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.

Fair Fuel UK? How to make UK fuel duty a little fairer

A nationwide campaign comes to London today, called National Fair Fuel Day, demanding that the UK government act on fuel taxes. Finally, the road transport sector and motoring lobby have cottoned onto the fact that some in the media have ignored – the high price of fuel is substantially due to government taxation. 

Some have argued that it is all about oil company gouging. Oil companies being the bogey of the left and easily pilloried. Yet whilst demand and supply do greatly influence price fluctuations, oil companies can't be blamed for much of the price of fuel in the UK.  It isn't hard to compare prices between countries, and notice that once currency fluctuations are taken into account, most of the real difference is tax.

Today, the average price of standard unleaded petrol in the UK is around £1.38 per litre, for diesel it is £1.45. However of those prices, around £0.58 is fuel duty. For the petrol there is also £0.23 in VAT (£0.24 for diesel) (on top of the retail price and fuel duty). So of the total price, the majority is tax. 

In the UK, this situation came about because of the two previous governments. John Major’s government introduced a fuel duty escalator, which increased fuel duty by inflation + 3%, which was then increased to inflation + 5%. When Gordon Brown became Chancellor of the Exchequer he raised it to inflation + 6%. So in short, it was a way to pillage the pockets of motorists, given that most revenue from fuel duty comes from road use. 

Unlike the US or New Zealand, none of the UK fuel tax is hypothecated for transport purposes. The reason being that the UK Treasury has a phobic opposition to government restricting the use of any tax revenues for any specific purpose. The history behind this being that the last time fuel tax was hypothecated was in the 1930s, and revenue was far in excess of spending on roads (which suggested the tax should have been lowered or more spending should have been made on roads). However, even compared to road spending, the fuel tax is grossly excessive.

About £10 billion is spent in the UK every year on maintaining and upgrading all roads, yet £26 billion is collected in fuel duty and £6 billion from vehicle excise duty. As these taxes wouldn’t be collected if people didn’t own or use motor vehicles, it is fair to link that revenue to that expenditure, although the left/environmental movement likes to think of it differently. 

So what should the rate of fuel duty be? Let’s reject the Treasury approach to this, and say that a dedicated roads fund could be set up which would be funded from revenue from road users. If the current level of spending is maintained it would be £6 billion from vehicle excise duty and £4 billion from fuel , or rather only 12.5% of current fuel duty. Given that there is significant deferred maintenance on road networks (and assuming this funding can replace council tax contributions to road maintenance), let’s boost that slightly by rounding it up to 8p a litre that could be hypothecated for road spending. Yes, in theory fuel duty could be only £0.08 if it was all spent on roads, with vehicle excise duty and it was used to fully fund local roads and given a small boost to maintenance.  Yes, the UK government is profiteering from the use of its own roads on a grand scale, that would make most entrepreneurs blush.  However, it's the government, so the left don't get so worked up about that, because tax is "good" because governments "spend it on everyone".

Of course cutting fuel duty by 50p devastate public finances unless there were equivalent spending cuts to match.  Not something I'm unafraid of at all, but let's proceed down a train of thought to do something a little different.

 A £0.50 cut in fuel duty would also correspond to another £0.10 off in VAT, so a £0.60 cut in fuel would nearly halve prices. That would be a major shot in the arm for the competitiveness of transport intensive industries, transport operators and motorists, but of course would dreadfully upset environmentalists, public transport operators and would increase congestion. Environmentalists would argue it would increase climate change. 

Let me be controversial and assume that this is correct, and accept that road users should pay for the "cost" of carbon emissions. The Stern Report claimed that the cost of climate change is around £0.14 per litre.  However, even if I add that to the road spending, fuel duty still drops by £0.36 with a £0.07 cut in VAT.

Another claim from environmentalists will be the cost of real pollution, the noxious kind that actually does affect people's health in cities. Well that’s been calculated too, and is around half of the cost of infrastructure maintenance, indicating a tax level of around £0.16 per litre. It is a cost that is declining as cleaner burning vehicles are renewing the fleet.  Again, it still means that fuel duty would drop by £0.20 with a £0.04 cut in VAT.

At that point I’d make an argument that there is a long run lack of investment in British highways, only part of which can be recovered in the short term by private investment (simply due to public sector crowd out in planning), so that an extra £0.04 a litre should be retained to be transferred at a rate of £0.01 a litre every year to the roads fund, to address 15 years of underspending.

Indeed, given the rail sector pays a small portion into this, it could be argued that tax could be recycled into paying for rail subsidies (although surely it would be simpler and fairer to enable rail operators to claim back the duty).

So what to do? Yes the government makes a fortune from road users, it collects over three times what it spends on roads. However, it also faces a massive budget deficit to cut, so in the meantime, here are my steps to remedy this, over time:

1. No more increases in fuel duty. 

2. Set up a hypothecated highway fund to which all vehicle excise duty and 8p of fuel duty goes into. Establish an independent board to determine how to allocate those funds to the Highways Agency, local authorities and the Welsh, Scottish and Northern Ireland administrations, based on receiving bids for maintenance and capital expenditure. Have those funds allocated on transparent criteria based on cost/benefit analysis. 

3. Calculate and explicitly state that a proportion of fuel duty is to reflect climate change and pollution costs, if that is deemed necessary.  Regularly recalculate these to reflect changes in the vehicle fleet.

4. Explicitly identify the remainder of fuel duty as “surplus”, with the aim of policy to reduce that downwards by 1p a litre every year until the budget is in surplus (estimated 2016/2017), with another 1p shifted into the roads fund for additional capital works. 

5. Once the budget is in surplus, cut fuel duty by the remainder, so that all that remains is the road fund component, plus the externality charge.

Whilst I'd much rather slash fuel duty by 16p overnight, and then argue over the rest regarding externalities, these gentle steps would put some transparency around fuel duty and cease the endless increases just to pay for general government expenditure. If all the roads were privately owned, or run as a business, they wouldn’t be paid for by fuel duty, but from user charges. However, unless and until that sort of radical reform is implemented, the second best option is to treat fuel duty as being linked to road use and road spending.  It would stop penalising the road transport sector and treating it as a cash cow.