INTERNATIONAL ROAD FUNDING PERSPECTIVE

1. INTERNATIONAL ROAD FUNDING PERSPECTIVE Road Funding Workshop 7 & 8 March, 2018 Dr. Peter Freeman Transport Economist

2. Background to Presenter • Doctoral thesis on “Recovery of Costs from Road Users in South Africa” 1982 at UNISA • Worked at CSIR, DoT, DBSA and Private Sector until 2003 • World Bank 2003-2010 responsible for Evaluation of Transportation Projects • Consulting transport specialist for World Bank and international clients as a retiree from 2010.

3. World Bank

4. South Africa Needs a Policy on Road User Charging • Current policy statements vague; user pay principle mentioned, but little detail on how this would work. • The link between an efficient road system, a vibrant economy and basic accessibility is undeniable, but how do we pay for our roads? • “User pays” philosophy for highways and expressways is widely accepted internationally. • Municipal roads and streets and rural access roads are usually funded locally, but may need to be subsidized.

5. Economic Theory of User Pays • Short run marginal costing is the benchmark for efficient pricing using infrastructure • Long run marginal costs take future infrastructure investments into account, and • Long run marginal social costs cover costs imposed by traffic such as congestion and pollution. • Water and electricity are sectors where consumption can be accurately measured; defense is an area where the Government must decide how much to spend • Roads lie somewhere in the middle of the spectrum.

6. First Snow last week on the Egyptian Pyramids for 125 years. When it last snowed in 1893 Henry Ford had his first engine running, but it was 1896 before he built his first car! Fuel taxes arrived in Oregon in 1919 and at federal level in 1932 (1c/gal)

7. Petroleum Fuels as a Proxy • In virtually every country a levy on petrol and diesel has acted as a proxy for vehicle use of the road system. • Merits are that it is easy to collect, it varies with distance traveled, it accounts to some extent for vehicle characteristics and driving behavior, and it is difficult to evade. • However, it does not fully recover the cost of damage to the road pavements by heavy goods vehicles, nor does it recover social costs. • Moreover, vehicles are increasingly powered by electricity and technology has improved so that conventional vehicles use far less fuel, affecting revenue collection.

8. Dedicated Road Funds • In some countries there are hypothecated or ring-fenced road funds, whereby all or part of the fuel levy is spent only on roads. • Some governments (e.g. USA and Japan) accept this, others have a different philosophy (e.g. Britain and South Africa). Even when such a fund exists, the level of the fund is determined by the Department of Finance concerned, which has the responsibility of juggling the Government’s priorities according to current policies and the prevailing economic climate. • Many African countries have dedicated road funds. These are often encouraged by development banks, concerned that their loans and grants for road projects should be invested in assets that will be well maintained. • Some countries are introducing weight distance taxes, for trucks.

9. How much should we Spend on New Roads? • The road industry would set a very high bar, but governments have to fund a myriad of other sectors including health, education and welfare. Fuel levies are also an easy way to raise funds for general use. • Many countries base road expenditure from the public sector for the coming year on previous levels of expenditure, adjusted for inflation, economic growth and other factors. • However, this amount can be expanded by charging tolls for the use of the roads, and by introducing private sector capital.

10. Road Pricing • Once we move into the concept of tolling road use, we move into the field of recovering the investment based on the cost of the capital. This involves assessing the risk of traffic projections, effectiveness of the collection system, and willingness-to-pay by the users. • Road pricing has also been developed in some cities to limit traffic congestion through peak pricing and network pricing of an urban area. It has also been use to raise revenue for future road investment (e.g. Norway) • Smart technology advances have enabled electronic fee collection without manned toll plazas.

