a strong incentive to exaggeratetheir 'needs' in order to get bigger slices of the available resource. This must tendto magnify the problem as it is presented, in the press and by the variousinterested parties, but the fact remains that there is a wide public perception, no

doubt supported by readers in the light of their own experience, that conditionson the British highway system are, in a word, unacceptable.

Four approaches to improvement

Those who advocate improvements usually take one or more of the followingpositions:

* raise more money, just to keep the present system going - 'we know whatneeds to be done, just give us more funding';

* improve the administration of the system - change the organization and/orthe staff;

* use better charging systems and investment criteria - apply to the roads theprinciples of pricing and investment that are used to allocate scarce resourceselsewhere in the economy;

* change the ownership structure - allow the private sector to provide highways.

This paper will explore the latter three approaches. It will investigate thepotential for market-style solutions and suggest changes inadministra1ion, financing and ownership so as to increase the productivity of theexisting highway system and enable it to develop in response to the demands ofits customers - the road users.

The first approach- that of seeking new sources of public funds to keep theexisting system going -- will not be addressed, because the highway problem isessentially institutional, and institutional problems cannot be solved simply bythrowing money at them. Further, in periods of pressure on government funds,the potential for raising new investment money must be limited.

2. IMPROVING HIGHWAY ADMINISTRATION ANDOWNERSHIP

The present situation

The division of responsibility for the British road system is shown in Tables 1and 2. A substantial proportion of local authority expenditure comes in practiceout of central government grants, and technical standards are laid down byministerial circular, so that the extent of local freedom of decision-making islimited.

Table 1. Public road length, 1 April 1989

Responsibility and type of road KilometresThe national system 15,618The local system –

Classified, principal 35,126Classified, non-principal 110,230Unclassified 195,544

The total system 356,518

Source: Transport Statistics Great Britain 1979-1989, HMSO, September 1990.Table 2.48.

Notes: The national system consists of the network of motorways and trunk roads that are theresponsibility of the Secretary of State for Transport (in England) and the Secretaries of State forScotland and Wales. The local system consists of roads that are the responsibility of localauthorities. Classified principal roads, which include local authority motorways, are roads ofurban or regional strategic importance. Non-principal roads (subdivided into 'B' and 'C' classes -though 'C' roads are not designated as such on maps and signposts) are those which distributetraffic to urban and rural localities. Unclassified roads are side roads in towns and local accessroads in rural areas.

Conventional wisdom has seen to it that the provision of road services has beenunquestioningly assumed to be a proper function for government, whethercentral or local. Private sector companies have been involved only by way ofbidding for construction or maintenance and repair contracts. In recent yearsthere have been examples where developers have agreed to build lengths ofroad, usually quite short, as a condition for the grant of planning consent, andthey have been involved in constructing minor roads in housing projects sincethe 1920s at least; but the idea of mixed funding has not been an acceptableproposition in the UK.

Only with the announcement, in May 1989, that private contractors would beinvited to build new highways (on an alignments previously determined by theDepartment of Transport) has there been a serious shift in government policy -

and even then, the idea that prospective investors might identify demand for ahighway, and back their judgment by offering to build and run it, is yet to beimplemented.

Possibilities for improvement

For any facility to be operated in an orderly and efficient manner, its ownershiphas to be assigned unequivocally to a clearly defined entity, be it public orprivate. The owner of a facility has an obligation to maintain it to relevantstandards, and a right to charge for its use, possibly in accordance with anagreed scale. Ownership also carries with it the right to sell or lease the facilityor, if there are no buyers, the right to close it down or abandon it. This hasalways been recognised in the case of public transport systems, whether road-orrail, with the further proviso that a tax-funded authority may contract for an'unwanted' facility to be continued by way of subsidy. But in the case of arailway, abandonment may include the track as well as the service, whereas forroad transport, generally including urban tramways, the road itself invariablyremains - for, as we have seen, it is in no meaningful situation as to its‘ownership'.

In the case of highways, then, the important objective is to ensure that eachhighway, or segment of highway, has one owner, and one only, responsible forits maintenance and operation, and clear funding sources (such as axle-weightcharges, congestion charges, a share of users' taxation, or even of local propertytaxes). It might be that central government should initially remain in ownershipof the motorways and trunk roads (the 'national' system), with the remainingloads being vested in the appropriate organ of local government. Bridge andtunnel authorities would similarly retain their property rights. But whatever thestarting arrangements might be, the ability to transfer ownership, especially ofrevenue-earning assets, would lead to far-reaching changes in the system, as lesssuitable owners were replaced by more suitable ones.

At the same time that the ownership of public roads is clarified, and all loads areunder the management of clearly identified entities, it would be desirable toimprove the accounting and administration systems of these road entities toensure that their performance and costs are made known to road users and otherinterested parties. To enable comparisons to be made, there might be a case forintroducing standard accounting and reporting formats so that the performanceof road entities could be monitored and compared with one another. In additionto financial reports of the entities' incomes and expenditures, information shouldbe published on such key factors as pavement condition, accident statistics,traffic speeds and volumes on major roads. In brief, this information would keeproad managers and others aware of how their systems perform, and at what cost.Where appropriate, performance reports should enable comparisons to be madewith railways.

3. CHARGING FOR HIGHWAY USE AND INVESTING FORIMPROVEMENT

A brief history of the Road Fund

At no time in the history of England has Parliament succeeded in discoveringand establishing a sound system of financing the construction and maintenanceof roads and bridges. An attempt to set up such a system was made in 1909, andit is worthy of mention here, because the lessons from it are still valid.

Lloyd George's 'People's Budget' of 1909 provided for a vehicle tax, based onengine power, and a fuel tax, which was initially 3d per gallon. The revenue fromthese sources was intended to be used for improving the road system and totransfer the costs of roads from the rates (local property taxes) to the actual roadusers. While some road improvement was done, no relief whatsoever wasprovided for the rates. A ‘Road Improvement Fund' (which later became the'Road Fund') was set up, as a sub-account in the Treasury. According to SirEdgar Harper, economist and Chief Valuer to the Inland Revenue, the purpose ofthe Fund was to provide 'machinery by which the owners of motor vehicles incombination and under State guidance are enabled to spend money on roads fortheir mutual benefits'. [1]

That radical solution to the problem of road finance was a total failure. Thesemiautonomous Road Board, which had been set up to administer the RoadFund, was wound up in 1919 and the responsibility was transferred to thenewly-formed Ministry of Transport (which for many years was markedly biasedin favour.of railways). Nothing was done with the increasing balance in theFund, until in 1926 the government repudiated the principle of linking roadtaxation to road finance, and raided the Road Fund to increase the generalrevenue of the state. Ten years later the road user taxes were diverted directly tothe Exchequer, and the Road Fund became a mere convention in thegovernment's accounts; it was eventually wound up in 1955. , Yet the successorto the 'car tax' of 1909 is still often called the 'Road Fund tax'; such is the tenacityof an idea.

Reasons for failure

The reasons for the failure of the original Road Fund were:

* First, both Parliament and the Treasury were hostile to the idea of having nocontrol over monies raised by taxation;

* Second, members of the Road Board, who were appointed by the Treasury andwere not accountable to road users, had no clear mandate for action, and allowedthe Fund balances to accumulate unspent;

* Third, as the funds were raised on a national basis, and were to be spentnationwide, there were linkages between payments by specific road-users andthe expenditures made on their behalf; and

* Fourth, unlike the toll roads and canals of the eighteenth century, the railwaysand ports of the nineteenth, there was no private sector entrepreneurship in theselection of investments, in the maintenance of assets or in the pricing of theiruse. The Road Fund system was an attempt to improve a governmentaloperation with the private sector providing the funding.

Britain's roads have remained largely a governmental operation ever since. Roadprovision is driven not by commercial markets but by politics and, as may beexpected, road users get poor value for their money. Table 2 shows the latestavailable data on road expenditures compared to payments by road users.

Table 2. Public expenditure on roads and payments by road users, 1989/90(£million)

EXPENDITURE INCOMEResponsible Capital Current Vehicle taxes Petrol taxes

National 1,573 1343,000 9,700

Local 904 1,913

£4,525 £12,700

Notes: 'Capital' includes new construction, improvements, reconstruction, new road surface,maintenance of bridges and other road structures, and some VAT later reclaimed. 'Current'includes minor repairs, routine and winter maintenance.Source: Transport Statistics Grftlt Britain 19791989, HMSO, September 1990. Table1.17.

