Toll roads, but it's not road pricing

The Government are reluctant to do anything that is seen as unpopular when it comes to roads. There is an old saying in politics; 'Never get involved with parking or dogs' as it divides the nation pretty equally.

When governments say that they want to reduce congestion everyone agrees,  but disagree violently on how to do it.

Some want more and wider roads. This upsets the environmental lobby as it encourages more cars to use the now clearer roads (and usually just causes worse problems somewhere else on the system).

Some want greater restrictions on driving, such as road pricing, which makes drivers pay for the roads they use according to the time of day and level of congestion. This was simply hinted at in 2007 and caused nearly two million to sign a petition opposing a policy that was yet to be proposed by any party.

A compromise that might be more acceptable is to charge tolls on new roads. Most people seem to back the idea of not raising taxes further and so this is the only way to build new roads.

But is this an integrated transport policy? A series of tolled and non-tolled roads might not work at all. Drivers may cram on to the non-tolled roads to avoid the charge causing even worse congestion in areas not designed for heavy traffic.

The M6 toll road (the Birmingham Northern Relief Road) is a case in point. Opened in 2004 the latest figures show it carrying just 39,000 vehicles a day, almost half the predicted 74,000 a day when it was planned. The rest continue to battle each other for space on the congested M6 to the south.

Toll roads may be a convenient way of avoiding the problems of fiscal policy faced by the UK at present, but it lacks the broader and deeper thinking required to meet the challenge of the 21st Century.

The BBC report the toll road policy here

Incomplete analysis can lead to errors

In a time when the Department for Transport have admitted their analysis of Rail Franchise bids is flawed we are reminded that a faulty method can lead to poor decisions.

One of the most difficult decisions to be made is what transport infrastructure to invest in. There are very many factors to consider, such as forecasts of future demand and external costs and benefits. All of these are difficult to value.

The solution is a full Cost-Benefit Analysis that considers all the private and external costs and values them properly. Only then can a judgement be made and even so substantial margins of error must be considered.

So should we give much credibility to a study by MIT that a third runway at Heathrow is a bad idea?

The MIT study says that, compared to a new Thames Estuary airport (Boris Island), a third runway at Heathrow would cause more early deaths due to pollution. So that's it then, decision made.

However when questioned the authors admitted they had not included any of the following issues in their study:

* The cost of construction at either site
* The impact on local transport at either site
* The impact of extra road traffic too and from any new airport
* The external costs and benefits of either airport

Of course their defence was that they were only looking at health impacts of the two options and that is actually quite reasonable. It represents a contribution to the full cost-benefit analysis and a valuable one at that.

The Guardian reports the study here

Another rail fiasco

The decision to award the West Coast Main Line franchise to First Group in August has already caused a commotion. Virgin had launched a legal challenge claiming 'somebody does not like us at the DfT' (Department for Transport).

Well its not only people in the DfT who find Richard Branson a pain in the arse, but that was not the reason Virgin lost. Officials miscalculated the time value of money and passenger numbers in the 13 year franchise bid. It does make a difference when money flows are received as inflation and interest rates are key elements.

The whole process is now up in the air and will have to be examined again.

For us the process is the issue. How do we assess long term transport projects? Stephen Glaister a former LSE and Imperial professor is a specialist Transport Economist. He looks at the issues in this excellent Guardian article here. (Essential for A2!)

Glaister's article is here

Virgin calls foul

Virgin have lost the franchise to run the 'West Coast Mainline', there is a map on the article if you are not sure what this is, but it is basically London to Glasgow, via Birmingham.

This is one of the really important rail routes in the UK (London - Edinburgh and London - South Wales being the others).

When rail was privatised the network was split up into franchises (most of the others being smaller and messier geographically) and whoever wanted the lowest subsidy, or would pay the most was allowed to run them.

The whole process was a mess. Too many franchises, franchise periods that were too short to allow investment or too long to promote competition. There were frequent changes and government interference. Nobody came out of the process with any credit.

Now there are medium term franchises (around 13 years) and the 'bid process' is well established. The aim is to maximise revenue to the government and provide better rail services while ensuring investment. The aims are not necessarily complimentary!

The latest route to be competed for is the West Coast Mainline, which the Virgin Group has run since it was first privatised. They have invested in new trains and improved service frequency and quality. They have also received quite staggering favouritism from government (see Private Eye ad infinitum).