11. United States • The Eisenhower Interstate Highway system was authorized in 1956 and 70 percent was funded by a fuel levy paid into a Highway Trust Fund. By 1992 the network as originally conceived was largely complete. Since then some further expansion has been funded by tolls and through other arrangements with individual state authorities. • For state highways the fuel tax is preferred supplemented by general taxation. Tolling existing interstates is the holy grail of financing options (estimated to bring in an additional US$37 million), but lacks political support. • Although turnpikes were found in colonial America, surprisingly only 5 percent of major highways in the US are funded through tolls, which remain a niche product. Nevertheless, 35 states have at least one toll road. Research in Florida showed that improved access to suburbs by toll roads could increase property values by 5 percent. High occupancy toll lanes in which single occupancy drivers pay a fee are appearing in several cities. • Because of the decline in income from fuel levies some states (e.g. Oregon) are experimenting with “pay-as-you-go” distance taxes using satellite tracking to assess public acceptance. Civil liberty advocates are wary of the misuse of data collected.

12. Canada • There is no single federal tax supporting major highways, but a portion of the fuel tax administered by Infrastructure Canada is used through bilateral cost-sharing arrangements with the provinces. • A further portion is allocated to an earmarked Federal Gas Tax Fund to help fund municipal infrastructure, which can include local roads. The amount is distributed up front based on population and the individual projects are prioritized locally. • Other federally funded programs have targeted strategically important roads. • Fuel excise taxes vary by province and some add VAT. • Although PPPs are common, historically there have been relatively few tolled highways, but cities such as Vancouver and Toronto are increasingly considering road pricing mechanisms.

13. Great Britain • The main source of tax income from British road users is a fuel duty paid into the general revenue account. Taxes are steep (equivalent to US$3.6per gallon)and are not dedicated for road use. There is also a vehicle excise tax on vehicle ownership. • A road levy on HGVs (over 12 tons) was introduced in 2014. The maximum charge is US$15 per day and this is also considered as general revenue. • Tolls have been introduced for major bridges and tunnels, but there has been considerable public opposition to widespread tolling. Weight distance charges have also been contentious. • Since 2003 inner London has had a congestion charge monitored by CCTV reading license plates.

14. European Union • EU policy supports the “user pays” through efficiency charges and “polluter pays” principles through including an “emission class” cost component in the charge. • The EU vignette (11 countries) allows the HGV user the right to use infrastructure across borders for a specific time period. Some countries prefer distance based tolls (8 countries) or network-wide tolls (7 countries). Not all technologies are compatible as yet. • In France 72 percent of its AutoRoute expressway network is tolled. Initially, 70 percent of the funds for such routes were from the government (central and local); in later phases the public contribution was decreased.

15. China • China’s National Trunk Highway System has an expressway network of 90,000 km. The Ministry of Transport sets policies and standards and the provinces provide most of the capital cost from borrowings (and some budget funds). Most of these roads are tolled. • When the capital is repaid, the practice is often to continue tolling, but at a lower level to cover maintenance, rehabilitation and road safety. • Gasoline taxes have increased substantially in recent years to contribute to the highway system, but this has also met strong opposition from the National People’s Congress largely out of concern for the impact on farmers. • Nearly all Chinese toll roads are located close to an existing highway, which may be free or subject to a lower toll. • Toll rates may be set to achieve a balance between strategic and financial goals. Less populous and mountainous areas may receive a degree of subsidy, which is negotiated.

16. India • 50 percent of the pump cost price on average is comprised of central government and state taxes. • Tolling is focused on new expressway corridors between cities. • Congestion charging has been considered, but the fundamental obstacle is enforcement and tracing violators through number plates. • Outside Mumbai dozens of tollbooths were set ablaze in a protest – there is a lack of trust in some private companies, a concern over double taxation and rural dwellers can no longer walk their animals on the roads.

17. Japan • “User pays” is followed. A Special Account was introduced in 1954 for road improvements. • At national level, all the revenue from a gasoline tax, half from an LPG tax, and 75 percent of a weight tax is transferred to the special account. • Local government roads are funded through 25 percent of the weight tax as well as diesel and vehicle purchase taxes collected at local level. • Almost all expressways are tolled, but central government finances 70 percent of the cost.