The British fiscal system makes it difficult if not impossible to identify the extentto which these funds come from national or local taxation, but a substantialproportion of current as well as most capital expenditure comes by way of grantallocations by central government.

That there are powerful interests opposed to the use of dedicated funds forhighway construction and maintenance does not in any way weaken the case fora radical reform of the existing system. Richard Marsh, a former British Ministerof Transport, suggested the creation of a corporation to be called ‘British Roads'[2] and some of the implications of this idea will be examined later in this report.What is plain is that the present system is a mess. In Britain, too, highway fundshave been diverted into the subsidy of public transport. In the city of Sheffield itwas expected that total-subsidy (‘fares-free') bus services would so reduce caruse as to make equivalent savings on road maintenance: bus travel rose as itbecame cheaper, but road expenditure did not fall so as to balance the budget.

(The ‘fares-free' situation was never reached, but the underlying assumption wasshown to be unfounded).

But it is not the purpose of this paper to argue that total expenditures on roadsshould equal the amounts paid in road-use taxes, or that government has noright to tax road users. The case we wish to make is that the payments for roadprovision should be separated from the taxation of road users and that,irrespective of Parliament's prerogatives to tax, mechanisms should bedeveloped to enable road users to efficiently ‘spend money on roads for theirmutual benefits.' What is needed is a clear accounting for the sources of fundsused to support expenditures on roads...'.[3]

PRESENT DEFICIENCIES

Average pricing

An efficient system of highway charging would require users to pay the coststhat they themselves cause. But present systems of paying for roads are far fromefficient, since users are not required to pay the costs that arise from their ownchoices. Instead of individuals paying the costs arising out of their own use ofhighways, total costs are divided among groups of road users, with individualspaying through road taxes a weighted average of the total costs incurred. In thisway, there is only a weak link between those who impose heavy costs and thosewho have to pay the resulting bills. The point was put as follows by Thomas BDeen, currently Executive Director of the US Transportation Research Board:

When all users of both high-cost and low-cost facilities pay the same tax, the result isequivalent to the situation of an electric company which decided to eliminate individualelectric meters and to bill customers not on the basis of individual consumption, but bymeasuring total power usage and charging each consumer an equal part of the total bill.Not only is this inequitable; more importantly, it will eliminate incentive for conservingelectricity. Many new houses would be heated with electricity, since an individual's costwould not be increased by a decision to install electric heating. Demand for power wouldsoar, and new investment would be needed for new generating facilities. There would beno real basis for determining the proportion of total resources that should be devoted topower generation. [4]

Under the present system there are of course some differences betweenpayments made by individuals; owners of trucks pay more than owners of cars,and those who consume large amounts of fuel pay more than those who uselittle. But these differences are too small to influence the behaviour of those whoimpose particularly heavy costs on the highways, especially in the categories of:(a) owners of heavy-axle trucks, and (b) users of congested roads.

Profitless investment

The application of 'average pricing', whereby the total costs of highways aredecided politically and then divided 'fairly' among users, logically leads to theresult that highways should make neither profits nor losses. How then are roadinvestment decisions made?

In the absence of market criteria of profit and loss, these decisions are made bycivil servants in the light of advice on highway 'needs' received from professionalstaff. The assessment of highways 'needs' in all countries today is based onmechanistic investment planning processes that are essentially the same as thoseused with disastrous results in the Soviet Union and Third World countries.Decisions on where to invest highway monies are not taken in response to theneeds of road users as expressed by their willingness to pay, but as a result ofadministrative allocations often governed by political priorities.

In the UK, as elsewhere, traffic forecasting is used to determine investmentrequirements, depending in its turn upon sophisticated model-buildingtechniques. The process has come under severe criticism from users, tradeassociations, and pressure groups, especially since the notorious example of theLondon orbital road (the M25), which was grossly overcrowded within weeks ofits completion. To the layman, it might seem that the forecasters' models fail torecognize the highway version of Parkinson's Law - that traffic will expand to fillthe roads available. This law would seem to hold in the absence of any form ofpoint-of-use pricing.

Even when there is no question of impropriety, investment decisions made onthe basis of official assessment of needs cannot adequately reflect the preferencesof road users. Thus, writes Alan Pisarski, 'the process of investment in the roadsystem can become independent of demand... In a process not governed byeconomic criteria, the roles of financial aid from other levels of government canbe very seductive and deleterious, reducing the effective costs of money and,thereby, distorting investment decisions'. [5]

POSSIBILITIES FOR IMPROVEMENT

Vehicles with heavy axles

In their recent book, Road Work: A New Highway Pricing and Investment Policy,authors Kenneth Small, Clifford Winston, and Carol Evans re-examine the costsimposed on US roads by heavy axle loads and by users of congested roads. [6]They conclude that the recovery of these costs from the individuals in thosegroups would raise sufficient funds not only to maintain all heavily used roadsin good condition but also to finance the costs of expansion to the extent desiredby the users.

It is well known that the damage caused by vehicles to highway pavements is afunction of axle weight. The American Association of State Highway Officials(AASHO - the predecessor of the present American Association of StateHighway and Transportation Officials - AASHTO) evaluated the effects of axleloadings on pavement life in the 1940s and 1950s. While the precise relationshipbetween damage and axle weight varies with circumstances, the researchindicates that damage increases approximately in proportion to the fourth powerof axle weight. This 'fourth power rule' means that a doubling of a vehicle's axleweight can increase the damage it inflicts on the highway by 2 x 2 x 2 x 2 =16times. Thus, an 80,000 lb truck with its weight equally distributed over five axlesdoes as much damage to a highway pavement as about 10,000 automobiles withtwo 2,000lb axle loads (5/2 x 8 x 8 x 8 x 8= 10,240).

A rational charging system for heavy vehicles would take account of this, inorder to encourage operators to reduce road damage by equipping their vehicleswith more axles. For example, a two-axle vehicle weighing 24 tons would causeover three times as much damage as a similar vehicle equipped with three axles.New Zealand does in fact tax its heavy vehicles in a manner that encourageshauliers to minimize axle weights (rather than vehicle weights) but the UK doesnot.

A policy of taxing heavy vehicles in rough proportion to damage caused,coupled with a road-strengthening programme, would produce substantialbenefits to the economy without imposing corresponding costs on most hauliers,who could benefit from reduced fuel taxes and registration fees. Some (forexample, those using two-axle vehicles) could become worse off, but even theirloss could be mitigated by giving them time to replace their equipment or byaiding them financially to do so.

Vehicles causing congestion

The direct costs imposed by users of congested roads are perceived to be theslowing down of other users. The sole user of a motorway can safely travel on itat a high speed, but congested conditions can bring all traffic to a stop. Thiscongestion can only occur because the road is almost freely open to users tocrowd onto it and degrade the quality of its service.

In this sense congestion can be seen as arising out of the absence of pricingwhich, in a market economy, serves the purpose of reducing demand andincreasing supply.

The levels of tolls required to maximize the output of a road system can be foundonly by trial and error, but payments in the range of £1-£5 per day would belikely in most cities. Calculations made for the San Francisco Bay area suggestedthat, under the conditions prevailing in 1972, 'optimal tolls charged toexpressway users... would range from below 1 cent per vehicle-mile for off-peakperiods up to rush-hour tolls of 1-7 cents on rural roads, 2-9 cents on suburbanand 6-35 cents on downtown roads'. In Singapore a fee equivalent of £1.50 hasabolished city-centre congestion in the morning and evening peak periods. It islevied by requiring those who drive cars into the central area in the morning andafternoon peaks to purchase in advance daily or monthly windshield stickers,which are observed by police at the entrances to the restricted zone.

To be efficient and effective, charges for the use of congested roads should beapplied selectively, with the prices charged reflecting congestion levels ondifferent road links, and at different times of the day, as is done in the case oftelephone charges. For this reason alone, collection at conventional toll boothswould be impracticable. It would also be sub-optimal because an efficientcharging system should enable charges to be levied without vehicles having tostop. Electronic charging systems can perform these tasks, and one, utilizingautomatic vehicle identification (AVI), is already in successful operation in theUnited States and elsewhere.

