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:
#eTolls round 1 to the good guys. Fantastic. In Germany now. Fantastic roads without tolls!—
Chris Hart (@chrishartZA) April 28, 2012
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.