Theoretical Framework REVENUE Stef Proost (KULeuven) Based on work Adpc, CERAS, IWW,TIS and KULeuven

Objectives Give theoretical guidelines on –Pricing and investment rules –The associated rules for using transport charges revenues Pass these guidelines under two forms to case studies: –Written guidelines –Small model (molino)

Cost structure, pricing and deficits Public Finance aspects Infrastructure funds and Contract theory Systems Dynamics model MOLINO-model to compare alternative options in the case studies EU wide – orders of magnitude Approach taken in Theory Work Neo Classical theory

Cost structure, pricing and deficits Theory The self-financing theorem The optimal user charges (=Marginal External Congestion Costs) finance the costs of infrastructure if marginal cost of capacity extension is constant – and this is rather robust result- Empirical evidence For roads: ok For Rail: mixed evidence but optimal user charges can go some way to cover infrastructure costs

Cost structure, pricing and deficits Public Finance aspects Infrastructure funds and Contract theory Systems Dynamics model MOLINO-model to compare alternative options in the case studies EU wide – orders of magnitude Approach taken in Theory Work Neo Classical theory

Some conclusions on public finance aspects 1 Cost of Investment depends on the way it is financed because a Euro of public revenu comes mostly from labour taxes and they have a high efficiency cost – this has 2 implications: –The CBA ratio of an investment depends on the way it is financed –The optimal use of revenues may very well be to reduce existing labour taxes

Some conclusions on public finance aspects 2 Integration of equity and efficiency considerations in transport pricing and in- investment studies is possible but requires to know –Who uses transport infrastructure –Who pays for the subsidies to fund the investment

Some conclusions on public finance aspects 3 Multi-government problems: –Spillovers of benefits of investment projects into other regions are not such a big problem if user charging is possible –Risk of monopoly charging is there is limited competition between routes or transport alternatives –Vertical tax externalities may be important handicap for investment and pricing projects (gasoline taxes may go to the federal level and limit the pricing options for lower government levels)

Some conclusions on public finance aspects 4 Political economy models can help to explain –The excessive demand (lobbying) for specific transport investments in some regions –Earmarking (dedicating revenues): not good in theory, but may be a way to commit politicians to not waste the money

Cost structure, pricing and deficits Public Finance aspects Infrastructure funds and Contract theory Systems Dynamics model MOLINO-model to compare alternative options in the case studies EU wide – orders of magnitude Approach taken in Theory Work Neo Classical theory

Contracting and role of Investment agency 1 The choice between public and private management (and the balance between them) depends highly on : –divergence of objectives (externalities, market power) –financial aspects (cost of public funds compared to the risk premium; leverage, ratings,...) Experience with contrating out road, rail and air can to some extent be translated into guidelines and efficiency parameters: contracting out can generate an efficiency gain of say 5 to 20% in some cases

Contracting and role of Investment agency 2 Discussion of investment agency advantages: – independence : credibility of commitments, continuity of infrastructure development – skills in contract engineering – reduction of information asymmetries : may give precious help whatever the precise definition of the agency

Objectives of MOLINO 1 Model to support implementation of theoretical guidelines of Revenu-consortium Designed to compute impacts (short to long term) of alternative pricing, investment and revenu use strategies Implementable for all case studies

Realisation MOLINO Simple “multi-purpose” model in Mathematica Dimensions of model –Any 2 competing modes –Passenger transport (poor rich) and freight transport (local, transit) –Role for operator and infrastructure manager –Dynamics of infrastructure funds –Reduced form coefficients for contract efficiency, marginal cost of funds, equity An illustrative example for an investment in a tunnel in Antwerp was developed

CASE STUDY DATA (t=1…T) - Calibration data for transport needs and behaviour - Cost data for operation and maintenance - Initial infrastructure stock (t=0) - Initial financial structure (t=0) POLICY INPUTS Regulation scheme (t=1…T): Pricing rules + Investment rules + + Revenue use rules + + Types of Contracts Transport market model + Investment + Financial model running from t = 1 to t = T OUTCOMES Transport flows Prices, Capacity Welfare Financial structure The Key Features of MOLINO

Economics is extremely useful as …

a form of employment for economists (J.K.Galbraith)