Some cities round the world already charge for the use of congested roads, evenwithout AVI. Singapore's area licensing system has already been mentioned. Itwas introduced in 1975 and was almost identical to one proposed for Caracas in1972 in a World Bank study. Caracas did not accept the proposal; Singapore didand has been operating it without a hitch ever since, and is now planning toupgrade to electronic AVI. Since 1986 the Norwegian city of Bergen has beenlevying a charge of 5 Krone (about 44p) for cars entering the business district; therevenues are used for road improvement. Oslo has implemented an 18-gate 'tollring' around the central core of the city. Each toll booth has one or two AVI lanes.Congestion pricing has also been considered in the Netherlands, but has beenpostponed. The United Kingdom Chartered Institute of Transport recommendedin 1990 the early introduction of AVI in London. 18]

Automatic Vehicle Identification (AVI)

AVI methods depend on vehicles being equipped with electronic identifiers,known as transponders, which reflect unique identification signals when passingthrough radio beams emitted by 'readers'. This equipment is routinely used toidentify aircraft, railcars, and containers, and has been tested on vehicles formore than twenty years. In the 1970s, for example, Los Angeles buses wereequipped with transponders for management control purposes. In the sameperiod the New York Port Authority was testing transponders with a view tousing them for non-stop toll collection. In the 1980s, around 3,000 vehicles in

Hong Kong were equipped with transponders. In all these systems thetransponders were fixed securely to the underside of the vehicles, and thereaders were located under the surface of the highway.

Since 1989, some 14,000 users of the Crescent City Connection 12-lane bridge inNew Orleans have had the option of paying their tolls without having to stop,thanks to AVI equipment designed, manufactured and operated by the AmtechCorporation of Dallas, Texas. Unlike the systems tested earlier, the Amtechtransponders, which are called Tolltags, are credit-card sized portable unitsdisplayed on the windshields of users' vehicles. The readers are on overheadgantries. Tolltag holders make deposits to their Amtech accounts - $40 being atypical payment - and their accounts are drawn down as the Tolltags signal thevehicles' passage along the tolled facility. When the amounts deposited arealmost drawn down, Tolltag holders are invited to deposit the next installment.As Tolltags reduce toll collection costs, New Orleans offers users a 30 per centdiscount on the regular toll rate.

Following the successful introduction of their system in New Orleans, Amtechtook on a more ambitious assignment in their hometown of Dallas: offeringTolltags to users of the 62 toll-collection points of the 17 mile Dallas NorthTollway. As the Tollway Authority does not provide Tolltags without charge, the21,000 or so Tolltag users in Dallas have to pay $2 per month rental, and a fivecent toll surcharge to cover the costs of the equipment. Despite this, over 24,000Tolltags were issued in Dallas in the first ten months of the system's operation,and over 36,000 transactions a day are recorded there. Eighty per cent of usersarrange for the transfer to the toll authority's account to be made automaticallyby credit card, so that once their accounts are set up, Tolltag holders need donothing to keep them open, except to pay their credit card bills. The AmtechTolltags have performed well, with no misreadings reported.

An AVI system named Fastoll is to be introduced in the Washington DC area, onthe DuIles Toll Road, in 1992. As in the case of the Dallas North Tollway, use ofthe system will be voluntary, but a high response will be encouraged because theVirginia Department of Transportation, which operates the Dulles Toll Road,expects to make substantial savings in operating costs from automated non-stoptoll collection. Therefore, Fastoll users will be offered dedicated lanes tomaximize time savings and are not to be charged for the use of transponders.

Other electronic systems have been proposed. In Cambridge, a system isproposed that would work like phonecards which lose value as they are used up,without being linked ,to particular individuals or automobiles. This is not theplace to go further into the technica1details of automatic toll collection. Suffice tosay that both theory and practice indicate that the collection of payment for roaduse without toll plazas is today as technically feasible as paying for telephoneuse without coin-operated call-boxes.

Dedicated road funds

Less radical than toll systems, but still an improvement on the present situation,is the idea of a dedicated road fund. Thirty-one US states already have dedicatedhighway funds, and as we have already seen, there once was such a fund in theUnited Kingdom.

However, both fairness and efficiency require that such funds do notdiscriminate against the private sector, so that privately provided publichighways can get their fair share of revenues generated by their traffic. The ideaof paying private road providers in proportion to the traffic generated on theirroads was discussed in Britain in the 1980s; these payments were dubbed'shadow tolls', as the road providers were to receive funds without the traffichaving to make additional payments. [9]

Even if congestion and axle-load taxes were introduced, other revenue sourceswould still be necessary to cover the costs of highway management - costs suchas policing, signposting and administration. These costs could conveniently becovered by a modest fuel tax. A fuel tax might also be used to cover the costs ofmaintaining underutilized rural roads. Dedicated road funds that do notdiscriminate against privately provided roads might provide the bestmechanisms for funnelling payments from road users to road providers - publicor private - in areas in which congestion, and heavy axle loadings do not posesignificant problems. A modem Road Fund in the UK might work along thefollowing lines.

Re-establishing the Road Fund

Purpose of Road Funds. The purpose of the Fund(s) would be exactly thatexpressed by Sir Edgar Harper seventy years ago as we have already noted,namely, 'to provide machinery by which the owners of motor vehicles incombination are enabled to spend money on roads for their mutual benefits'.

How the Fund might work. Road users would pay into a U.K. national fund (or,preferably, into separate funds for England, Scotland, Wales and NorthernIreland) by means of special charges on fuel, and (for heavy lorries) amountsequivalent to the damage caused by their axles, as proposed above. The revenuesthus raised would be distributed, motorway by motorway, county by county,city by city, in proportion to traffic, due regard being paid to the proportions of'heavies'. The revenues would not be paid to a government department butlodged in private banks under the care of trustees appointed by representativesof road uses. The trustees would have one function only: To organize nationaltraffic counts and distribute the funds in accordance with the agreed formulae.

Payments into the Fund(s). The total amounts paid into the Fund by road userswould initially equal the total governmental expenditures on roads, so that thechange-over - from the present to the new system would be 'fiscally neutral' - thecontribution of road users to general revenues would remain the same. However,once the new system gets going, only the amounts payable into general revenues

would be determined by Parliament. The amounts payable into the Road Fund(s)would be determined by associations of road users, in the light of proposedexpenditures. The involvement of road users in the determination of road usercharges is well-established in New Zealand: 'User groups - trucking, agriculture,bus and car associations - are consulted when charges are set and are quick tomobilize when attempts are made to undertake inessential expenditures, or todivert funds'. [10]

Payments out of the Fund(s). On the basis of traffic counts, the trustees wouldpay out the funds to the organizations owning the roads, in proportion to traffic.Thus, each road would have an earning power, and the earnings would accrue toits owner, which might be a motorway, a city, a county or a private company.This arrangement would not necessarily involve the privatization of the roads, asthe vast majority of road owners in Britain would be public-sector entities - thelocal authorities. But their roads would become revenue-generating assets. Somecould be organized as self-financing publicly-owned 'roads utilities'; some mightbecome suitable for privatization.

Options of the road owners. While the Road Fund trustees would have nooption but to disburse the funds they collect, the road owners would havealternative options within a general requirement to cater efficiently to the needsof road users. They could, for example, as is the case with existing highwayauthorities, raise or reduce maintenance and/or safety standards; they couldbuild new roads; they could close down or sell off roads; they could (as wasintended in the original road fund) reduce local rates; they could (which existinglocal authorities cannot easily do) vote themselves large salaries. The extent ofthe freedoms to be enjoyed by road-owning organizations is a question thatneeds further attention.

Payment by property owners

In the case of lightly used roads, such as are to be found in many rural areas,there may not be enough traffic to generate the funds required for maintenance.[11] In some cases, payments by property owners, either through voluntaryassociations or through property taxes, could be the best way to keep such roadsopen. In others, specific subsidies would be appropriate.

Vehicles causing pollution

This paper cannot deal with the problems caused by pollution-emitting vehiclesbecause so little is known about the magnitude of the costs involved. But it isclear that pollution charges, equal to the costs caused by pollutants, would be amuch more efficient solution to this problem than Europe-wide regulations ofthe kind being discussed. To the extent that pollution problems are serious incertain places at certain times, policies should be designed to discourage the useof polluting vehicles in those specific areas, rather than to prohibit them in ruraland urban areas alike.

Donald Stedman, a chemistry professor at the University of Denver, hasdeveloped a device for assessing pollution charges, by measuring the carbonmonoxide emissions of vehicles as they pass a sensor. This device can enableroad authorities to detect precisely which vehicles pollute. A programme toidentify the worst polluters and deal with them could cost £25 per ton of carbonmonoxide removed. (12]

Investment criteria

If road use were to be charged for on a market basis - that is, users being requiredto pay for costs imposed, including congestion and pollution costs - theinvestment criterion of profitability could be used as a yardstick for investmentdecisions. This would have two obvious advantages: (a) investments made onthis basis could be compared with other revenue-earning ones, includingespecially railways, and (b) such investments could be carried out by both thepublic and private sectors. By definition, use of the profitability criterion wouldresult in a self-financing highway system, independent of general revenues. Self-financing is now taken for granted in the electricity, gas and telephone services.

