Friday, 18 January 2008

Privatising the roads? - why roads are not a public good

At the special Manifesto Conference on Saturday, I muttered to a colleague that rather than continue with the congestion charge, we might be better off simply privatising the roads. While this was meant to be deliberately controversial, his response was quite surprising. “They are a public good” he replied, to which I responded “No they’re not.” It being a whispered conversation in the margins of a meeting, it could only continue along the lines of “Yes they are”/”No they’re not” until there was a real danger that the audience were going start joining in or we were going to be joined on stage by a pantomime dame.

Not being one to let things drop, however, I find myself needing to explain why roads are not a public good, both because it highlights errors about transport policy and because it highlights misunderstandings about other public goods.

Before we look at what a public good is, we need first to dispel one myth and so clear up what a public good is not. Public goods are not merely goods from which we all benefit. After all, as Adam Smith made clear, we all benefit from the activities of a baker (he provides us with bread thus obviating the need for us to learn to bake, build an oven etc.), but baking is not a public good. In the same vein, just because the economic activity that roads facilitate benefits us all does not make them public goods. Neither does the fact that they are free at the point of use make them a public good, for this would be to put the cart before the horse; just because things are provided in the manner of a public good does not mean that this is the right or best means of doing so.

The Economist defines a Public good as one which is available to all or to none: they are non-rival, non-excludable and not-rejectable. Dr. Paul M. Johnson adds that they “cannot practically be withheld from one individual consumer without withholding them from all … and … the marginal cost of an additional person consuming them, once they have been produced, is zero”.

Tellingly, none of these applies to roads. Indeed, the first highlights the key problem facing road-users today: roads are extremely rivalrous. There is a very limited amount of space, and so use by any one individual is at the expense of others (expressed through traffic congestion and so loss of both time and temper). This is of course the logic behind the congestion charge.

Roads are also excludable, though in practice this option is not often exercised. Users of the M6 will be well aware that it is possible to exclude drivers from sections of the road dependent upon whether they pay a fee. The template for road privatisation is the service provided by Dulwich College: in 1789 John Morgan built a road from the top of the hill to fields he rented from Dulwich College, charging a toll on people who passed through his land, and on their animals.

Roads are also rejectable, in that one does not have to drive. One may walk or take trains; I know of many environmentally-minded people who have chosen to forgo the car, as well as urban residents that cannot face the horrors of road travel. Yet they are still taxed to pay for a commodity that they do not use.

Dr. Johnson’s points are actually covered by the above: tolls do enable one to withhold the service from some but not others, while congestion means that the marginal cost of an additional road-user is not zero; it is merely defrayed across other road-users by increasing their journey times and frustration, as well as on the general citizenry through pollution and eventually demands for extra roads. And so the cycle continues.

Nonetheless, the arguments that Adam Smith and others used to justify the funding of public goods through taxation are often applied to roads. This is most easily described as the “free rider problem”: to wit, everybody benefits from the building of roads yet without taxation individuals cannot be forced to pay. This is patently not true: not every taxpayer benefits from the building of a road from Henley to Oxford, and through the use of tolls free-riders can be excluded.

In fact, the arguments for funding even some classic public goods are flawed. Adam Smith himself used the example of the lighthouse, arguing that because all shipping would benefit from being warned of the reefs but no private lighthouse keeper could exclude those who did not pay from receiving the warning, nor force them to pay a toll, those who built lighthouses would bear all the costs individually while the benefits would be spread broadly. Yet this does not mean that no private interest will build a lighthouse. One or two shipping magnates may decide that their own losses from shipwrecks are so great that they would personally benefit to such a degree from the building of a lighthouse that they are willing to bear all the costs even though others might benefit. This logic was applied by the Roman and British empires which, in suppressing piracy, gained so much from facilitating trade that they did not mind the fact that others benefited from safer seas without contributing. Similarly, rich burghers who wish to live in beautiful cities may choose to build great public works at their own expense. Thus, depending on one’s viewpoint, there is either a fine line between enlightened self-interest and philanthropy, or Smith’s “Invisible Hand” was a better guide to individual action than even he realised.

