Highways: free or toll?

In the past, roads were considered a public good Now it is possible to make people pay: should roads be produced by the private sector? With modern technologies it has become possible to set prices at marginal social costs.

Project financing Concessions Financial Cost Pricing (toll revenues to cover operating and financial costs) FCP predicated on the benefit principle: pay “for better service”

Objections to FCP Better service compared to what? The benefit principle to justify FCP is misplaced FCP conflicts with MSC pricing FCP causes fragmentation FCP causes distortions in investment allocation

which are the benefits of project financing? Financial benefits Greater efficiency

PPP in highways can increase efficiency? Investment costs are likely to be lower if assigned through public tenders Assigning a concession requires longer time and higher costs than a construction contract Very little room for greater efficiency in operation and maintenance

Are there gains from competion? Competition is limited to very rare cases Each concessionaire manages its own natural monopoly Yardstick competition only theoretical Securing efficiency and preventing extra profits depends entirely on regulation

Independent regulatory Authorities? Regulatory Authorities have inevitably a wide discretionary power over tariffs and operators’ profits High risk that they be “captured” by private concessionaires Regulation would be much easier if concession was granted to a public company.

Concessions to private operators or to a single public company? Cost of private capital much higher than that of public funds Financial advantages of private funding are overstated Unbundling to exploit advantages of competition

Tolls or fuel taxes? Covering road costs through tolls has disadvatages: Tolls divert traffic to free roads and increase average social costs of travel Collection costs for tolls are much higher Fuel taxes are a better instrument to cover road costs

What are tolls for? 30% goes for tax In most cases, costs absorb only one third of toll revenues IRI got 7,7 billion euro from privatization of Autostrade. The original investment was 5 million

Tax revenues and investments in roads Tolls are an additional tax, equivalent to doubling fuel tax per km In Italy, road taxes exceed 40 billions. 4,7 billions are paid for tolls. ANAS spends 1,5 billion for state roads Concessionaires invest million

What effect on growth potential? High taxes and low investments for roads reduce competitiveness? Road traffic is 10 times that of railways; yet Italy invests on railways four times more than on roads The distribution of taxes, subsidies, investments among various transport sectors is socially optimal?

Tolls are for congestion Fuel taxes to keep traffic within the socially optimal level of (average) congestion Tolls to ration traffic in specific areas, time or type of vehicle “Congestion tolling” has no relation with financing roads costs

Benefits of congestion tolling Imposing tolls where congestion is high promotes a better use of roads and allocation of investments Congestion tolls accepted if revenues are earmarked for: Improving public transport Improving roads where congestion is higher

Congestion tolls damage the poor? Those who attach a high value to time are not necessarily “rich” Revenues from tolls may be spent to benefit the poor The overall distributional impact is likely to be minor