Under conditions of congestion, the price of road use would be determined bycongestion levels, in the same way that office rents are determined by occupancylevels. Additional investment would increase highway capacity, and hencereduce congestion and the appropriate congestion charges. If highways weresupplied by competitive markets, the equilibrium prices on different road linkswould be those that generated the funds required to operate the highway systemand increase its capacity to the point at which congestion was reduced to levelsacceptable to users.

It may be objected that this statement is merely utopian, and plainly we shall notsee the introduction of competitive road prices for a long time to come. But theinstallation of property rights in highways, even though such rights remained inpublic ownership for the time being, would enable a start to be made at assessingequilibrium prices, and improving the criteria for new investment.

The road not taken

The idea of charging for the use of congested roads is not new. Sir Alan Waltersdiscussed the subject in 1954 [13], while Milton Friedman and Daniel Boorstinwere working on a similar proposal at the same time, apparently withoutknowledge of the work being done here. [14] In 1959 William Vickrey ofColumbia University proposed electronic road pricing in evidence to acommittee of the US Congress. [15] Following a Ministry of Transport report in1964 [16], the subject received intense investigation in the UK, with the RoadResearch Laboratory (now the Transport and Road Research Laboratory)assessing the contemporary technical devices and modeling their likely effects ontraffic movement. Hong Kong tested the equipment in the early 1980s andconcluded that there were no technical problems in identifying road users incongested areas and in billing them at their homes or workplaces on a regularbasis.

Proposals for market-based solutions to the urban transportation crisis weredeveloped in 1990 for the San Francisco Bay Area by the Bay Area EconomicForum (BAEF), a partnership of the Association of Bay Area Governments andthe Bay Area Council. Taking as their starting point the need to reduce trafficlevels in order to improve air quality, BAEF published a two-part report whichexamined some of the economic, technical, and public policy ramifications of (a)requiring road users to pay the costs they impose and (b) linking the payments tospecific corridor improvements. [17]

Nevertheless, the idea of charging for the use of congested roads is stillhypersensitive, and many politicians avoid the subject studiously. One reason forthis might be that many advocates of 'road pricing' discuss the notion only as away of restricting demand: the other effect of price - that of stimulating thesupply - is forgotten. Road users facing new charges can hardly be blamed forseeing themselves as net losers from such a process. Those who depend on roaduse will of course fear that they are threatened with exploitation by thegovernment, as the monopoly provider of road space today. Yet it is significantthat the Bergen scheme, whose revenues are dedicated to road improvements,was found acceptable by motorists.

But if the public resists the charging of economic road prices by a publicmonopoly, would it accept such a system if operated by competitive privatesuppliers? This question cannot even be considered without exploring thepossibilities of the private provision of highways.

4. PRIVATE PROVISION OF ROADS

WORLDWIDE EXPERIENCE OF PRIVATE PROVISION

Historical examples

In the beginning of the nineteenth century, hundreds of turnpike companiesoperated in the UK and US. In Great Britain there were in 1830 1,116,tumpiketrusts maintaining 22,000 miles of toll roads, which accounted for about one-fifthof the total road system. [18] These companies were financed almost entirely byprivate capital and received tolls from road users. The British example wasfollowed by toll road companies in the US; in the eastern states alone turnpikecompanies built and maintained 10,000 miles of road. Relative to the size of theeconomy at that time, such investments in highways, were very large; in theircomparative magnitude exceeded the post-World War II public sectorinvestments in the Interstate Highway System. [19]

However, road development in the United Kingdom, as in the US, wasinterrupted by the rise of the railways, which put most turnpikes out of business.There was some development of private toll roads in the twentieth century, butthey, in their turn, were superseded by public-sector roadbuilding - though evenas late as 1933 there were in the United States over 200 private companiesoperating toll bridges. [20] The demise of the turnpikes is often used to illustratethe weakness of the private provision of public services, but the contrary is thecase: unlike public sector operations, private operations cease when demandbecomes inadequate. [21]

In Britain, the Turnpike Trusts had discriminated in their tolls against the use of ,mechanical traction, and the development of the steam railway seems to havebeen hastened by this. In consequence the traffic deserted them, and enablinglegislation was passed to facilitate their winding up. They did not, however,actually own any roads, being responsible only for improvement (includingsome re-alignment) and subsequent maintenance. They were unpopular, sincetheir tolls conflicted with the ancient definition of the highway as a 'right ofpassage', and this attitude remains a barrier to radical reform in the UnitedKingdom to the present day. [22]

Examples in modern Europe

In twentieth-century Europe, governments have been willing to rely on tollhighways, many of which had significant private-sector inputs.

In 1989 the United Kingdom reaffirmed its intention to involve the private sectorin the provision of toll roads.

In 1986 the government awarded a contract to Dartford River Crossing Ltd. (acompany jointly owned by Trafalgar House Plc and three financial institutions)to construct a £225 million toll river crossing across the Thames at Dartford. The1.7 mile crossing includes a 1,476-foot-cable-stayed centre-span bridge, thelongest in Europe. The crossing is to be transferred to the government free ofdebt as soon as sufficient tolls have been collected.

In Italy, the toll motorway network was established in 1924 with thecommissioning of - the 30-mile Milan Lakes route, probably the first tollmotorway in the world. By 1990 the Italian toll network was more than 3,600miles long. These toll highways are operated by 22 concessionaires, the largest ofwhich is the Autostrade Company, in which the state has a holding, and which isresponsible for the management of over 1,600 miles of toll motorways. TheItalian concession companies work closely with the government; they benefitfrom government guarantees and, in return, are obligated to give the highwaysto the state at the end of the concession periods.

Similarly, postwar France has relied on a system of private concessionaires toprovide over 4,000 miles of toll expressways. In 1982, the government'harmonized' the toll rates with cross-subsidies to ensure that the financiallystronger concessions supported the weaker ones.

Public/private partnerships for the provision of toll roads are also to be found inSpain, where over 1,200 miles of expressway were built by privateconcessionaires. The government decides on the routes and specifications of theexpressways and invites companies to construct and operate them for periodsnot exceeding fifty years. The government gave certain guarantees to the privateinvestors, and had to take over three of the eleven concessions when revenuesfailed to cover costs. [23]

In Sweden, parliament has already passed a bill enabling new privately ownedtoll roads and bridges to be built, and consideration is being given to a proposalby the private sector to replace the existing Svindersund bridge between Swedenand Norway. A consortium including road builders has offered to completeStockholm's orbital expressway with a privately funded link (which wouldinclude six miles in tunnel) to connect Stockholm to the island of Nacka, and thusreduce congestion in the capital city.

Developments in the United StatesUntil recently, US development of private sector roads was confined to suburbanareas, in conjunction with property development, and to private commercialestates. The suburban roads are generally taken over by local authorities uponcompletion but many of them, including facilities owned and operated byshopping and commercial centres, are privately managed and maintained. In thearea of St Louis (Missouri), over 400 streets are owned and operated byassociations of local property owners.

However, a number of new toll projects are now under way, marking the rebirthof private tollways here.

In the vicinity of Phoenix, Arizona, landowners wishing to enhance the value oftheir property had a 28-mile public highway built at their own expense to localauthority specification. The construction was financed by loans taken out on thesecurity of the land adjacent to the highway. As the landowners expected to berepaid by the increase in the value of their land, this privately provided highwayis toll-free.

In 1988 The Bridge Company, a private partnership, completed construction of aprivate toll-bridge between Fargo (North Dakota) and Moorhead (Minnesota)after voters rejected a proposal for public funding. Ownership of the bridge,which cost $1.9 million, will revert to the two cities after the bonds are paid off.

In July 1990, Virginia gave final state approval for a 15-mile highway, which theToll Road Corporation of Virginia is planning to build, own and operate in thevicinity of Washington DC, from Dulles Airport to the town of Leesburg. Thehighway is to be privately financed, all the costs are to be recovered from tolls. Itis to meet expected demand in a rapidly developing area and has the backing ofthe local authorities and of the state governor. The state approval process tookalmost four years, but construction is now expected to be completed in 1993.

