The benefits of motorway privatisation

When governments try to manage infrastructure the results are usually disastrous. Wasteful investment, bloated bureaucracies and political interference are the frequent consequences of state control.

Government owned motorways are no exception. In most countries they are cursed with chronic congestion and delays. Typically there is overcrowding in some locations and overcapacity in others. The supply of road space is almost completely divorced from consumer demand. This is because motorway networks are supplied using methods that are thinly disguised versions of Soviet central planning. Politicians and senior officials decide where new routes will be built with little regard for the needs of road users.

Typically decisions are heavily influenced by special interests. Local or regional governments, together with large corporations, might argue that they need a new motorway to boost economic development in their local area. They will lobby fiercely for funding from national governments or the European Union. Unfortunately this means that the preferences of consumers and taxpayers are neglected and motorways get built in the wrong places.

As well as building motorways in the wrong places, governments also charge the wrong prices. Toll levels are decided by politicians and bureaucrats rather than based on consumer demand. Indeed, in many countries there are no direct charges whatsoever. Motorways are free at the point of use. There is no price mechanism to allocate road space efficiently and unsurprisingly this leads to chronic inter-urban congestion in high-demand locations, as seen for example in the UK and the Netherlands.

The problems associated with state control make a strong case for privatisation. Private owners do not set prices for political reasons; they set them to maximise revenues by attracting customers. And since drivers – particularly those whose time is valuable – do not want to be delayed by congestion, private motorway owners set toll rates at levels that ensure the free flow of traffic. They also vary tolls to make maximum use of capacity. This has an important additional benefit. By maximising the use of existing infrastructure, privatisation reduces the need to construct expensive new routes.

Toll revenues also provide motorway owners with valuable information about where to invest. If prices are high due to strong demand, it may be worthwhile adding new capacity. However, if prices are low this may be a sign that building new infrastructure would not be profitable. In other words, privatisation restores the link between supply and demand, making motorway investment responsive to the needs of road-users.

Privatisation also opens the door to innovation and entrepreneurship on the motorways. Private owners could, for example, decide to increase speed limits to reduce journey times. Or perhaps they might allow heavier trucks to use their routes. They could also provide a range of additional services for their customers or even decide to make money from developing land alongside interchanges with shops, offices and housing.

By allowing entrepreneurs to experiment and discover new ways of serving their customers, motorway privatisation has the potential to inject much needed dynamism into the transport sector, bringing very substantial efficiency gains. These benefits depend, however, on politicians and state officials renouncing control.

If governments transfer motorways to the private sector but heavily regulate the new owners then most of the benefits will be lost. For example, the regulation of prices could jeopardise attempts to tackle congestion, while speed and weight restrictions could limit the scope for productivity gains.

Many previous privatisation programmes have been undermined by the retention of tight political control. Privatised electricity markets across Europe have been rigged by governments to promote renewable energy, while privatised railways have been forced to operate under complex regulatory structures that have seen costs explode.

These mistakes must be avoided when motorways are transferred to the private sector. The new private owners must be free to experiment and innovate without being stifled by the dead hand of the state.

The rewards from genuine privatisation will be enormous – lower congestion, massive efficiency gains and new investment where it’s most needed. And there is a further benefit that will be particularly welcomed by politicians: the prospect of huge flotation receipts from the sale of motorways to private investors. In an era when public debt is reaching dangerous levels, more and more countries are likely to take advantage of this potential windfall.

September 2012, SSE

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