18. New Zealand • Road user charges are applied on all diesel vehicles and all vehicles over 3.5 metric tons, according to a cost allocation model. Funds collected are placed in a dedicated account. • Distance licenses are purchased in units of 1,000 km and display a placard on the windshield. A hub odometer installed on an axle allows authorities to inspect compliance. Costs rise with axle weight. • A major criticism has been the cost of administration leading to higher freight haulage costs.

19. Latin America • Toll roads are found extensively in Argentina, Brazil, Chile, Colombia and Mexico - mostly successful, especially in Chile, but some lessons learned: • Importance of mitigating traffic risk; improvements in tendering and legislation led to better outcomes. • In Mexico also shadow tolls, initial state contributions and tendering for minimum state contribution. • In Chile a special effort was made to include citizen input at all levels and introduced conflict resolution forums. The program, which included urban tolls, was seen as fair and transparent and was combined with public transport improvements.

20. Africa • African countries derive most revenue for highways from fuel taxation, with smaller amounts from licensing, cross border charges and fees. • South of the Sahara there are 27 countries with ring-fenced road funds in place, encouraged by development banks and other financiers to improve sustainability of road investments. Performance-based contracting for maintenance and strong road agencies are also supported. • Namibia has a weight distance tax for vehicles over 3.5 tons • Low road density has contributed to traffic congestion in the fast growing cities.

21. A familiar sight in Africa

22. New Roads are Expensive

23. Toll Roads in Africa • North of the Sahara, Morocco has a network of toll roads and Egypt has a couple. South of the Sahara (excluding South Africa) there is a handful of PPPs, but with mixed results: • In Senegal there is a successful toll road in Dakar supported by the IFC. Nigeria, however, experienced problems with the Lekki-Lagos toll road, where there was congestion at toll booths and negative public reaction to “double payment.” The state government was forced to buy it back. • Kenya introduced tolls in the late 80’s but abandoned them in favor of a road levy because of rampant corruption at toll stations. It is now planning their re-introduction. Similar plans are afoot in Tanzania, Uganda and Zambia. In Zimbabwe there have been issues with revenue “misappropriation.”

24. Roads in South Africa • By far the best road system in Africa, but provincial and local roads often starved of funds and maintenance suffers. The Department of Finance has the difficult job of allocating funds between competing needs. • Inter-city toll roads have increased the pool of available funds and have worked effectively, but tolling has become contentious with the Gauteng Freeway Improvement Project (GFIP). • The problems have not been with the technology, but the business processes and the preparation for the system’s introduction, leading to a compliance rate reputed to be less than 30 percent.

25. The Dilemma • The legacy of apartheid is an urban form where most poor people live far from their places of work, cities are sprawling and public transport is poor. • South African economic growth has stagnated and the country’s credit rating has deteriorated, making borrowing more expensive. At the same time the Rand/dollar exchange rate has deteriorated (until recently) making imported oil more expensive. • Short term we can fund roads from government appropriations and we have the option to expand the supply of roads through tolling. Long term we need to look at alternative and more equitable ways of generating revenue. • This issue is a global one. Simultaneously with this workshop a similar one is taking place in Brussels, Belgium.

26. Dilemma Continued • Clearly the need for the upgrade is not questioned, but the reason for cost escalations certainly is. • However, the Gauteng area is the main beneficiary and a default would have to be paid by the taxpayer and this means all South Africans in all provinces would be paying for the facility. • If we don’t sort this problem out it will further affect the credit rating of SANRAL and increase the risk perception of potential investors.

27. Points to Ponder • Until the economy grows faster the supply of roads is likely to remain fixed or grow only marginally. • Is the process of prioritizing conventional roads and toll roads sufficiently transparent and does it involve real consultation with the users? • Is open tolling workable in South Africa? • Chile introduced a sector regulator, which helped in achieving negotiated outcomes iro of toll concessions.

28. The End • Your road system is one of the country’s best assets, let’s not waste it! • There is a new team leading the country. This is a great opportunity to work together to solve the road problems. • Thank you for listening and I look forward to the debate.