In the Summer of 1989 the California legislature passed a bill (AB 680) thatenabled the California Department of Transportation (Caltrans) to developpartnerships with private entities to design, build, and operate toll highwaysunder 35 year leases on state-owned rights-of-way. Caltrans promptlyestablished a Department of Privatisation charged with the task of arranging fourdemonstration projects, of which one has to be in northern California and one inthe south. Ten consortia submitted proposals, and the four winning teams wereselected in September 1990. Implementation was delayed in 1991 byenvironmental and other political opponents.

Private roads elsewhere

To relieve congestion on the existing airport road, a private-sector group is tobegin construction in Bangkok of an expressway over the existing highway,which is already often operating at full capacity. The overhead highway is to betoll-financed, and the existing one to remain toll-free.

Private projects also are underway in Malaysia, where a consortium is building amajor , north-south tollway for $770 million. The Malaysian government alsorequested proposals for a second highway/bridge link to Singapore.

In Latin America, the Salinas government in Mexico announced plans in 1989 forat least 2,500 miles of private tollways, with the first two projects already underway. In September 1989, a private consortium began constructing a 164-miletollway from Cuemavaca to Acapulco, and the first private toll bridge is underconstruction linking Juarez with EI Paso, Texas, across the Rio Grande. Improvedhighway connections to the Texas border are also being built between Montereyand Laredo, to enable traffic from Monterey to by-pass the delays at NuevoLaredo. A consortium of five Monterey companies has raised $200 million for the

project, and they received a franchise to operate the roads for eight years - orlonger if needed - to earn a 15 per cent annual return.

Types of private involvement

Looking at the various examples from around the world shows that the privatesector is flexible and can serve in a variety of ways to improve highway services,for example:

* Unencumbered ownership. In this role the private sector takes fullresponsibility for the project and all financial risks and is entitled to all therewards. While common in the competitive sectors of the economy,unencumbered ownership is rare in the provision of highways because of thepublic-sector interest in regulating tolls and other aspects of highway projects.

* Franchises. In this role the public sector contracts with a private entity toprovide and operate a highway. Under ‘Build-Operate-Transfer' agreements,private investors raise the money and build highways at their own risk, operatethem for an agreed period, and then transfer ownership of the highway to thepublic. California has decided to use the B-T-O ('Build-Transfer-Operate') varianton-this theme and will take formal title to privately built highways before leasingthem out for private operation, in order to relieve private operators of the needto insure against public liability claims.

* Management contracts. In these cases the Public sector undertakes the initialinvestment and contracts with the private sector to manage its operation. It iscommon in the United States for highway maintenance to be contracted on thisproblem in urban areas.

It is relevant to note that railway-building in the nineteenth century wassometimes undertaken in this way. The French government, for example,divided the country up into areas and invited franchisees to tender to build andoperate on 99-year leases.

Obstacles to private provision

In view of the failure of governments the world over to meet the needs of roadusers, why are not more highways provided by the private sector? Roads are not'public goods' in the sense that those who do not pay for their use cannot beexcluded. On the contrary, payments for road use can be heavy and difficult toavoid. Six obstacles to the private provision of roads are often cited: difficulty ingetting necessary rights-of-way; difficulty in road providers getting paid;competition from public-sector 'free' roads; uncertainty about legal liability;concern about equity and the fear that poor people will be unable to travel; andthe potential for private owners to extract monopoly rents on their routes.

Getting the right-of-way

The private provision of roads is often dismissed as a serious possibility on theground that only by the use of the powers of eminent domain - the power ofgovernment to appropriate private property for public use - can the requiredrights-of-way be assembled. This problem, through serious, may be addressed inat least three ways:

(a) There are numerous cases in which rights-of-way suitable for highways arereadily available in existing transport corridors. The Dulles Toll Road in theWashington DC area, for example, was built alongside the existing DullesAirport Access Road. Underutilized railways can also provide opportunities fornew highways.

(b) The options available to the private sector to purchase land are oftenunderestimated. For one thing, the private sector - unlike many governments -can carry out quick deals with landowners without having to go through time-consuming statutory procedures that, inter alia, limit the amounts payable.Furthermore, private entrepreneurs often have the choice of more than one route.Pipeline builders, for example, regularly consider alternative routes, negotiatewith different groups of owners, and settle with the first group that comes upwith an acceptable arrangement.

(c) Finally, there.is the possibility of government using its powers of compulsoryacquisition to enable private investors to purchase land. This was generally donein the railway age without the private sector giving up the rewards of successfulinvestment nor the risks of unsuccessful ones.

Getting paid

If simple institutional arrangements are in place, such as have been outlinedabove, there is no reason why payments made by road users cannot be routed toprivate road providers as easily as to public providers. Indeed, private providersare more likely to ensure that monies payable are actually paid. (In the UK,evasion of excise duty is sufficiently large that a special 'blitz' was deemednecessary in early 1991).

As we have seen, there are many ways in which private road providers can bepaid, even where the levying of tolls in the traditional way may be inappropriate.At its simplest, highway trust funds that do not discriminate against privatelyprovided roads can be made to allocate to any road owner the amounts due onthe basis of traffic counts. Alternatively, the development of AVI and othermodem methods of payment enables highway providers to levy appropriatecharges where costs are particularly high, as on congested roads.

Competition from 'free' motorways

Even a brief review of the history of toll roads indicates that competition fromfree roads is a major obstacle to the private provision of roads. To expect private

investors to risk their funds on a road that requires payments from users, whenalternative routes do not require additional payments, is to expect a great deal.This argument has been used against privately built toll by-passes, for example -the problem being that some drivers would prefer to go through the town centrefor nothing rather than pay £1 or more to use a new by-pass.

Some of the disincentive could be mitigated to a considerable extent by the use ofdedicated highway funds that do not discriminate against the private sector. Insome situations the funds generated in this way on a privately provided roadmight be sufficient to recover all its costs; but even where they were not, theexistence of earnings from a highway fund would enable a lower toll to becharged by the private provider than would be the case if he were deprived ofthe revenues from road user charges earned on his road. A lower toll - or zerotoll - would also reduce the amount of traffic diverted from the privatelyprovided road to the free, publicly provided one.

Uncertainty about legal liability

This is regarded as an especially serious problem in the US and, for this reason,the private firms that are to receive franchises in California will lease, rather thanown, the highways they are to operate.

However, it is hard to see this as a really serious problem, even in the US. Privateowners of local roads associated with shopping centres have Jived with this issuefor years and have no difficulty in obtaining liability insurance. Toll highways,such as the New Jersey Turnpike, obtain insurance without difficulty and theclaims experience is wide enough to enable the insurance industry to set rates.And so it seems quite probable that in other countries legal liability would not bemuch of an obstacle.

Equity arguments

One of the standard objections to the private provision of any public service isthat it would be unfair, especially to the poor. However, in reply it must be saidthat the present system discriminates against low-income people and that therevision proposed would help many of such people, for the following reasons.

(a) First, as road space is currently not used economically, an important class ofgainers would be those who do economize in its use, namely; the users of publictransport, in which the poor, the very old, the very young, and the disabled areheavily represented. Public transport operators’ costs would be considerablyreduced, even after paying a toll.

(b) Second, there would be important gains to those who live in urban centres,who tend to be heavily disadvantaged. One of the main causes of distress in citycentres is the poor accessibility that prevents low-income people from travellingfor work, shopping, and other important activities. All these would benefit fromincreased economic activity that would arise from the more efficient use ofcongested city-centre roads.

(c) Third, to the extent that low-income workers live in city centres, they are lesslikely to be affected by congestion charges imposed on traffic travelling in peakdirections.

(d) Fourth, to the extent that the measures would reduce air pollution in innercities, the main beneficiaries would be the poor. (24]

(e) In addition, there could be substantial gains to local authorities that allowedtheir congested roads to be operated at a profit: rents and taxes payable forprofitable road space would allow them to reduce taxes and/or increase servicesto low-income people. It is difficult to see how, on balance, the provision ofhighways in accordance with market criteria can be considered 'inequitable'when compared to the present situation.

The monopoly problem

A common objection to the private provision of public roads is that road ownerswould be monopolists and thus in a position to exploit their customers. Beforedealing with this issue a preliminary point should be made. Monopolies are notnew to road users. We confront them almost everywhere: when we findourselves held up in a long tailback on the way in to London or when our shock-absorbers are broken by pot-holes in Liverpool, we do not have the option ofchoosing another road supplier.

And where our road taxes are not even dedicated to road provision, the outrageis compounded. In countries as diverse as Britain and India, road users areforced to pay high road-use charges that serve to augment the general revenuesof their governments. In most countries, in fact, none of the highway taxescollected are dedicated to road improvement. So the issue is not monopolyversus competition but whether private highway suppliers can improve theworkings of existing systems dominated by government monopolies.

