Perils of Privatization and Pricing as Proposed - Towards a Public Utility Model of Roads


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The 2012 proposal by David Cameron to “privatize” UK roads, by contracting out management of the roads in exchange for a stipend of taxes (but notably not tolling existing roads, only new construction) (Watt, 2012) is interesting, and promises a short-term revenue fix (and possibly better managed roads) in exchange for less funds downstream. In Great Britain, after World War II public corporations managed most utilities (electricity, gas, water, and rail) while others remained within the public sector (post and telecommunications, roads). The Thatcher administration successfully privatized British Telecom in 1984 and other public utilities in subsequent years, including bus transit and some rail transit, but not roads. The government retained the power to regulate these natural monopoly industries.

In many countries, freeways are operated by private sector firms under a franchise or concession agreement with the government, which usually retains underlying ownership of the road (Daniels and Trebilcock, 1996; Poole, 1997; Poole Jr and Fixler Jr, 1987). As of 2004, more than 37 percent of motorway length in the EU25 plus Norway and Switzerland was under concession, and 75 percent of that was privately operated (Albalate et al., 2009).

There is even limited experience in the US with contracting operation of existing roads, which has not been without controversy, the most notable examples are the long-term leases of the Indiana Turnpike and Chicago Skyway (Samuel and Poole, 2005). New toll roads built and operated by private firms are much more widespread, and include the Dulles Greenway and Pocahantas Parkway in Virginia, the Adams Avenue Turnpike in Utah. This experience applies well to toll roads, and variants such as High Occupancy/Toll (HOT) lanes (Poole et al., 1999) and Truck-only Tollways (Samuel et al., 2002). California’s SR-91 median toll lines were privately built on public right-of-way, and later bought out by a public toll agency. Presently, the MnPass HOT lanes in Minnesota manage toll collection under a concession to private organizations. A large share of the few new limited-access roads built in the US have adopted the toll model, and more could follow suit (Fields et al., 2009; Poole and Samuel, 2006; Poole and Sugimoto, 1995; Staley and Moore, 2009).

Yet, most roads, and even most freeways, in the US are not toll roads. Strategies such as mileage-based user fees or vehicle mileage taxes, which replace and improve upon existing motor fuel taxes have been vetted, and may ultimately be implemented. But allocating funds to particular roads, while technologically straight-forward, may face resistance from privacy concerns.

There are technical solutions to privacy issues, but implementing these, in the face of the desire of security agencies to be able to track individuals, will be difficult. It may turn out with cameras, mobile phones, and other devices, we lose privacy about our whereabouts well before road pricing is implemented. The solution may be as Brin (1998) suggests a Transparent Society, where everyone can watch everyone, the state does not have a monopoly on monitoring. Based on historical experience (Levinson, 2002), implementing tolls on existing untolled roads is likely to be politically difficult and unpopular. A 2007 petition in the UK to then Prime Minister Tony Blair beseeched:

“The idea of tracking every vehicle at all times is sinister and wrong. Road pricing is already here with the high level of taxation on fuel. The more you travel the more tax you pay.

It will be an unfair tax on those who live apart from families and poorer people who will not be able to afford the high monthly costs.

Please Mr Blair forget about road pricing and concentrate on improving our roads to reduce congestion.”

– The petition, now closed, could previously be found at: http://petitions.number10.gov.uk/traveltax

This petition to scrap “the planned vehicle tracking and road pricing policy” was signed by more than 1.8 million UK residents by 2007, more than any other petition in history. It clearly has informed Cameron’s proposed policy.

Further the problem of rates differing by route (such as marginal cost prices, the theoretical ideal from a micro-economics perspective), would undoubtedly increase system complexity and distrust, with likely only small gains from system efficiency. Our best estimate from computer models is that moving from a user equilibrium solution, where each driver selfishly chooses his or her own route, to a system optimal solution where each driver chooses a route that is best for society is less than 5 percent reduction in total Vehicle Hours Traveled in the Twin Cities. This suggests the “price of anarchy” (the ratio of user equilibrium to system optimal travel times) is not large on real road networks, despite externalities such as congestion, and imperfect competition among roads. Much larger gains are to be had if travelers shifted to different times of day, but that need not be route-specific.

