Thursday, 18 April 2013

Economic Myths: Privatising roads

A reader's letter from today's FT:

The only area where there is evidence of inadequate investment [in the UK] is road building(1), where there are many unbuilt projects that promise high economic returns.(2) The Commission's proposal for a superstructure of institutions to plan infrastructure investment is irrelevant to this issue.(3) Privatising the road network, and financing it through user charges,(4) is the only way of removing roadbuilding from political control.(4) Any investment financed by the state will be controlled by ministers.(5)

1) For the sake of this discussion, let's assume that we could do with more and better roads (might or might not be true).

2) For whom? Superficially, the whole economy benefits because easier travel and transport makes it easier and cheaper to exchange goods and services. Hooray. But a large chunk of that gain just gets capitalised into higher rental values of the areas which now have better transport links (and a few areas suffer from increased traffic noise etc). Boo. Financing roads out of Land Value Tax receipts would solve this little dilemma nicely, but either way, the benefits (and burdens) of road building are so widely dispersed that it can be considered to be a "national" thing.

Remember: the roads in themselves are of little value to anybody (unless you like driving round for the fun of it), they are a means to an end, there is no requirement that they actually make a direct profit for the person who "owns" them any more than the government makes a direct "profit" by employing policemen. It doesn't and it doesn't have to. We, the nation, benefit from having policemen.

As it happens, the UK government makes a handsome profit from roads, because of all the taxes on fuel and motoring generally, and more roads means more economic activity, so it gets more in taxes on incomes as well, so there is no need for existing roads to be privatised.

3) Yes, that does sound like a quangocratic wank-fest.

4) All that does is divert the extra rental value from the hands of existing landowners to a new group of landowners, the road-operators. Any income from a road above and beyond the cost of building and making it is pure rent/monopoly income and entirely unearned. Just like any other land, the amount of money you can get from a toll road or toll bridge depends entirely on where it is and how many people are likely to use it, and not how well it is maintained and run.

And collecting money in tolls is hugely inefficient, there are the costs of collecting small amounts of money, the hassle of having the right change and long queues during busy times, all of which are an absolute cost to the economy.

5) Now he's gone completely off piste. There are so plenty of things which the private sector can do without government interference or assistance, and plenty of things which the private sector can do better or cheaper than the government, but it is impossible to take "political interference" out of road building.

Why?

Because roads need huge amounts of land between A and B. Imagine planning your route and then having to negotiate privately with every single landowner along the route; each and every one of them can hold you to ransom. For sure, railways built prior to the mid-20th century were privately financed, but what the Faux Libertarians always overlook is that there were greedy landowners and NIMBYs even then, every single railway required an Act of Parliament to agree the route and lay out the terms of all the compulsory purchase orders and a scale of compensation for those affected.

Exactly the same applies to roads nowadays.

5) So put all these things together - road builders and "infrastructure funds" keen to divert rent into their own pockets who need politicians to agree the route and pass the necessary legislation, with the equal and opposing force of the landowners and NIMBYs, it is a recipe for corruption, foul compromises, one-sided contracts and disaster generally, and what we end up with might well be worse than what the government would have decided to do off its own bat.

16 comments:

Bayard said...

"where there are many unbuilt projects that promise high economic returns.(2"

I expect he is using the DfT's cost-benefit analysis figures, which basically work out all the time saved by the new road, multiply that by some figure to get a figure for money saved, subtract the envisaged cost of actually building the road and there's your profit. Mind you, all those figures are pretty imaginary, so the "high economic returns" are probably pretty imaginary, too.
BTW this explains why so many new roads are dual carriageways: that extra 10mph makes a big difference to the COBA figures.

Mark Wadsworth said...

B, well, guessing what roads are needed where is a bit haphazard, but as long as you are reasonably right then it doesn't matter as people will adjust to take advantage of the new road, so they might end up travelling somewhere where they otherwise wouldn't have done etc.

Kj said...

And collecting money in tolls is hugely inefficient, there are the costs of collecting small amounts of money, the hassle of having the right change and long queues during busy times, all of which are an absolute cost to the economy.

Yup, in the 20-30% of revenue range. That doesn't mean that tolls can never be used, and serve a purpose, for example with CC.
One point that is related to what the bloke is saying, is that without tolls, most projects aren't going to get built. The political process is so insanely slow, and my govt seem to have given up on any radical infrastructure improvement from general revenue, and toll roads is where it's at.
As long as these are alternative roads that save time, get truckers (who have a high willingness to pay tolls) off minor roads, I'm mostly fine with that. Go the slow road for free, pay up if you're in a rush. Express lanes is a good idea in some places, instead of having bus-lanes only, allow in those who are in a hurry.

Kj said...

- and are willing to pay.

Bob E said...

A question then - just suppose the "privatise the road networks" programme was announced ... what "model" is the most likely to be adopted - something similar to the "Rail" franchises, or something based on "geographic areas" - I particularly have in mind what would happen at somewhere, like say, on the A282 approaching the Dartford Tunnel, the Dartford Bridge interchanges - the same company having exclusive rights to "toll" all the approaches, or one company paying £X to be able to control the Tunnel and another £Y to control the bridge, or could the 2 then pair up and split the costs and proceeds (bearing in mind both were built by taxpayers, who were, certainly in the case of the tunnel, promised that once it had been "paid for by tolls" use of it would be "free" ...)