This might apply equally to roads, for two reasons. Firstly, because the benefits of road-use are not equal, those who benefit most may wish to build roads from which others may benefit. An example from Hong Kong is instructive: when business leaders approached Sir John Cowperthwaite, Financial Secretary, to argue that the government should build a bridge linking Hong Kong island to Kowloon Bay on the grounds that it would boost business in the colony by billions of pounds, he responded that if it was so valuable to them then they should build it themselves. After a long and hopeless battle they eventually did, to their own and everybody else’s benefit. Similarly, one might expect freight hauliers and other big businesses to pay for improved roads so as to reduce the costs of transporting goods.

The real value from infrastructure, however, lies in the boost they give land values. A (less happy) story from London is equally instructive: when Canary Wharf was being built, the developers offered to spend £300 million to build a brand new railway line linking Waterloo and London Bridge to the Isle of Dogs and then gift it to the nation, because they knew that by making it easier for commuters to reach their offices, the rental values of those offices (which they were building) would be raised by billions of pounds. Instead, a combination of rent-seeking by Members of Parliament (who wanted stations in their constituencies) and bureaucratic protectionism (as London Transport sought to protect its monopoly on the building and managing of tubes in the capital) led the Conservative government to look this gift horse in the mouth and instead build the Jubilee Line extension entirely at the expense of taxpayers, many of whom have never used it but have paid vast sums to help wealthy bankers to get to work more easily.

Thus roads, like railways, are best funded not through general taxation but through a combination of land-values and user pricing. This could be achieved in either of two ways: one would be to levy a general land value tax to pay for infrastructure, and to introduce road-user pricing to pay for upkeep and to control congestion; this would maintain the government’s road monopoly (which those who distrust private markets might prefer). Alternatively, we might allow private investors to build and maintain roads, which they would do in the hope of gaining profits from the land they own, the charges they levy and the reduction in costs of other business activities.

I actually remain quite agnostic about these two choices (though as Tristan Mills has pointed out, the latter avoids the increasingly apparent problem that Government cannot be trusted with the vast amount of information that nationwide road-user charging would generate about individuals private movement). What is clear is that the current habit of treating roads as though they are a public good that must be funded from general taxation is not only theoretically incorrect but also leads to a “tragedy of the commons” expressed through congestion and pollution, causes roads to be built where political forces rather than demand dictate, and raises levels of economically-damaging taxation. Whether the shift is from state to private or merely from taxing the general public to making the beneficiaries pay, it is time to start treating roads as a very private good.

11 comments:

Kit said...

You might like to read Frederic Bastiat's idea of a Negative Railroad.

a radical writes said...

hmmm, have a feeling that this might be just a little bit unpopular, it was always the local toll booths which suffered first from rioting in the 18th century. Interesting though, we have to really ask ourselves just because its not a perfect public good, although it is close, does that justify privatisation. Who will benefit most, people or development companies. How far would it go in reducing the publics power to stop unwanted development? This is a tougher question than government vs private sector as you present it, this is also a question of control, regulation and, well, popularity. people don't like feeling powerless against tolls and developments from corporations anymore than they like it from central government. You have to look beyond the rather simplified economics your using at the realities of bureaucracy on both sides (corporation and government) to really get to the root of the problem.

Tom Papworth said...

John (aka. "Radical"),

"just because its not a perfect public good, although it is close..."

The entire point of my article was that it is not in the slightest a public good. The value accrues specifically to landowners and users, and it is they who should pay, not poor innocent taxpayers.

Who will really benefit? Those who are currently playing massive taxes to subsidise the haulage industry and create windfall gains for landowners.

As for the public's power to stop unwanted development, nothing in road privatisation would affect the right of (local) government to regulate planning, just as private housing and business has to satisfy local planning regulations.