If the rates were set by private firms in an unregulated manner, monopoly links would have higher prices and be rightly perceived as exploiting their position. In a robust network, monopoly routes are scarce, often there are many viable paths between given origins and destinations, but local monopolies remain, especially on poorly designed, or geographically constrained networks. While there are innovative economic solutions it is likely that a disjoint system of too many road operators, in addition to being complex and unpopular, may be inefficient as economies of scale and network externalities are not fully realized.

Albalate et al. (2009) describe recent toll road privatizations as indicating a change in government intervention which sees “transitions from internal control on processes and inputs to external control on performance outputs.” Toll privatization results in an increase in price regulation. In Europe, privatization entails transfer of management and operation (through concessions) for a time period, while underlying asset ownership is retained by the government. It is widely observed in the public management literature that found that more agency autonomy is accompanied by an increase in external controls. Still focusing on the outputs (the performance measures) rather than on how those measures are achieved should, by decentralizing decision-making, produce a more efficient outcome.

Economic solutions to the monopoly problem include auctions for the privilege for operating routes which would allow the public to recover these monopoly profits, or reverse auctions where firms would bid to charge the lowest rate to operate the route. Future franchising such as Present-Value of Revenue (PVR) auctions may entice government agencies to reconsider the toll finance mechanism. The PVR auctions are similar to the so called Demsetz auctions (used in the Build-Operate-Transfer (BOT) approach) with the exception that private firms compete through bidding for the present value of toll revenue they want to obtain from the project. In this way, the consequences of these auction are: no renegotiations (franchise terms are lengthened or shortened to meet bid PVR); no special clauses such as competition (the governments may build additional competing infrastructure projects because of previous consequence); incorporated buyout option (private firms receive their PVR bid, and governments acquire the infrastructure without bargaining behavior); and others. However, disadvantages of PVR auctions include: no incentives to increase demand (if demand increases it shortens the franchise term), and thus projects that require higher service quality may not be appropriate for PVR auctions (Engel et al., 2006).

A model that has been insufficiently explored in the US is that of public utilities. Many utilities share with transportation systems the characteristic of having a networked structure. Most, if not all, of these utilities are operated on the basis of a payment-for-use system. Utility pricing varies regionally, some locales vary prices by time of day, and users often have the option of choosing different rate plans. These models are never strict marginal cost pricing, but they may improve upon average cost pricing. There are strong parallels between public utilities and transportation services, though some differences exist in the nature of the services consumed, the role of technology, and the structure of institutions and decision making (Hillsman, 1995).

Water faces similar difficulties to transportation in the ambiguity of appropriate property rights. Institutional reforms began in the 20th century to better allocate water resources and to improve the efficiency of water use. The perspective of water changed from being perceived as a free good to a scarce economic good took place around the world (Saleth and Dinar, 2004). Institutional reforms differ by political setting and social environment (Saleth and Dinar, 1999), who observed that decentralization (from central to state and municipal governments) took place in Mexico, Brazil, while corporatization and privatization occurred in Chile, Brazil, France, United Kingdom, Australia, and New Zealand, among others.

Hillsman (1995) suggests four categories in which utilities have developed to manage demand:


  • Altering infrastructure,

  • Packaging services,

  • Substituting technologies, and

  • Changing the price of service.

Transportation agencies have considered all of these, but implemented them weakly. In reverse order: Prices are largely invariant, technological (modal substitutions) are not viable for most passenger or freight users, bundling and packaging of services is not considered when looking at pricing, and infrastructure is hidebound to engineering standards, and difficult to modify. One could easily imagine more creativity on the part of road providers in all of these aspects. The constraints on the application of creativity are due to the engineering culture in a public agency, where risk-taking is discouraged if not punished, and certainly never rewarded.