Kj said...

Bob E: I'm sure it would be the option that enabled Favoured ones to pull in as much rent as possible... I don't really see that there is any efficiency from competition in road provision. Tolls overe here are collected by corporations fully owned by the govt.
There could be some cases where you could auction out leases for projects if govt doesn't want to finance something, bypass tunnels or something, the sort that is nice to have but very optional.

Mark Wadsworth said...

Kj, we've discussed this before.

In principle, I'm fine with road tolls. In practice, the collection costs negate any benefits, so let's go with nationalised roads and tax on petrol. Once we are sophisticated enough, we will be able to do it with satellite trackers but people don't like having the government spy on them (and neither do I).

BobE, good question, I bet the smart arse who wrote the letter can't answer it. The whole thing fails on practicalities and will be a giant PFI-style rent-grabbing bonanza for people who bribe politicians.

adamcollyer said...

That "the only way of removing roadbuilding from political control" is a good example of that siren song that you hear so often now.

"Let's take the setting of interest rates out of political control, and have an "independent" Bank of England," is another example.

Basically that phrase is a direct rejection of democracy. "Out of political control" means "out of control of the people's representatives".

Mark Wadsworth said...

AC, that's a good point.

A.K.A. Damo Mackerel said...

Please see here about a discussion on how we could privatise our roads.

http://wiki.mises.org/wiki/The_Privatization_of_Roads_and_Highways

Bob E said...

A.K.A. Damo Mackerel ..

Went to the Wiki page specified and followed the link to the Excerpt "The Road to Freedom: An Interview with Walter Block"

to be confronted with ...

Walter Block:

"It is difficult for me to speculate as to how a free market in roads would actually operate. I'm a theoretical economist, not the entrepreneur to whom such questions would be better addressed. However, with that proviso, here are my thoughts. I speculate that some road owners would have more strict rules, others less strict, some slightly lenient, and others very lenient. Then, the market would sort things out. That is, possibly, consumer desires would impel road entrepreneurs into either a more or less strict stance — I don't know which".

and so on, reaching as far as

"I am trying to apply economic analysis as it is commonly applied to ordinary issues (bubble gum, beans, beer) to an area (roads) to which it is unusual to do so".

when I got the urge to go in search of some wet paint.

Sorry. But stuff like that is well above my intellectual competence ...

Mark Wadsworth said...

BobE, I allow the Faux Lib nonsense comments to stand, but the possible income or profit to the owner of a road is RENT and the main input cost of building new roads is the cost of buying the land, and each individual landowner can hold the potential road builder to ransom etc.

So the whole thing boils down to competing landowners battling over state protected monopolies and rents, it is about as far from free market as you can possibly get.

Conversely, once the government has built the roads, you can easily have a free market in competing bus services, haulage companies etc, because they compete on a level playing field and against each other.

Kj said...

Actually, buses is some times mentioned as an example of market failure. If anyone can snatch you passengers, it's difficult to invest in them. That's what they say anyway. The faux' says that can be resolved by private roads ofcourse..

Mark Wadsworth said...

Kj - there was a real life example to show that is not true.

On Malta (until recently, when the EU regulated them out of existence), the system was, you buy a bus, meet certain safety standards and just get on with it.

There was a standard price for the whole island (about one lira) and that was it*.

They competed just like taxi drivers. Drivers chose which routes they thought would get most passengers at what time of the day, put up the sign at the front to say where they were going and then just got on with it.

And the system worked fine. At busier times of the day there were more passengers and more buses, at night time there were fewer passengers and very few buses.

I was there on holiday and I didn't find out until afterwards - their bus service was no better or worse than anywhere else in Europe.

* This was the only rule, just to level the playing field a bit. I'm not sure it was necessary but it did make things simpler for the passengers.

Remember - the government can set a minimum (or maximum) price as long the government then leaves the markets to decide the quantity.

It is only a problem if the government sets a minimum price AND restrict the quantity, OR if the government sets a maximum price and then pays subsidies to guarantee a minimum quantity.

Kj said...

MW: thanks for the example, I'll check it up. On the face of it, it does seem that they still have some sort of coordination in place though. Were there timetables?

What I've read about markets in buses often mention UK bus de-regulation. This for example:
http://link.springer.com/article/10.1007%2FBF00150469

Around these parts, the arguments for transport monopolies are that of maintaining rural and unprofitable routes through cross-subsidising, same as with mail-delivery.

My thoughts are that maybe one could utilize negative bids for unprofitable routes at a set price. Or maybe negative bids without price limitations would work as well, and make for more customer-friendly operations?

Mark Wadsworth said...

Kj, the article I read was here

http://news.bbc.co.uk/1/hi/programmes/from_our_own_correspondent/9520210.stm.

I can't remember if there were timetables, there were just numbered bus routes and you waited until one came.

Yes, you can semi-regulate bus services by deciding what the routes and timetables are and what the ticket price will be.

Then you auction off the profitable routes for highest price and auction off the loss-making routes for the lowest subsidy.

But we are getting off the topic here. The point is with buses you can have anything between free-for-all and state provided and it all "works".

With roads, ultimately it is all state-approved and all profits are rents.