But Virgin lost the franchise to First Group, already a major rail operator. Virgin offered less money and less comprehensive service improvements and after 18 months of the process their bid was judged inferior.

Virgin feel hard done by and are using their considerable PR clout to call foul and demand intervention by MP's. It's very sad and I think really embarrassing.

They have, however, one valid point. The way franchises are awarded may not work.

The theory of franchising is this:
1. Competition promotes efficiency.
2. Efficient allocation of resources is better for consumers - lower prices, and society - more efficient use of scarce resources.
3. Rail is a natural monopoly and so it is inefficient to have multiple train providers on single routes.
4. Therefore competition should be provided in the process of bidding to run the routes. Regulation and regular 're-franchising' will keep franchise holders honest and prevent monopoly profits.
5. The government can make money selling the franchises!

But the process can go wrong when a bidder for a franchise offers too much. If they make losses and walk away this can cause massive disruption and reduce investment in the network. And it has happened before. National Express offered too much for the East Coast mainline and had to be replaced at great cost. In another industry Harlech Television paid too much for the ITV franchise for 'Wales and the West' and went bankrupt.

I hope Virgin is wrong. They have been given preferential treatment throughout their time as a rail operator and this just stinks of sour grapes. However the issues are real and not just for Transport Economics.

The BBC covers the story here

Workplace parking tax in Nottingham

Nottingham is introducing a tax on workplace parking if a firm has more than ten parking places for employees. The aim is to provide a further disincentive to using private transport and reduce congestion.

The fee for a parking place is £288 a year and employers can pay it or charge their employees. Presumably if the employer pays the fee then employees will need to declare it as a 'benefit in kind' for tax.

Will £288 be enough to reduce congestion very much? Well probably not. But the scheme should raise £14 million and that is going to fund two new tram lines and provide a cheap and efficient improvement to public transport.

Trams are incredibly cheap to provide compared to other types of public infrastructure and if they have good routes will be very fast (but not if they head down crowded streets and compete with cars of course). They are also very environmentally friendly and fit into a sustainable transport policy very well.

We know from places like Singapore that congestion policy needs a series of supporting measures. This increases the effectiveness of each (making the cross price elasticity of demand more elastic). So Nottingham are also introducing parking restrictions to avoid people avoiding the charge by parking on the street. With the investment in trams they are probably doing all a local authority can.

Many people object to this move but it really does seem to be a policy informed by our understanding of transport economics.

Local coverage of the policy is here

Road privatisation - is this the death of sensible road pricing as an option?

The Prime Minister announced that there is to be a consultation on putting the road network, at least partially, into private ownership.

This move has many implications and Transport Economics will be changed forever.

The Independent article raises most of the important issues. How will the roads be 'privatised', will the same mistakes be made as in past privatisations? Has PFI ever really worked? Will this scheme bring the investment the roads need?

But there are two issues I need to highlight.

The report suggests the cost of congestion is £7bn a year. I know this was estimated at £15bn in 1990, so this seems far too low a figure. I have asked for information on the source of The Independent's figure, but the difference seems to me to be so massive that it would change the result of any Cost-Benefit Analysis.

The issue that really bothers me about this plan is that it effectively abandons any thought of a national road pricing scheme. Such a scheme, where charges vary according to the time of day and level of congestion and co-ordinated on a national basis, holds the answer to the road problem.

Road pricing will pass on external costs, reduce road use and encourage alternative modes of transport. Such a scheme uses all the principles of charging that economists know can lead to an optimal outcome and a sustainable transport policy.

Can you imagine a road network with a mixture of public and private roads, a variety of tolls and SatNav's that direct traffic down the cheapest route, which will probably be past a school or old peoples home? Let's not even start on what happens when firms and investors walk away from their franchises!

Vital reading for Grecians, but important for everyone.

The Independent article is here

Has Rail Privatisation failed?

Yesterday The Guardian compared the NHS reforms to a 'failed Rail Privatisation'. I'm not at all clear on the NHS aspect of this but the article largely dealt with rail anyway.

The article chronicles many of the worst aspects of what was a botched privatisation in the rail industry. But even so I found  the negative aspects of it somewhat overstated. The problem of rail privatisation was its success allowing a huge rise in use.

That is very little consolation to those who stand everyday on overcrowded trains and pay the world's highest fares, but a more than 50% rise in passenger km's since privatisation seems like a measure of success, not failure.