In the case of local roads, we have some relevant experience by which to assessthe monopoly question. Private ownership of streets is accepted in St Louis(Missouri) and in commercial and residential new developments. Whiledissatisfaction with maintenance on privately owned streets occurs from time totime, no cases have been reported of homeowners or businesses being deniedaccess to their premises by street owners.

In any event, the remedy against monopoly is obvious: so long as privateinvestors are permitted to add competitive links to the network and to chargecompetitive prices, road users would enjoy some protection from exploitationfrom monopolists. Users would be protected from excessive charges bycompetition or even by the threat of competition. But where users have noalternative routes, regulations, comparable to those governing bridges andtunnels across or beneath waterways, would be required to prevent theexploitation of a monopoly.

Advantages of private provision

In the same way that most telephone users in countries such as India and theSoviet Union have great difficulty in appreciating the advantages of privatetelephone companies, so most road users in the UK have difficulty in imaginingany advantages from private road provision. Yet these could be very significanton many fronts, as follows.

* Depoliticization. Privately provided highways are more likely to be providedin response to users' needs than government programmes that respond topolitical priorities.

* Pricing and investment. Highways that have to cover their costs are morelikely to be built where they are most needed and to standards for which usersare prepared to pay; and to charge fees that correspond to costs imposed. Theprofitability criterion used by the private sector may not be perfect, but it is likelyto be preferable to the non-profit investment methodologies currently used forhighway planning, whose weaknesses we have already seen.

*Speed of response. Hallowed by the local planning processes, private providerscan get highways financed and built more quickly than governmentalinstitutions.

* Benefits to local authorities. As private commercial projects pay rents andproperty taxes, privately provided highways can convert local authority roads –especially congested ones - from money losers to money-makers.

* Revelation of costs. The accounting requirements governing the private sectorwould ensure that privately provided highways would be properly depreciatedand would provide information on total highway costs, which is currentlydifficult to get. Furthermore, the competitive pressure on private providerswould exert a constant downward pressure on costs and, for example, forcehighway operators to take serious measures to protect their roads from damageby overloading.

5. THE ROLE OF GOVERNMENT

All levels of government have a legitimate interest in the existence of safehighways, built to standards responsive to the economic demands of users. But itdoes not follow from this that government has to provide the roads, or evendetermine their standards. Government has a legitimate interest in a well-fedpopulation, but many would argue that it does not have to tell people what to eatand most would agree that it does not have to operate food shops.

The argument advanced in this report implies a substantial adjustment of theroles of central and local government. If, for example, monies that are distributedin accordance with traffic flows, or some other agreed formula, are to be used forhighway finance, then central and local responsibilities must follow the funding.

The UK’s (rather centralized government structure would suggest that the role ofthe state is to deal, with safety and economic regulation, both in terms of its ownhighway responsibilities (the national system) and in setting standards for localauthorities - and private road operators, To ensure a proper division of function,a new supervisory body, the Inspectors of Roads (similar to the Inspectors ofRailways, but with fiscal regulation as well as that of safety) might be set upwithin the Department of Trade and Industry.

The Roads Inspectorate would have responsibilities for the standards ofconstruction and maintenance of roads comparable with those of the RailwayInspectorate for rail track and signaling. If their fiscal responsibilities - advisingas to investment policy, for example - were to be given similarly to the RailwayInspectorate, and the two bodies were to be responsible to a single branch of theDepartment of Transport, a considerable step would be taken toward theachievement of a level playing field for road and rail policy.

Certainly the present system, whereby road users pay taxes to the governmentwhich, in its turn, remits funds to the counties, cannot be justified, because of thepoliticization it inevitably produces.

Trade and defence

Even though the government has vital interests in defence and in encouragingcommerce, it is not necessary for it to finance all major highways for thesereasons. If, for example, experts find that certain bridges are too weak to carrytanks or missiles that are necessary to UK defence, there should be nothing tostop the authorities putting the necessary work in hand, preferably with fundsappropriated to the MoD.

Safety in design and management

Safety concerns can require intervention both in the design of roads (for example,to ensure that the geometry, surfacing, and signing of roads minimize accidentrisks) and in their management (for example, to ensure that motor vehicles arenot driven in a manner that poses danger to others).

Administration

Central government and the local authorities also have the responsibility ofcollecting some payment from road users., and ensuring that it is allocated,according to law, to road funds or to general revenue.

A further role, discussed above, is to provide appropriate economic regulation toensure that private highway owners do not take advantage of any monopolysituations they may have.

Congestion and underutilization

The local government level is particularly important in dealing with the extremesof congestion and (at the other end) underutilization of roads.

Congestion can be addressed by the pricing methods discussed above, the sameprinciples being applied whether the roads are privately or publicly owned.Congestion pricing, if the prices are of the right order, would not only relievecongestion but also earn substantial revenues to hard-pressed municipalities andenable them to reduce local taxes.

Underutilized roads in rural areas pose much more difficult problems, as theycannot generally be financed by economic user charges. Unless such roads can befinanced by property owners (either through local charges or through owners'associations), they would have to be subsidized or abandoned.

6. RECOMMENDATIONS FOR ACTION IN THE SHORT TERM

Despite a continuing increase in highway receipts, the UK still faces aninfrastructure crisis in which expenditures have failed to keep pace withmaintenance and construction needs. Political considerations have guideddecision making on infrastructure expenditures, with the result that basicmaintenance has often been neglected. Administrative costs soar, leaving asmaller proportion of revenues for actual maintenance and construction work.But with politics, rather than economics, driving the decision making, it is notsurprising that we have an infrastructure crisis.

In this context, the principles of ownership, pricing and investment used in othersectors of the market economy offer valuable policy tools both for improving theefficiency of existing road operations and maintenance as well as for providingresources to expand infrastructure capacity. This programme for reform containsseveral key elements, as follows.

Clarify the ownership of roads

Before these assets can be transferred to private owners or operators, so that thebenefits of competition can be introduced, it is important to clarify who ownsroads now. In the United Kingdom this is not always obvious, and it would seemlogical to make the central government (the Secretary of State for Transport andthe Secretaries of State for Northern Ireland Scotland and Wales) the beneficialowners of the national road system, with the remaining roads being vested in thelocal authorities, after their proposed re-organization. The New Roads andStreetworks Act of 1991 has gone some way to meet this requirement, but a moreradical change is still required if an equity is to be created. It might be necessaryfirst to purchase any property rights of frontagers, which probably exist whereroads remain on medieval alignments. The actual ownership of roads built bydevelopers and then 'adopted' by local authorities under general or speciallegislation would require further examination.

Design standard performance and accounting systems

To enable the performance of roads and their managements to be assessed,standard performance reporting formats should be designed, covering thecondition of roads, the quantity of traffic carried at different speeds, safety andenvironmental measures, and financial data on monies received and expended.

Select an AVI technology

Although the introduction of AVI would in general be decided locally, it wouldclearly be advantageous if transponders could be recognized on any part of thehighway network, in the same way that mobile telephones can be. Appropriatenational standards could be prepared by an industry group, perhaps with agreed

international status.

Use axle-load charges

While their novelty might excuse delay in introducing charges for the use ofcongested highways, one an see no justification for allowing heavy axles todestroy the nation's roads without the users being required to pay theappropriate compensation. The charges could be levied by means of annuallicence fees, based on expected mileage, with hauliers being given the option ofhaving their vehicles fitted with metering devices to enable charges to beassessed on the basis of actual loaded miles travelled. Within the EuropeanCommunity the mileage data would be assessable from the tachograph disk,which would bring into the system all heavy goods vehicles and publicpassenger vehicles other than buses operating on local services. .Such chargeswould: (a) encourage hauliers to spread heavy loads over more axles and (b)raise the requisite amounts for road resurfacing from those who cause thedamage.

Establish dedicated road funds

To separate the payments made by road users for road use from payments madefor taxes, establish road funds for England, Scotland, Wales and NorthernIreland. These funds would be held in private banks under the care of trusteesresponsible to road users, and distributed by them to road entities within theirareas, on the basis of traffic counts, without discrimination against privatelyprovided roads. Initially, the amounts paid into road funds would equal theamounts currently spent on roads.

Allow the provision of private roads

At the moment it is the government - or county planners - who decide whethernew roads will be built, and efforts to provide infrastructure privately face longodds. Even where permission is given, the statutory conditions are so difficult tomeet that freedom to build is in practice denied. But if there is a shortage of roadcapacity, why not allow newcomers to provide it? What is the point of allowingthe private sector to provide vehicles but not road space? (The American wit WillRogers is reported to have suggested that the way to end traffic congestionwould be to have the roads provided by the private sector and the vehicles bythe public sector.)

