Ask an economist: e-tolls 4

On Saturday the North Gauteng High Court granted an urgent temporary interdict stopping SANRAL from implementing e-tolling on the Gauteng Freeway Improvement Project. This saga went from the Minister of Transport saying the e-tolling is a done deal, to the interdict being hailed as a historic victory for active citizens. The Opposition to Urban Tolling Alliance (OUTA) lead the charge on the grounds of the negative impact that e-tolls would have on consumers and businesses. The process of price setting and financial arrangements have also been questioned.

But what have economists been saying?

For the most part they are concerned about the impact that the additional costs will have on household budgets that already strained. If e-tolls replace other spending it is bad for businesses and slows the recovery of the economy. In addition, if the tolls get added to the transport costs of goods or costs of delivering services, it will have a negative impact on consumers and businesses and may fuel inflation. Currently the concern is about SANRAL’s bonds and the PIC who bought them. This is very much a macro perspective, but every economist should ask, what does theory say about road pricing?

This blog would like to argue that there are a few key points to keep in mind:

  • Having better freeways in Gauteng generates private benefits for commuters and public benefits for the economy as a whole.
  • But there are also private and public costs involved in the construction, maintenance and use of the freeways.

It is  paying for these costs that has become the sticking point.

If freeways were a typical private good, the users would pay in accordance with the benefits that they receive. In this case, the benefits (in lower vehicle maintenance costs, shorter commuting times) are difficult to measure and as the  OUTA initiative shows, consumers are unlikely to reveal they preferences and volunteer payments.

They can get away with this because it will be difficult to prevent people from using the freeways if they are unwilling to pay. In addition, the freeways are merit goods that benefit the economy as a whole, beyond the benefits that individual commuters or companies get from using the roads. Enter the government and its agency SANRAL.

When we argue that government can provide the freeways, it does not mean that they have to be directly involved in the construction and maintenance – they can subcontract that part – the market fails on the financing part. Government can provide the money to pay for the costs of construction and maintenance by setting a price, collecting tax, or using a combination of tax and debt.

  • Road pricing is  ideal if the actual users pay for the benefits that they receive. However, government would be not better at getting people to reveal their willingness to pay and to set the price accordingly. Setting an efficient price is difficult since freeways are to some extent non-rival in consumption and the additional costs of adding an additional user are low.
  • Taxes, such as an addition to the fuel levy, have the same problem, with the drawback that now everyone is paying, irrespective of whether you are using the road or not (and irrespective of whether you have the ability to pay or not).
  • Using a combination of tax and debt is the same as using taxes now and using taxes later, along with all of the above problems. What can be added is that the benefits of good freeways accrue to society over a longer period and it makes sense to pay for them over a longer period.

In the end, improved freeways have costs and someone has to pay for building and maintaining them.  Over the weekend Chris Hart tweeted:

There may be no tolls but there are costs. The question is, which Germans are paying for the autobahn and how?

It comes down to a choice between road pricing and taxes. If you believe that the benefits of nice freeways accrue to those road users, then they should pay. It is also quite fair, since it will be car owners who pay the tolls and they have some ability to pay. If everyone who uses fuel has to contribute through an increased fuel levy is inefficient and unfair.

And I have not even touched on the issue of congestion pricing yet.

But maybe the whole e-toll saga is less about road pricing than about the tax burden and efficiency of spending in general. Maybe people do not care about costs and benefits, efficiency or equity. Maybe they just do not want to pay even more for something that they think should be paid for from their current tax contribution. If this is the case, government may be in trouble.

4 comments

  1. All valid points, though I don’t think the issue of congestion pricing can be ignored. That was the whole point of improving the roads in the first place!

    The public goods argument is only valid if a good is non-excludable and non-rival. With current technology, user charges can be issued to those using the service, making cars on our highways easily excludable. Of course, a service that was “free” and will now be “taxed” seems unfair. All it does is to shift payment from the South African taxpayer at large to the car driver on the road between Pretoria and Johannesburg. Given that I live in Stellenbosch, this seems pretty fair to me.

    Another frequent criticism is that there are no alternatives. Wasn’t the road network recently expanded? Why not designate two lanes to those who’d like to sit in traffic, and two lanes to those willing to pay for the use of an open road? I think people will very quickly be all too willing to pay the price of a movie ticket to get to work an hour earlier.

    By the way, Chris Hart is wrong. The Germans do pay. Wikipedia can confirm: http://en.wikipedia.org/wiki/German_autobahns#Toll_roads

    • Thanks for the comment Johan. I cannot agree more. In fact, I think the congestion pricing part of the story deserves a post of its own, but for now just a quick rejoinder.
      I wrote that the freeways are to some extent non-rival in consumption, but anyone who has tried to get from Tshwane/Pretoria to JHB or Sandon in the morning will know that you have to get up pretty early not to drive bumper to bumper with your fellow road users. For the non-economists: the congestion is a negative external effect. You impose a time cost (and some pollution) on everyone through your choice to drive. This cost is external to the price that you pay for the car, fuel etc. and the burden is on other road users and society at large. This is a key argument for government to ask some kind of price (unrelated to the costs of building and maintaining the freeways). There is a large an interesting literature on road pricing and across the world it has been shown to reduce commuting time and add to efficiency, productivity etc. Those that are interested can have a look at this blog: The congestion pricing angle was also a key part of Dr Roelof Botha’s analysis of the e-tolls, but I don’t think that many people understood it:

  2. Pingback: Ask an economist: More about e-tolls « Skool vir Ekonomie

  3. Pingback: Opinion: It is #etolls Tuesday « Skool vir Ekonomie

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