With some modification, it seems possible to transfer the utility model of governance to road transportation. This model separates the organization delivering the service from the client, is subject to rate regulation, and implements a more direct, user-pays system of financing. This model could depoliticize management of the existing transportation system. Whether rate regulation is in fact economically necessary is the subject of debate; for instance Stigler and Friedland (1962) argue there is no difference in prices in the electrical sector due to regulation, because electricity is competitive with other energy sources in the long run. One expects from experience with other utilities, toll roads, and road concessions in other countries that it would be politically necessary to have some public guarantee of an upper bound on the rates a road utility could charge, as provided by a regulatory agency. The risk is that an upper bound on revenue would be too tight, resulting in financial losses (and one of the causes of municipal takeover), as occurred in the then private mass transit sector throughout in the US in the early to mid 20th century.

Such a system would transform but not replace public highway or transportation authorities as the party responsible for providing and maintaining roads. One example of a transportation system that has transitioned to more of a utility-based model is the road authority in New Zealand (Starkie, 1988). This system was designed to be self-financing, with what was originally called the National Roads Board allocating charges among users on the basis of costs incurred. Three types of costs were identified: load-related costs, capacity-related costs, and driver-related costs (covering signing and other costs not related directly to road use).

There are other elements of costs not included, such as access costs (the cost of accessing the network from land and the cost of a connected network, which can be separated from capacity costs (related to the width of the roadway), and load costs (related to the thickness of the roadway), and environmental costs (both how the system deteriorates due to weathering independent of use, and how the environment is degraded due to use).

Vehicles are split into two classes on the basis of weight, with vehicles less than 3.5 tonnes paying a charge in the form of a fuel tax. In the US, Oregon has a weight-mile tax for heavy trucks. Heavier vehicles pay a distance license fee, which is essentially a form of weight-distance tax. Such a system is relatively straightforward and requires minimal new technology, leading to low collection costs compared with most proposed road pricing systems. (Newbery and Santos, 1999) have also estimated the costs and relevant charges for a similar, though hypothetical, system of user charges for the UK.

These types of road user charging schemes contrast with user charges based on a mileage tax concept utilizing GPS systems (Forkenbrock, 2008). There are a variety of potential technologies for assessing mileage taxes, most use GPS (or an equivalent such as cellphone triangulation) to identify location, since one of the advantages of these types of systems is the ability to charge different rates for different locations (city vs. country, freeway vs. local street, congested vs. uncongested road). GPS receivers do not normally transmit information. GPS-equipped vehicles can log the vehicle location internal to the vehicle. Some additional communication technology, which might report a reduced form of information (e.g. total amount owed) would be used to complete the transaction. For instance, a pilot study in Oregon (Zhang et al., 2009) had a chip in the vehicle log distance traveled by zone (an aggregated version of location) and time of day, without storing the precise location. The chip only reported to the external source the total charge owed, calculated by an onboard algorithm. So no detailed tracking information was shared. Simpler technologies such as a mileage based user fee would simply record the odometer reading, but this would not allow differentiation by time of day or location.

While the road user charging concept remains an attractive prospect, its application may still be many years away due to a combination of privacy concerns, implementation and transaction cost issues (Levinson and Odlyzko, 2008), and technological development issues. Some of these concerns might be obviated under a different governance structure, where it was neither the legislative nor executive branch of government making these decisions. Public utilities have a “mean level of trust” of 42%, (Jenkins-Smith and Herron, 2004), which is much higher than the trust in the federal government, which hovers in the 20% range (Pew Research Center for the People and the Press, 2010). Dynamic pricing, as suggested for toll roads, significantly reduces consumer’s trust in an organization (Garbarino and Lee, 2003), as prices are no longer predictable and feelings of price gouging take place. Other US surveys suggest that the public feels dedicating the gas tax to transportation (hypothecation in the British jargon) would be a good idea. Of course this already occurs in most states and at the federal level, the public just does not realize it, and the political debate does not help. Hypothecation does not occur in localities, where roads are in fact funded out of general revenue, typically property taxes.

The discussions of road pricing for financing and congestion management in the US are still largely under the guise of existing institutions doing the pricing. To date, this has essentially been a non-starter. Perhaps with institutional reforms, reconfiguring state and local DOTs as public utilities rather than departments of state and local government, the logic the public applies to roads will change, from one of a public service paid by the pot of general revenue to a fee-for-service proposition paid for by direct user charges.