The statutory procedure in Great Britain today is clumsy and obsolete. It isalready recognised that change is desirable, in the case of light rapid transportinvestment, and what is necessary there is equally essential for highways.

The law needs to be clarified, so that prospective highway providers knowclearly, in advance, what is, and what is not, permitted, and to eliminate anydiscrimination against the private sector.

Start with bottlenecks

Once the legal background and the ownership of highways is clarified, andfinancing mechanisms established that do not discriminate against the privatesector, the way would be open for the private provision of highways. A startcould be made with the construction of private for-profit roads to .relieveexisting urban or suburban bottlenecks. These would give road users immediatechoices of getting, for extra payment, better facilities. [25] Additional facilitiescould be provided alongside existing motorways, as in the case of the Dulles TollRoad or above them, as over Bangkok's airport road; congested roads such as theMl and M25 are obvious candidates for such new facilities.

Where the private sector shows that it can build and operate new highwayssatisfactorily, some authorities are likely to find it to their advantage to transferexisting roads to private owners or operators. There are a number of reasons forthis. First, a private operator would relieve the public authority of the costsinvolved in highway operation; indeed, the public authority would receive rentand rates for the use of its land, thus turning a financial liability into an asset.Second, if private operators were allowed to impose economic charges to reducecongestion the area would become attractive to individuals who place highvalues on their time, and these individuals are likely to increase the prosperity ofthe area.

Privatize bridges

Many road bridges need repair or replacement. Currently available funds areinadequate to cover the cost of this work. Privatization could provide analternative means of rehabilitating or replacing high-volume bridges, with costsbeing recovered through tolls or other means.

7. RECOMMENDATIONS FOR ACTION IN THE LONG TERM

In the previous chapter a number of courses of action were outlined, such ascould be pursued immediately, and to the advantage of road users andgovernment agencies, central or local, alike. They would have a furtherattraction, in that they would also be steps towards a new dispensation for theprovision maintenance, and use of the highway system. The point has alreadybeen made that the fundamental weakness of the existing system is the lack ofany equity in the roads themselves. There is no balance sheet that indicates, incash terms, what are the costs and benefits of their provision and of their use. Ithappens that, in the UK, this is true for the land owned by the British RailwaysBoard, but this is no reason why the same should apply to British roads. In recentyears, the privatization of the major utilities - gas, electricity, and water - hasbrought them back into the market: the market for land.

In 1965 the Allais Report on transport tariff policy {26] recognized that the priceof using a congested road or railway, while reflecting the appropriate 'impact'cost (wear and tear), should then be, in economic terms, a ‘quasi rent'. Itrecommended that tolls should be set so as to even out the flows of traffic so thatthe indifferent user moved to the less congested trade. This remains a compellingargument, but underlying it there is the issue of who should own theinfrastructure system.

Privatize the roads

By creating an equity in. the highway system, albeit one that remained in theownership of central and local government, the first step would have been takentowards the desirable end of moving roads fully into the market sector, throughthe vesting of their ownership in privately owned and financed corporations -public limited companies, in UK law. And were the infrastructure of the railwaysto be privatized, the creation of companies owning both road and rail track, andable to apply the Allais principle of charging, would become a reality.

Such companies would no doubt be active in new construction, financed fromtheir earnings and their future cash flow, but in the market thus developing, newinvestment would be able to enter, and there would be constant pressure toupdate and rationalize the whole system.

In urban areas, where land is inescapably in short supply, the local companieswould need to operate under the oversight of a 'watchdog'. All transportinfrastructure could be privately owned, with the new owners recovering costsfrom road users, and from railway and light rapid transport operators alike, inaccordance with similar general charging principles.

As a final consideration, it could well be that some vertical integration woulddevelop, as substantial hauliers and coach companies bought shares in the track

companies, to try to influence their policies; motorists’ associations might seek todo the same. And at the local level, residents' associations might seek similaraccess - not least if they were themselves to take responsibility for local accessroads in their own areas.

These are the outlines of some potential advantages that can be foreseen; otherstoo may be expected. But the real argument for an extended policy of this kind is(a) to restore the financial decision-making to the discipline of the market, and(b) to move away from the monolithic and politicized administration of today,towards a user-oriented range of firms with both the opportunity and theincentive to innovate.

8. CONCLUSION AND SUMMARY

Commands without order

While the UK relies on a market economy for most of its goods and services, itstill has a significant communal economy in which scarce resources are allocated,not by the wishes of consumers and producers interacting through markets, butby the decisions of politicians and administrators motivated by what theyconsider to be the common good. Most UK roads are fairly and squarely in thecommand economy, in which prices play minor roles and in which investmentsdo not have to pass the market tests of profit or loss. The results are the same asthose produced by command economies in Eastern Europe, Africa, andelsewhere: overcrowding and queuing in some parts of the system,underutilization of others, and physical deterioration.

The gradual transfer of roads from the command economy to the marketeconomy would result in more economic use of the existing system and in itsexpansion in response to the wishes of its users. Significant economic gains canbe expected.

Those who have learned in recent years that taxes discourage economic growthmight have difficulty in understanding why increases in charges for the use ofcongested roads can produce benefits. The essential point is that the pricingsystem provides the best method we know to allocate scarce resources to urgentand important uses. 'Free' or underpriced roadspace (like metered parkingcharges that are too low to equate the supply and demand for onstreet parking)leads to waste in the use of an important resource, and it is the elimination of thiswaste that is the basis for the gains from market pricing. Furthermore, theapplication of market pricing to highways need not result in road users payingmore in total; reductions in fuel and other road use taxes could result in lowercharges for the use of uncongested roads, while freer movement would reducecosts too.

It is inevitable that, as in any transformation, there would be losers as well asgainers. Losers would include motorists who would be induced by congestionpricing to share their cars, or travel outside peak hours, or to transfer their travelto less-congested roads. There could be losses to those who operate lorries withheavy axle loads, and who would be forced by higher charges to switch tovehicles with more axles. If the charge were to be spread over a number of years,the costs to haulage companies could be minimal, but the railways may makesome gains at their expense. Other losers could be those, especially in rural areas,who depend on little-used roads to maintain their accessibility, though as apractical matter, existing roads would generally be 'grandfathered' for a periodto facilitate reform, as the savings made in public road budgets would, in mostcases, be more than sufficient to compensate the losers.

Of all the activities undertaken by government, few are worse managed thanhighways. Traffic congestion in cities, the most glaring and ubiquitous example

of waste, is so taken for granted that it is regarded by many as some kind ofdisease inherent in civilization. However, underused roads outside cities alsoinvolve substantial waste, as does the tendency of politicians to prefer newprojects over the maintenance of existing ones.

The scourge of politicization

The attraction of new projects in this field was noted by Adam Smith in 1776, andhis words then still ring true today;

The proud minister of an ostentatious court may frequently take pleasure in executing awork of splendour and magnificence, such as a great highway, which is frequently seenby the principal nobility, whose applause not only flatter his vanity, but also contributeto support his interest at court. But to execute a great number of little works, in whichnothing that can be done can make any great appearance, or excite the smallest degree ofadmiration in any traveller, and which, in short, have nothing to recommend them buttheir extreme utility, is a business which appears in every respect too mean and paltry tomerit the attention of so great a magistrate. Under such an administration, therefore,such works are almost always entirely neglected. [27]

The inadequacy of the political system has been shown in many examples, andmost recently in the problems arising in Birmingham, where the completion ofthe M40 motorway to London has not been matched by any action to link it withthe city centre, so that those whose homes or businesses lie in the southernsuburbs have to suffer the consequent congestion of their streets. In contrast tothe 'proud minister', the humble entrepreneur has every incentive to spendmoney where a gain can be foreseen from improved utility.

The road to reform

Some improvement can be obtained by unravelling overlapping responsibilitiesfor highway management and by introducing business-oriented procedures toroad financing, but major improvements cannot be expected until road pricingrelates to costs imposed, and investment criteria to profits and losses. Provisionby the private sector should be allowed where the public sector is unlikely toundertake the necessary expenditures in the near future.

Highways need better management, on a businesslike foundation. But a businesscan be managed effectively because its ownership is clearly defined, with a dutyto the shareholders as the constant concern of management. It is the equity in abusiness that counts: there is no equity in the roads, and, over most of theirmileage in the UK, they are not even a property. If we are to seek a marketsolution to the highway problem, steps must be taken to clarify their ownership.