The problems of the rail industry were highlighted in the McNulty report (a copy is now on the website in the Transport Economics page). The poor privatisation and subsequent meddling of an incompetent government (Prescott and Byers primarily) has prevented the intended competition from keeping costs down and the necessary investment has not happened because nobody trusts the government or PPP.

If the NHS reforms led to 50% more patients being treated on essentially the same health infrastructure wouldn't that be counted as success? Really the rail industry needs £20bn of new infrastructure investment in the next five years and about the same each five years after that without a single high speed line being built.

The Guardian article is here

Fatties surcharge proposed for airlines

A former QANTAS economist has proposed that overweight people should pay more to fly.

When you fly you are given a weight limit for you luggage. A base amount might be 20Kg or 23Kg, which is not that much for a long trip. Ryanair charge €12 per Kg for overweight bags (and more for each extra bag).

And yet as you queue up you see people of all shapes and sizes and their weight differences make the luggage weights look insignificant. So why not charge passengers by their combined body and luggage weight rather than per seat?

This may seem rather odd, even discriminatory. But the heavier an aeroplane is the more fuel it uses. So the airlines costs are affected and in a market prices should be (partly) determined by costs.

The economics of this idea is known as price discrimination. Customers are charged different prices for the same product. Usually this is according to when they buy, or where they buy the product, but this is a quite reasonable extension of the idea.

Of course for overweight people this will be a new way of improving on the market failure caused by the 'lack of information' goods - high fat foods!

The ABC report the story here - please tell me if you can't see the video

Is it really worth it?

There is a proposal to build a faster passenger link between London and Birmingham. It's called HS2 (HS1 was a more ambitious plan for the building of a high speed link to the North of England).

The link will cost £17bn and will take 49 minutes ofF the journey. This is exactly the type of capital project that Cost Benefit Analysis was designed to evaluate.

The problem is that the last major review of UK transport needs, the Eddington Report, said this was the dumbest idea ever and that a vastly more beneficial use of the money would be in removing the many bottlenecks in the transport system. Cost Benefit Analysis gives you a Benefit:Cost ratio (BCR), and Eddington said that such a high speed link would give a BCR of about 1.3, whereas smaller schemes, costing £100 to £1bn could provide BCR of 100+!

It would seem that there is a political will to build this new railway. Perhaps because it gives hope to many that such Keynesian work creation schemes solve unemployment (they don't by the way).

You might consider what the costs and benefits of the HS2 scheme are and how they can be evaluated. This is part of the A2 Transport module.

The BBC covers the story here

Chinese have been reading the Development textbooks

One of the pieces of advice given to Less Developed Countries (LDC's) by the 'First World' in the 1960's was to invest in 'leading sectors'. This was based on the view that certain sectors have high second round effects and so a high multiplier value.

While this advice was largely ineffective, and in many cases disastrous, the idea of government intervention and 'unbalanced growth' to kick start under developed economies has remained in the literature. Clearly the Chinese have read about it as they now wish to invest in British infrastructure in order to help boost economic growth.

The Chinese are, of course, acting in their own best interests. They need Europe to grow so they can buy more Chinese goods. They also need somewhere to invest their considerable wealth. They have established 'sovereign wealth funds' to do this, a very sensible move as China cannot possibly use all the profits currently earned by their exports.

There are several ideas to explore here. Will there really be a big multiplier effect as a result of the proposed new investment? Is this the golden goose the Public Private Partnership programme has been looking for (it has totally failed to attract significant private funds for nearly ten years)? Are sovereign wealth funds a good idea? And of course how long has China considered the UK an LDC?

Whatever the answers it is clear that old copies of Todaro have a ready market in China.

The BBC cover the story here

Costs and benefits of a Heathrow-Gatwick rail link

There is a proposal to link Heathrow and Gatwick airports by a high-speed rail link. This suggestion will require a thorough cost-benefit analysis (CBA).

The idea is to help improve airport capacity and avoid building new runways or new airports to achieve that. While I am not really clear how much capacity it could add the costs and benefits are worth investigating.

A CBA identifies all the costs and benefits of a project, both private and external, gives them a monetary value and then decides if the investment is worth the cost. Perhaps the strongest advantage of CBA is that it allows comparison of projects. So in this case the Heathrow-Gatwick rail link can be compared to expanding Gatwick, or Heathrow or building a new airport somewhere.

For those doing transport economics this year it represents an excellent opportunity to apply CBA. Also it is not too late for this to be included in the June Transport paper, and is a certainty for 2013 otherwise.

The Telegraph reports the scheme here