Wednesday, October 31, 2012

Yes you can privatise the roads - says UK thinktank

The Institute of Economic Affairs (IEA) is rapidly becoming one of the highest profile think tanks in the UK, certainly it has been getting increased media exposure, including the regular appearance, on the BBC no less, of the excellent Communications Director Ruth Porter (who has links to New Zealand, having once worked for the Maxim Institute - not a reason to hold against her though).

It describes itself as "the UK's original free-market think-tank, founded in 1955. Our mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems".

It has become one of the foremost advocates for questioning new government interventions, preferring less government spending and regulation, and seeking solutions involving free markets and personal choice over statism.

The latest report commissioned and published by the IEA, has been written by German transport economist and President of the Institute for Free Enterprise, Dr Oliver Knipping, and IEA deputy editorial director and director of its transport unit, Dr Richard Wellings.

It advocates privatising all roads in the UK.  Yes, ALL roads.  

The report is available here, and makes a compelling case that damns the existing system for producing inefficient outcomes (congestion, poor maintenance standards, inadequate supply of capacity in some areas and overbuilding in others) and suggests that the government simply get out of the way, by selling some roads and giving others away perhaps to co-operatives of road users and property owners to decide for themselves how to make money from them.

The authors propose that all roads, motorways, major highways, rural roads and urban streets could be privatised. Just selling the major highways is estimated to generate £150 billion for the government, which could be used to repay public debt, saving several billion a year in interest.  That would still leave local roads to be privatised by transfers to co-operatives of businesses and residential properties.

The new owners could choose to toll, issue access permits or leave the roads free when and where they saw fit, using whatever technologies they decided.

In exchange, the authors suggested abolishing vehicle excise duty (the equivalent of motor vehicle registration), and cutting fuel tax by at least 75% (noting that the UK, unlike NZ and the USA, does not legally dedicate any fuel tax to government spending on roads - but the existing fuel tax takes four times as much tax revenue as is spent on the roads), with the remainder being a sop to environmentalists by reflecting a carbon tax and tax on emissions.  This would reduce the price of fuel in the UK by a whopping 53p/l (though they neglect to note that EU law sets a minimum tax rate for energy that is about 29p/l).

Wouldn't the new road owners rip everyone off?  Well the authors say no. They have several ideas to avoid this.

They argue that the way privatisation is carried out should be done to promote competition between road owners.  For example, major highways could be sold to different companies, so that the M6/M1 and the M40 would have different owners offering different prices for driving between London and Birmingham.  Yes, there will be many cases where competition isn't feasible, but having some competition is more than exists now.  They see breaking up the road network so it doesn't resemble the patchwork of central and local government controlled routes now, would promote competition and innovative approaches to pricing.

By allowing road owners to price flexibly, it would mean prices at off peak times would likely be lower than at peaks, because underutilised assets are better off with customers willing to pay to use them, especially cars as they inflict relatively little damage to road surfaces compared to trucks.   As such, it may be much cheaper to drive outside commuter and holiday peaks than today.

Local roads owned by businesses seeking customers are more likely to discount access or offer it for free, especially if it attracts retail customers.  They may see this as important as offering free parking, so that the incentives are wider than just paying for the roads.

There remains competition  from other modes for certain trips, such as railways, airlines and canals.  In addition, telecommunications technology makes it increasingly attractive to use phones, Skype and other forms of teleconferencing instead of travelling.  Road owners will not be insensitive to these options.

Indeed, the question about being "ripped off" becomes more moot, if road owners are seeking to attract users by having well maintained, well signposted roads, which are priced to avoid congestion by spreading demand, and a planning system that does not prevent new capacity being built except by road owners needing to consider private property rights.  The likelihood is that the motoring experience will improve.

Finally, it's worth noting (though they did not appear to do so in the report), that with government in the UK already recovering four times as much in motoring taxes from road users (fuel tax and vehicle excise duty) than it spends on roads, that motorists are already being ripped off, by the government.

The UK government is today considering how to get more private sector involvement in financing and building roads, this report shows how far it could really go, and is one of the few studies I've seen which actually breaks apart the "consensus" of state owned and operated roads, and shows how it might be different, and better with privatisation.


Mark.V. said...

At the moment having one owner of the roads - the Government - paying for the roads is simple, the oil companies write out a cheque once a month based on the fuel sold and the motorist pays the tax with the cost of petrol and is paid when filling up the car. Having multiple owners of the roads will be less efficient, motorists will have to pay multiple owners for the roads they use. Each of the owners will have to employ their billing systems, accounts people to send out and recive accounts and to pursue non payers. The presumed reduction in cost of tax will be off set by the inconvience of having to pay the various road owners.

Libertyscott said...

Mark, there are hundreds of owners of roads in the UK. Local authorities own the majority of the network. However, paying for them involves not just fuel duty, but vehicle excise duty and council tax (as fuel duty is not hypothecated). On top of that, fuel duty bears next to no relationship to the capital consumed through the use of roads or the scarcity of road space when demand exceeds supply.

Your claim about transaction costs is one-dimensional. If that were true, then everyone should pay for food through taxes and go to a government store to get whatever politicians decide we should eat week by week. The results of that system would be shortages, surpluses, good and poor quality and vast dissatisfaction and a lack of trust.

You could argue the same for airlines and once upon a time for telecommunications.

There is little reason why motorists couldn't have one account with a highways retailer that bills for all road use, from the wholesalers owning different roads. However, these transaction costs will be miniscule compared to addressing half of the £20 billion a year in time and fuel costs from congestion or the billion or so wasted through vehicle damage, time and accidents due to maintenance.

The NSW Treasury produced a report claiming that the distortions from the (similar) motoring tax system cost the economy 25% of the equivalent of the revenue collected. In other words more than the operating costs for a road pricing system.

The Soviet style socialist highways policy has failed - it's time to put the roads in the hands of people who want people to use them, not people who want to discourage their use and tax and regulate the users to the 'nth degree.

Richard McGrath said...

Exciting to see the IEA floating ideas like this. The Adam Smith Institute and Cobden Centre are also great think tanks and worth visiting online.

Anonymous said...

I wonder if it is all too complex. i think consumers have a threshold of information and signals after which it all gets too hard unless they are economics professors. for most people the most important thing is getting from A to B, so they may do what's easiest and pricing may be a minor factor, especially if taxes are lowered. Does the model work effectively and more efficiently if this signal,is smeared?