References

Albalate, D., Bel, G., and Fageda, X. (2009). Privatization and regulatory reform of toll motorways in Europe. Governance, 22(2):295–318.

Brin, D. (1998). The transparent society: will technology force us to choose between privacy and freedom? Basic Books.

Daniels, R. and Trebilcock, M. (1996). Private provision of public infrastructure: An organizational analysis of the next privatization frontier. University of Toronto Law Journal, 46(3):375–426.

Engel, E., Fischer, R., and Galetovic, A. (2006). Privatizing highways in the united states. Review of Industrial Organization, 29(1):27–53.

Fields, G., Hartgen, D., Moore, A., and Poole, R. (2009). Relieving congestion by adding road capacity and tolling. International Journal of Sustainable Transportation, 3(5):360–372.

Forkenbrock, D. (2008). Policy Options for Varying Mileage-Based Road User Charges. Transportation Research Record: Journal of the Transportation Research Board, 2079(-1):29–36.

Garbarino, E. and Lee, O. (2003). Dynamic pricing in internet retail: effects on consumer trust. Psychology and Marketing, 20(6):495–513.

Hillsman, E. (1995). Transportation DSM: building on electric utility experience. Utilities Policy, 5(3-4):237–249.

Jenkins-Smith, H. and Herron, K. (2004). A Decade of Trends in Public Views on Security: U.S. National Security Surveys 1993-2003.

Levinson, D. (2002). Financing transportation networks. Edward Elgar.

Levinson, D. and Odlyzko, A. (2008). Too expensive to meter: The influence of transaction costs in transportation and communication. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 366(1872):2033.

Newbery, D. and Santos, G. (1999). Road taxes, road user charges and earmarking. Fiscal Studies, 20(2):103–132.

Pew Research Center for the People and the Press (2010). Public Trust in Government: 1958-2010.

Poole, R. (1997). Privatization: A new transportation paradigm. Annals of the American Academy of Political and Social Science, 553:94–105.

Poole, R., Orski, C., and Institute, R. P. P. (1999). HOT networks: A new plan for congestion relief and better transit. Reason Public Policy Institute.

Poole, R. and Samuel, P. (2006). The return of private toll roads. Public roads, 69(5):38.

Poole, R. and Sugimoto, Y. (1995). Congestion relief toll tunnels. Transportation, 22(4):327– 351.

Poole Jr, R. and Fixler Jr, P. (1987). Privatization of public-sector services in practice: Experience and potential. Journal of Policy Analysis and Management, 6(4):612–625.

Saleth, R. and Dinar, A. (2004). The institutional economics of water: a cross-country analysis
of institutions and performance. Edward Elgar Pub.

Samuel, P. and Poole, R. (2005). Should States Sell Their Toll Roads? Reason Public Policy Institute.

Samuel, P., Poole, R., and Holguin-Veras, J. (2002). Toll truckways: A new path toward safer and more efficient freight transportation. Reason Public Policy Institute.

Staley, S. and Moore, A. (2009). Mobility First: A new vision for transportation in a globally competitive twenty-first century. Rowman & Littlefield Pub Inc.

Starkie, D. (1988). The New Zealand road charging system. Journal of Transport Economics and Policy, 22(2):239–245.

Stigler, G. and Friedland, C. (1962). What can regulators regulate-the case of electricity. Journal of Law and Econics, 5:1.

Watt, N. (2012). David Cameron unveils plan to sell off the roads: Sovereign wealth funds to be allowed to lease motorways in England, says prime minister. The Guardian Newspaper, Sunday 18 March 2012.

Zhang, L., McMullen, B., Valluri, D., and Nakahara, K. (2009). Vehicle mileage fee on income and spatial equity. Transportation Research Record: Journal of the Transportation Research Board, 2115(-1):110–118.

David Levinson

Network Reliability in Practice

Evolving Transportation Networks

Place and Plexus

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This page contains a single entry by David Levinson published on March 21, 2012 10:35 AM.

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