Full speed ahead for the RAB route

For the first time in decades, a government recognises the importance of improving Britain’s strategic roads. On 19 March 2012 the Prime Minister said: “There’s nothing green about a traffic jam – and gridlock holds the economy back.” He was unequivocal about the solution: “We need to look urgently at options for getting large-scale private investment into the national roads network – from sovereign wealth funds, pension funds and other investors …We need to look at innovative approaches to the funding of our national roads.”

But under the present, centrally-planned system there is nothing for private investors to invest in. They need an identified, reasonably predictable cash flow to repay interest and principal: pension funds need their – our – money back. In other words, the big problem is funding: i.e., who pays in the end. Solve that and financing (borrowing and lending) will follow. Investors also need a legally defined entity with whom to do business.

On first principles the road network ought to be a prime candidate for long-term, private investment. Road space has hardly changed while traffic has grown rapidly, something reflected in official estimates of the excellent benefits to users of increasing capacity relative to the costs of doing so. Economic recovery and expected growth in population – 10 per cent a decade in some areas – will assure future demand.

FINANCIALLY VIABLE

Crucially, the road system is financially viable. Each year the Treasury receives £27 billion (€34 billion; $43 billion) plus VAT from fuel duty and £6 billion from vehicle excise duty. Yet spending on local and national roads is a mere £10 billion or so annually. The difference goes to funding general government expenditure.

In theory there are several ways the system could be reformed to meet the government’s objectives, produce a better outcome for users and create attractive propositions for investors.

Leaving aside funding and ownership for a moment, consider the roads as civil engineering. They are long-lived physical assets. They have to be maintained. Parts, such as bridges, have occasionally to be replaced. Some roads should be enhanced as needs and technologies change. That suggests that whatever else happens we need a comprehensive asset base (AB); a register of what we’ve got and what condition it’s in. Without this it is impossible to estimate the future maintenance, repair and upgrade costs.

One assumes the Highways Agency already has a register for the trunk roads (4,300 km) and motorways (3,000 km). It would be perfectly possible for the Agency to continue administering its part of the system with the benefit of direct grant from its parent, the Department for Transport (DfT).  Some commentators have proposed increasing the separation between the DfT and the Highways Agency and that the DfT should publish a ‘high level output specification’ and a ‘statement of funds available’ on a five-year cycle, as for the railways.

While this would give the Highways Agency more freedom to run the business effectively, the reality would remain that, unlike the railways, there would be no way of enforcing the commitment: as the only easily varied part of the DfT budget, roads spending would continue to be subject to short-term fluctuation, with all the inefficiency that brings. And the borrowing would remain public.

RADICAL CHANGE

A radical change would be to create a regulated asset base (RAB). ‘Regulated’ refers to the creation of an independent body with the powers and duty to act in the public interest. As with the other utilities (telecoms, power, water and railways) this body would adjudicate the annual expenditure, with reference to a long-term plan, that an economic and efficient operator should be expected to spend. It would set a value for the assets and a reasonable rate of return on that value, in view of the risks. If the RAB were privately owned, the owner would deserve this cash flow to compensate for keeping the capital invested here rather than in their best alternative.

The infrastructure ‘owner’ would propose enhancements to the regulatory body. If accepted, the value of the approved investment would be added to the RAB and the physical asset would enter the asset base.

The RAB is a clearly defined entity. Private investors can lend to the RAB ‘owner’ and the regulated charges will provide a cash flow to remunerate the investment. The investor is effectively taking a share in the whole portfolio of assets, which alleviates the problem of investors unwilling to take the risks of individual, ‘greenfield’ assets.

The necessary clarity and robustness of governance does not pre-suppose a sale of the RAB to private owners – although that is an option. It could remain in the ownership of a modified Highways Agency as a government-owned company. Alternatively it could be a company limited by guarantee or a public trust (in the US known as a public benefit corporation). Much of our road infrastructure was originally developed by the Turnpike Trusts. The London Passenger Transport Board (1933 to 1948) was a public trust with powers to borrow; the Port of London Authority and the Port of Dover still are.

BALANCING INTERESTS

The regulator also does another job. By seeking to balance the public interest with the interests of investors in economic and efficient enterprise, it offers a degree of protection from the policy risk, which is such a problem for investors in the provision of public services.

As the generally successful experience with utilities has demonstrated, the regulatory regime can be flexible, re-basing rates of return and charges every few years as circumstances require. This avoids the intractable difficulties caused by rigid contracts lasting for up to 30 years, periods over which nobody can reasonably be expected to forecast. The consequences of attempts to do so have been illustrated by the problems with passenger rail franchises, Private Finance Initiative (PFI) deals and the public-private partnership for the London Underground.

In the case of the reconstituted and privatised power and water utilities, income has been generated from direct charges to users. In the case of the railway, the fixed infrastructure owner, Network Rail (a company limited by guarantee), receives some income from charges to customers (train operators) and some by direct grants from government. In the case of roads, the government is clear it would only countenance direct charges to users (‘tolls’ or ‘road pricing’) for new, not existing capacity – although current proposals for a rebuilt A14 funded by tolls on the existing line of route, suggests an easing of this position.

The government’s aversion to user charges is not necessarily a problem for the RAB model. But it does imply an alternative, tax-based stream of income must be designated. One possibility being discussed in Whitehall is to re-think vehicle excise duty as an access charge to the strategic road network, with the income funding the RAB. An alternative would be to ‘ring-fence’ a proportion of fuel duty revenues.

PUBLIC TRUST

Gaining public trust and acceptance of this kind of reform to strategic roads will be challenging. Yet despite similar scepticism to reform of the water industry, since privatisation a vast quantity of physical investment has been funded out of charges to users and many domestic customers welcome only being charged for what they use as measured by water meters.

It is crucial that any new roads proposal is not portrayed as a ‘stealth tax’. It must be made crystal clear that additional payments by users or taxpayers are for the express purpose of improving the quality of service they receive from their roads. This must be demonstrated through transparency, accountability and audit. Part of the key to success is to demonstrate the implications of not changing: continuing under-investment, relentlessly increasing congestion and more journey time unreliability.

The specifics of any proposal are vital. Without them people cannot judge how they would be affected. Few public policy changes do not leave someone worse off. But a fatal mistake of the poll tax proposal was to make large numbers of people believe they would be hit financially. The government may develop a proposal which finds more overall funding for roads and makes very few road users worse off, but only if the net contribution from taxes and charges to road users to general government expenditures is reduced.

Maybe the government is willing to countenance more of the money road users presently pay being used to improve the roads. If so, we have the makings of a reform that would suit motorists, commerce and the investment community alike.

Stephen Glaister CBE is director of the RAC Foundation, a transport policy and research organisation.