In the UK, as in most countries, there are problems of overlapping responsibility.For example, the roads have been available to any utility company or board todig up at any time - we all have seen roads resurfaced, and then broken up againwithin a matter of weeks. Legislation now provides powers for highwayauthorities to control their 'customers', but it can at best be an ad hoc solution to

the problem, and it is a rather bureaucratic one at that. . There is need for aradical solution.

The logic is inescapable: property rights must be created in roads. Without them,electronic road pricing (now being examined by the UK Department of Transportas a possible solution to the congestion problem) will be a hybrid and not amarket activity - and worse, will be seen by many as a means to extractmonopoly rents from road users.

There is no need for a nationwide monopoly to be created; comprehensive roadcompanies of various kinds would react to market pressures to providecontinuing improvement to the benefit of road users and all those who dependupon an effective road system to supply their needs. And that means everyone.

Finding the right route

If the objective is, as it must be, to serve the interests of road users, ways must befound to empower independent bodies to operate and maintain roads, and toundertake improvements and new construction. In a market system, suchempowerment follows from ownership, but in the absence of a market for roads,an ingenious government could create one. Highway companies could be set up,initially as arms-length entities whose duties it would be to undertake suchresponsibilities, but with the legal status of registration under company law. Aprecedent for this is to be found in the former municipal bus companies andairports, whose boards must take responsibility to ensure the solvency of thebusiness.

A precedent also exists for the funding of such companies by 'shadow tolls', suchas those provided for in the privately constructed motorways now being built inthe UK. Revenue flowing from designated charges- fuel tax, and an axle-weighttax are but two examples - could be allocated to a central account, not unlike the‘Road Fund' which was so badly misused, but outside the control of theTreasury. The trustees of this fund would have the single function of distributingmonies in accordance with an agreed formula to the highway companies.Electronic data sources would enable the formula to reflect the actual use of theroad or roads within each company's domain. The companies would thenpossess commercial decision-making powers, and would balance their incomewith their expenditure (which would of course include the payment of thebusiness rate or its equivalent to the local authorities in whose areas the roadslay).

It is, of course, road pricing that makes the creation of such entities attractive. Butwhere it is not in place (and it is unlikely to be justified everywhere), the exampleof the water companies shows that revenue can come from other sources. Roadsin rural areas might be financed solely from a property tax, as the watercompanies are, while highway companies in congested districts might have atwo-part tariff, combining road pricing with a similar tax. (A further attraction ofthis could be the ability of highway companies to deal with the problems oftourist demand - a Lake District Highways Plc would be in a position to deal

with the problem of severe overcrowding in a way that the existing highwayauthority can not)

Meanwhile, inter-urban companies could own parts of the motorways and trunkroads, making the M1 competitive with the A1, and opening the way to fundingthe East Coast Motorway from the private sector. Meanwhile, the roads ofBirmingham or Sheffield, along with other cities and the larger towns, could bevested in similar public limited companies. The motoring associations might buyshares in them, as might various commercial road users. The relevant functionsof the Department of Transport would no doubt be transferred to a regulatorybody, which might also prescribe minimum standards for design andmaintenance.

New thinking

The attraction of such a radical reform is reinforced by the new thinking aboutthe organization of railways that has recently emerged from Brussels; with theendorsement of the House of Lords [28] This envisages the separation ofownership of track and train operation, and the encouragement of a competitiveregime for the movement of passengers and freight. The present UK governmenthas committed itself to competition in the railway industry, and the implicationof this is to strengthen the case for the EC proposals. Economists have longrecognized the fundamental issues of track costs, and the opportunity exists nowfor an extensive rationalization of the way in which the road and rail transportinfrastructure is financed. Then at last, the East Coast Main Line would also beable to compete for traffic on equal terms with the M1 and the Great North Road.

The extent to which such disaggregation should be taken is a matter for debate,but in the UK at any rate it would seem a rational course for the majormotorways and trunk roads, with their feeders, to be the responsibility ofhighway companies. In some urban areas, and subject to guarantees about safety,it may prove desirable to transfer the ownership or management of the mainroads into the hands of one or more private companies, while leaving local roadsin local ownership. [29]

Many other innovative arrangements may also be possible. The important pointis to establish a transport infrastructure framework that is based on thecustomary rules of private property- and thus to enable road users everywhereto obtain, through the market mechanisms of choice, competition, and pricingthat work so uncontroversially elsewhere, the road services which they areprepared to pay for.

REFERENCES1 Report on the Road Fund (1920-1),p.16, para.46, quoted in W Rees Jeffreys:The King's Highway (London: Batchworth, 1949), p.58.

2 Richard Marsh (Lord Marsh): On and Off the Rails. An Autobiography.(London, Weidenfeld & Nicolson, 1978).

3 Ian G Heggie: ‘Improving Management and Charging Policies for Roads:An Agenda for Reform', INU Discussion Paper No 92 (Washington DC; WorldBank, 1991), p.34.

4 Thomas B Deen: 'Fiscal Policies and Transportation Planning'. TrafficQuarterly, January 1963, p 119

5 Alan Pisarski:. Report on Highways, Streets, Roads and Bridges(Washington DC; National Council on Public Works Improvement, May 1987).

6 Kenneth A Small, Clifford Winston, Carol A Evans: Road Work: A NewHighway Pricing and Investment Policy, Washington DC: The BrookingsInstitution, 1990)

7 Theodore E Keeler and Kenneth A Small: 'Optimal Peakload Pricing,Investment and Service Levels on Urban Expressways'. Journal of PoliticalEconomy, 85, 1, 1977.

8 David Bayliss, Bill Bradshaw, Kenneth Button, John Hibbs, Phil Goodwin,Tony May, John Turner and Bill Tyson: Paying for Progress. (London: CharteredInstitute of Transport, 1990).

9 See Eamonn Butler, ed., Roads and the Private Sector (London: Adam SmithInstitute, 1982).

10 Ian G Heggie: 'Improving Management and Charging Policies for Roads:An 'Agenda for Reform', INU Discussion Paper No 92 (Washington DC: WorldBank, 1991).

11 See John Semmens and Gabriel Roth: The Road to privatization of HighwayFacilities'. Proceedings of the Transportation Research Forum, 24.1.1982.

12 John C Goodman et al: Progressive Environmentalism (Dallas: NationalCenter for Policy Analysis, 1991), pp.46-7.

13 Alan A Walters: 'Track Costs and Motor Taxation'. London, Journal ofIndustrial Economics II, pp 135-146, April 1954.

14 Milton Friedman and Daniel Boorstin: 'How to Plan and Pay for the Safeand Adequate Highways we Need'. (Submitted for a competition in the early1950s, but not published). Private communication.

15 William Vickrey, statement to the US Congress Joint Committee onWashington Metropolitan Problem (Washington OC: US Government PrintingOffice, 1960), pp.454-91.

16 Road Pricing: The Economic and Technical Possibilities (London: HMSO,1964).

17 Bay Area Economic Forum: Market-Based Solutions to the TransportationCrisis: The Theory. (San Francisco: BAEF, February 1990).

18 W Rees Jeffreys: The King's Highway (London: Batchworth, 1949)

19 Gerland Gunderson: 'Privatization and the 19th Century Turnpike', CatoJournal, 9, 1, Spring/Summer 1989.

20 Intemational Bridge, Tunnel and Toll Privte (verbal) communication fromIBTTA (Maureen Gallagher), Washington DC.

21 Gerland Gunderson: 'Privatization and the 19th Century Turnpike'. CatoJournal, 9, Spring/Summer 1989.

22 T C Barker and C I Savage: An Economic History of Transport in Britain.(London: Hutchinson, 1974).

23 Organization of Economic Co-operation and Development: Toll Financingand Private Sector Involvement in Road Infrastructure Development.(Paris:OECD, 1987).

24 Bay Area Economic Forum: Market-Based Solutions to the TransportationCrisis: The Theory. (San Francisco; BAEF, February 1990).

25 Robert Poole Jr: 'Resolving Gridlock in Southern California'. TransportationQuarterly, 42, October 1988.

26 Options in Transport Tariff Policy. (Brussels: BEC, 1965).

27 Adam Smith: The Wealth of Nations (Book V. Chapter 1).

28 House of Lords Select Committee on the European Communities, Session1990-91, 3rd Report: A New Structure for Community Railways. (London:HMSO, 1990).

29 On private management of local roads in urban centres, see Nicholas Elliott,Streets Ahetui (London: Adam Smith Institute, 1989).