Road regulation and wishful thinking

“The jungle drums are beating for RAB”. I can’t tell you who said it, since the seminar at which the words were spoken – and hats off to London lobbying firm Westbourne Communications for organising it – took place under Chatham House rules. The reference was to the Regulated Asset Base model and its potential application to the UK’s roads network.

“There’s nothing green about a traffic jam,” was a neat phrase coined by Prime Minister David Cameron as a prelude to the government’s launch of a feasibility study into the future of UK roads. (As with so many things, it seems, an announcement about it is awaited in December’s cheekily-named autumn statement). In order to attract the investment required to get traffic flowing in the way the PM envisages, voices in support of RAB are getting increasingly louder.

Compeling case

One of the beauties of RAB is its perceived ability to attract those institutional investors apparently so beloved of the government. The economic case for investment in the UK’s roads is fairly compelling, with rapid population growth (from 62.3 million in 2010 to 73.2 million in 2035, according to the Office for National Statistics) set to boost demand. And maybe at some point there will even be sustainable GDP growth.

But what institutions will really like about roads within a RAB context – or so the theory goes – is that they are offered the predictability and stability that they yearn for. When governed by a regulator, a sector is protected from policy risk – a very important consideration for institutional investors. The RAB model also ensures that investors get a fixed return. From the public’s point of view, RAB should also work well since charges are capped at what is deemed to be a fair level.

For all the supporting voices, however, there are real practical problems in implementing a UK road RAB. For one thing, as was pointed out at the seminar, you need an “AB” before you can have a “RAB”. The audit of the asset base that would be required as a precursor to the implementation of a RAB model would be a huge undertaking.

Even if you managed to get to the point of deciding that RAB was the way forward, you would then in all probability be faced with harsh political realities. “Adoption of an RAB model would need to be accompanied by a commensurate shift in taxation to make the change palatable and this, together with the legislation needed to establish a regulatory structure, would require a degree of cross-party consensus which at least currently seems to be unlikely,” says Jonathan Hart of law firm Pinsent Masons in an article on the out-law.com website.

And, actually, is RAB the right way forward in any case? When mooting the prospect of a roads RAB earlier this year, Cameron was keen to draw parallels with the UK water industry. And no wonder: despite initial resistance to change, the model seems to have worked very well in that context. What he neglected to provide was an example of a sector – airports, for example – where many would argue that RAB has worked less well.

And then there’s the good old general public, of course. Any attempt to impose user charging – a likely part of whatever strategic plan emerges – might be greeted with something less than unbridled enthuisiasm. Of course, there are historic examples of hard sells being successfully achieved, but the required medicine for UK roads may taste particularly bitter. Can it be stomached?