20 March 2012
The Government is looking hard at injecting private capital into supporting the under–strain roads network.
That certainly was one of the key messages that came out of Prime Minister David Cameron’s speech at the Institution of Civil Engineers today.
This and the tone of the speech tell us a few things about current Government thinking and also raise speculation about other aspects of its approach.
Firstly, the green agenda is shifting. Until recently the preferred politics had been to lean against expanding the capacity of the roads network in favour of alternatives such as increasing rail capacity.
Secondly – and obviously – this government wants capital investment in roads that it feels it can’t pay for from the public purse.
Thirdly, it seems more eager to keep the business community on board as it tries to navigate troublesome economic and political waters.
Fourthly, and this is speculation, the government appears keen to take the opportunity, under the cover of austerity, to experiment with engaging private businesses more fully in managing the nation’s infrastructure.
Ultimately we will need to examine the detail of how the government plans to do this closely when consultation is complete later in the year.
But the suggestion is that the aim is to slice up the nation’s road network and put private management groups in charge of the various slices.
The private management firms would, it seems, be paid by results, however measured, in part at least from a ring-fenced allocation from a slice of the road tax take. The way would also be open for building new toll roads.
There is very good reason to improve the way infrastructure funding is managed in the UK. And, of course there’s a whole selection of possible models to choose from, ranging from more or less keeping things as they are to selling off regional concessions.
But whichever model you choose there is one tricky problem. A large amount of the full costs and full benefits related to investment in the roads network come from externalities.
That is one reason why the roads network is seen by many experts as a natural monopoly.
And it is one reason why you can find models for private investment in the water infrastructure much more easily than you can for the road network – to answer one of the questions Mr Cameron threw out rhetorically in today’s speech.
So, for example, improving the M1 would have implications not just for the M1 traffic and local roads, but for the A1 and possibly the M40 and other roads and areas of the country. That doesn’t take account of the impact it would have on other alternative forms of transport.
The impacts may be positive for some people, users and routes that see reduced traffic and congestion.
They may be negative for other people, bringing unwanted traffic, noise or road building.
The true balance of these costs and benefits are not easily assessed. This is partly because valuing non-financial gains and losses can be tricky, but also because the impacts are so widespread that capturing all the values – negative and positive – within a financial model is not easy.
This means that many important investment choices will be political however much the cost-benefit analysis can is dressed up to appear objective.
Is this an environment that lends itself to private firms making strategic investment decisions? Well, my instinct would be to say no. Unless I can be convinced of an overwhelming case for it. The danger is that any the deals struck with private sector firms become either so complex or so crude that they open the way for a host of unfortunate unexpected consequences. It is not as if we find in recent history no examples of the government being taken for a ride on the ownership and management of public service capital projects.
The private sector, quite rightly, will follow its narrow interest of maximising profits (hopefully, although not necessarily) over the long term. If it’s not it’s failing its shareholders.
These concerns however should not hide the truth that, whether you want roads or don’t want roads, we all save from spending that is more efficient and more effective.
There is a strong case, made well in A fresh start for the Strategic Road Network – a Department for Transport-commissioned review by Alan Cook – that change to the existing structure is needed.
But before we become too fixated on whether or not to increase private sector involvement in the roads network, it is worth noting it already has a significant role. As Alan Cook’s review points out 95% of the Highways Agency work is delivered under contract to the private sector.
The question is whether the management and selection of that investment should also be passed to the private sector.
There is need for change, not least because we all gain if there is more certainty in the flow of funding into the roads network.
But before the Government commits to the route of engaging for-profit private firms as guardians of the nation’s road network, it might wish to look much more closely at the alternatives. There are many. And among them there are those that could open the way for increased private investment, if that is deemed necessary.
I may be misreading things, but for me it is unfortunate that within his speech, and during questions after, Mr Cameron drew on similarities with the water industry.
It suggests he doesn’t fully understand the implications of significant differences (from a funding point of view) between the supply of water and running and maintaining a roads network within the complex transport infrastructure of a densely populated nation.