So I think your claim that I am relying on "simplified economics" and need to "look...at the realities of bureaucracy" is really just defeatism in the face of entrenched interests, who have for decades been exploiting working men and women who pay far too much tax for things which are sold to them as, but are clearly not, public goods.

Lee Griffin said...

The trouble is Tom, that even if the cost is taken up by those that benefit from the roads, that cost will only get passed on to everyone anyway. Rather than specific road users paying for the roads you'd be shifting the cost to the entire population (assuming they buy anything that isn't local). It's a good idea if you just skim over it, but I really don't feel it holds up to scrutiny.

Tom Papworth said...

Lee,

By that logic, we should subsidise petrol, too. After all, the costs incurred by the transport industry in buying petrol will only be handed on to everybody anyway.

Pursue that logic to its conclusion and you end up nationalising everything.

Jock Coats said...

A veritable triumph of a return to blogging Tom! I've often thought about this but never really voiced it - or at least mostly in terms of rail than of road (after all, the whole network was privately built basically).

A couple of thoughts strike me though, and not necessarily negative or insurmountable and some about the comments...

First, John, of course you don't need toll booths anymore really. If this were done today on a large scale it would be electronic (I like the M6 Toll personally - though I didn't like the idea to start with - but as a one off it needs cash toll booths). If it were widespread I'd imagine something more like a "The Cloud" account (which is I think an apt anaology) with reciprocity between operators not competing on the same patch and automatic billing or subscription.

Second, Lee, like any land tax I don't think it could, at least theoretically, be passed on without a cartel operating. There is no additional utility value in a good just because it comes to me from 300 miles away as opposed to 30. So suppliers of competing goods could not pass on transport costs without coming out more expensive than a more local supplier. Distributors would have to learn to be more efficient - many years ago we tried to suggest the idea of a "trans-shipment" area outside Oxford where all the artics would disgorge that protion of their cargo destined for Oxford onto multi-user/multi-destination local trucks

I've often thought that this would all occur quite naturally in an LVT based fiscal system though. Transport infrastructure as mentioned raises land values at either end, and brings marginal land into use. So say loads of companies moved to Hull because of low land rents to save on their tax bills, it would then be in their interests to build infrastructure to get their goods to markets elsewhere - just as the Hong Kong example (where of course a similar mechanism to LVT - leasing the land periodically from the colony government - the only piece of freehold in HK is the Anglican Cathedral apparently - operated).

The other thing that worries people about such private provision is whether the least well off will be priced off the infrastructure. One response to this is that the land occupied by the road or railway itself would be subject to LVT (definitely so if you were using planning to make road zoned land scarce). This tax take *could* be used to provide free access for some if that was desirable - for example for "public transport" (a third of households, mostly in the poorest third of households do not even own a car as our own party research on road tolls suggests).

In fact, when I was city councillor for the strangest ward in Britain (I maintain - it was made up of four discrete and disconnected bits Oxford had inherited in a neighbouring district's boundary review) we hatched a tongue in cheek scheme to avoid the ward being broken up in the subsequent city reorganization by declaring UDI, and charging a toll on the A40 northern ring road to pay for our parish expenditures! There would be nothing wrong with a bunch of local authorities (or just neighbourhoods) clubbing together to produce and maintain "mutual" roads!

dreamingspire said...

First, private interests (property developers) are indeed required to pay for road improvements (Section 106 planning agreements) as well as for building the access roads on their site and then handing them over to the LA. All that does, of course, is increase congestion on the rest of the road network...
And the concept of edge of town freight interchange depots was included in the Integrated Transport White Paper 10 years ago - but LAs were expected to raise the funding to develop them, just like they were expected to fund proper public transport interchanges in areas that don't have them (still don't in my area).

a radical writes said...

