Road privatisation can deliver huge benefits – but only if government gets out of the way

The British government is finally recognising the strong link between transport infrastructure and economic growth. The Budget set out plans for a national road strategy while earlier this week the Prime Minister announced that motorways and trunk roads could be operated by the private sector.

The new proposals represent a significant shift in policy. Since the early 1990s public transport has been prioritised by successive governments. Huge subsidies have been given to buses, trams and trains. Expenditure on roads has focused on deterring car use through traffic calming, new controls and priority lanes for buses and bicycles. But despite these measures, private cars still carry 85% of passenger traffic. In most areas public transport carries a tiny minority of travellers (with the important exception of travel to and from central London).

In practice public transport simply does not have the capability to move more than a small fraction of passengers and goods around the UK. Economic activity is too dispersed and buses and trains don’t offer the flexibility and convenience of cars and lorries. Moreover, public transport requires massive taxpayer subsidies – totalling over £10 billion per annum. It is inconceivable that a heavily indebted government could increase this burden much further.

Improvements to the road network offer far better value for money and need not cost the taxpayer a penny. Unlike many rail projects (High Speed 2 is a typical example), road schemes can be self-financing with construction and operating costs funded by tolls. This makes roads an ideal investment for the private sector. Without the need for government subsidies, the political risks are much smaller than with public transport. David Cameron is therefore right to see the huge potential for greater private sector involvement in the core road network.

The benefits of privatisation are potentially enormous. Private operators would depend on toll revenues for their profits and they would have very strong incentives to provide a good service to customers. Congestion – which currently costs the UK economy about £20 billion per year – could be eliminated by flexible pricing, with off-peak users offered bargain rates. Safety could be improved dramatically as operators sought to avoid costly delays from accidents. Perhaps most importantly, investment in new capacity would reflect consumer demand rather than political priorities. In marked contrast to the current system, new roads would be built where they were needed most.

Privatisation would also bring entrepreneurship and innovation to the road network. This is how really big efficiency gains become possible. For example, private operators could increase weight and size limits on goods vehicles. Imagine the productivity gains in the distribution sector if each lorry could carry say 50% more cargo. Speed limits could also be increased where safe to do so, leading to massive time savings and lower business costs. All manner of improvements would be possible as entrepreneurs sought to maximise the returns from their infrastructure.

But none of these benefits will be possible if government regulates the roads too tightly. Private firms need flexibility if they are to innovate. And this is where the current plans fall short.

The Prime Minister talked of private companies leasing roads instead of owning them outright. And he said that pricing would only be permitted on new capacity; it would be prohibited on existing infrastructure. Operators would also be subject to strict rules set by a regulator, in a similar framework to the water industry. There won’t be much scope for entrepreneurship and innovation under such arrangements. The benefits from such a limited form of privatisation are likely to be small.

There is also a danger that private operators will be subject to the kind of complex contractual arrangements seen on Britain’s railways. Rail subsidies have roughly trebled in real terms since privatisation, largely as a result of high ‘transaction costs’ resulting from the artificial fragmentation of the industry.

The government must be careful not to repeat this mistake on the roads. In the longer term, it should also move to remove distortions to transport markets by moderating fuel duty and phasing out subsidies. Road privatisation can deliver huge economic benefits – but only if government gets out of the way.

22 March 2012, Reuters


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