I just don't think that it will work in the manner you describe. Its not that I'm being defeatist about the ability of private corporations (and you do need to be a large corporation to afford to build roads) to provide better and cheaper transport access. In fact I'm rather open to the idea.
However, do I think that such reforms suffer a great risk of being unpopular due to road charges which even with Jock's idea would fall disproportionately upon the middle income driver: yes.
Do I fear the reform being put through by people who understand the theoretical economic implications of such a reform but have no idea about the realities of public and corporate institutional management: yes
I ask you, imagine a conservative government implementing such a policy, without respect for local democracy or the needs of people who need roads but who simply couldn't afford to have them built because it would not be economically viable. Power would simply be handed from those of central government to big business whose interest is profit and big business can manipulate planning organizations whether quango or local government. They can bribe and do deals behind the scenes with relative ease under current planning laws.
In short I think its an interesting idea but as long as we don't have the institutional corporate and public sector reforms that would make such an adventure accountable and in the publics interest rather than simply the private sphere's (they aren't the same thing, one is based on money the other society) then I think the entire thing would neither get the results we want out of it while wasting a huge amount of time and money in government restructuring. phew!

Jock Coats said...

Okay - remember I for one, if not Tom, am looking at this in the context of an LVT based fiscal regime. We will already have or be starting to move toward much more efficient optimal use of land, so the need for personal transport is likely to be much reduced. Indeed one of my first blog posts was on just this topic.

For those on the roads because of work, it becomes a work expense - rightly so, why should anyone else pay taxes to make it cheaper for salespeople to hurtle around the motorway network or computer engineers to get to my operations room?

Toll motorways are already party policy aren't they? I seem to remember Chris Huhne or Martin Horwood saying we had done quite a lot of work with major contractors who were adamant that they could make that bit work at least.

The "section 43" (or is it 42?) network - local ressidential streets, are already subject to different arrangements between local authorities. I did some work in my ward seeing whether we could actually make it work financially - their local roads were apallingly maintained and we proved that you could probably put £20k on the value of every house if we set up a co-operative/community land trust to maintain the local roads with a neighbourhood precept and end the "tragedy of the commons" all too evident in the area where people didn't care whether they broke down the kerbs and mashed up the grass verges so long as they had a place to park their cars (which places also ought to be funded by renting space on the roads if you don't have off-road parking IMHO).

Personally I don't think the average motorist would be against this if it meant that road expenditure rose to nearly what they pay already to use roads or what they pay fell nearly to what was spent on the roads.

All the duties associated with road transport - Road Fund License and Fuel Duties mainly, bring in £23bn at the moment and we spend £6.6bn on the roads network. If people could be assured this was a replacement for existing taxes and not a way of raising more revenue it would be a massive reduction in tax (which I realize is a different argument than Tom was making - but you could spin it that why should I pay £150 per year when I only do a few hundred miles a year and someone paying the same in RFL might do several thousand).

On a slightly humourous note, I'm trying to imagine signs up instead of speed limits saying "20p", "50p" and so on roads...:)

Jock Coats said...

PS - figures came from here.

Lee Griffin said...

Tom, the reality with petrol is that it is pay per use...and I am certainly not against the idea of a well thought out "pay per use" plan for Britain's roads, just not one that penalises those that have a greater need for more individualistic use versus public transport, and not one that allows market forces to dictate how much a road is worth to an individual.

I think maybe you misunderstand where I'm coming from and that is my mistake more than anyone elses. I am not against people paying for what they use, I'm against people paying for unrealistically more than they are using. Privatisation allows for a premium to be demanded on certain routes and certain roads that are completely separate from the maintenance needs of that land. I would much rather the government abolishes any taxes relating to the maintaining of the road network and replaced it with the proportionate tax of charging for what we use against a co-efficient of public transport expected to be used in the area.

I state about the passing on of costs not because I think that it shouldn't happen, I think businesses need to pass on costs to perform well in their annual reports, but because it shows that the privatisation of the roads will not lead to a better financial situation for people in this country, in fact I personally believe more people will be financially impacted by such systems. Is this wrong? Potentially not, but to argue that people would be better off for not paying for road maintenance directly is avoiding reality. :)