BITRE | Working paper 74 Enhancing road infrastructure The proposition Congestion charging may be introduced because an alternative road expansion strategy is politically unpalatable and/or economically unjustifiable. However, to the extent that road investment is still practical, it might be argued that scheme revenue be applied to roads. Investment in new roads is commonly advanced as an appropriate use of revenues. Newbery and Santos (1999) reasoned that ‘earmarking taxes for dedicated expenditure on highways is an obvious application of the benefit principle of taxation, which, properly applied, should lead to a more efficient structure of road charges’ (Newbery and Santos 1999, p. 127). Others have argued that earmarking the revenue for road infrastructure would result in a more efficient level and structure of investment. Essentially, rather than complicated and imperfect methods for determining road-users’ willingness to pay, congestion charges can serve as a trigger to indicate when the gains are greater from expanding road capacity than allowing congestion to increase (see, for instance, Hau 1998). In this context, Starkie identified the fact that investment decisions would benefit from the information provided through a system of congestion charging: If road congestion pricing was in place and the costs of expanding the network were known, the investment decision from an economic perspective would be reasonably straightforward: capacity should be added when the marginal cost-based price for the road use exceeds the incremental costs of adding to the network (Starkie 2002, p. 11). Hence, there are two elements underlying the proposition that revenues from congestion charging should be earmarked for road infrastructure enhancements: the application of the benefit principle of taxation and the use of the congestion charging to reveal the true preferences of road users. Analysis The basis of the benefit principle of taxation lies in the view that community members should benefit from public expenditure in proportion to their contributions. This could have popular appeal with community support high for a clear link between road-user charges and road expenditure, particularly where there is a strong geographical overlap. In a way, this could help overcome the widespread criticism of congestion charging as ‘yet another tax’. In addition, public finance theorists point out that by strengthening the link between benefits and payments, much lobbying by powerful interest groups and wasteful rent seeking activity could be eliminated. As Gwilliam and Shalizi observed: 90 Where individual preferences for public goods differ, it can be shown that separate earmarked funds could potentially increase general welfare if the payments to those funds by each of the different individuals reflect that individual’s relative marginal utilities for different public goods (Gwilliam and Shalizi 1996, p. 6). 72 The second point is that related to the potential improvements in investment decisions through the information provided by the congestion charge. The current 72. Gwilliam and Shalizi note that ‘This proposition, derived from Wicksell and Lindahl, is elegantly proved in Johansen (1963)’.
Chapter 4 | Congestion charging and community attitudes use of benefit–cost analysis in the absence of congestion charging assumes roaduser charging that reflects average rather than marginal costs. The result is that the ‘… value of an investment when the existing network is not subject to congestion pricing will generally be greater than if the existing network is tolled’ (Starkie 2002). Ultimately, however, there are major practical problems relating to indivisibilities when pursuing a goal of expanding infrastructure to the point where the marginal cost of expansion equals the marginal cost of congestion. If infrastructure can only be incremented in lumps, expanding capacity whenever short-run marginal cost is greater than long-run marginal cost may result in overinvestment. On the other hand, the Verhoef rule, which guarantees that the last unit of investment is valued precisely at cost (and that all preceding increments are valued at greater than or equal to their cost), may result in under-investment if the total willingness to pay exceeds the cost of the additional capacity (MOT (NZ) 2005, p. 27). Furthermore, in most cities where congestion charging is under consideration, there may still be limited scope to improve infrastructure capacity. Notwithstanding the developments in tunnelling technology, the technique remains costly and complex. Finally, as with public transport, the use of congestion charging revenues to fund infrastructure expansion needs to be rigorously evaluated. Conclusions on strategic use of revenue Congestion charging is politically difficult to sell to the community. It is understandable that there is a temptation to gain community acceptance by applying scheme revenue to high profile projects. Should congestion charging be earmarked for specific purposes or should it simply become part of consolidated revenue, allowing general increases in spending or an offsetting reduction in other, more distorting sources of revenue Lee warns against earmarking revenues for specific purposes, noting that such an approach: … can be dangerous economically and misleading politically. Spending toll revenues to increase highway capacity, subsidise transit, or support the freight rail system may be inefficient if those sectors receive more funds than they can use efficiently—that is, apply in ways that generate positive net benefits (Lee 2003, p. 50). Singapore, in particular, learnt this lesson the hard way after earmarking a share of revenue from their Area Licensing Scheme for ‘park-and-ride’ car parks at the edge of the city. Poor patronage led these to be abandoned and all revenues now go into consolidated revenue: Congestion revenues are not earmarked for transport related projects. All transport projects need separate economic justification or financial allocation from a central pool of development funds (Menon 2003, p. 136). Application of this principle would not exclude any particular area, such as public transport, from benefiting from the funding. Rather, it would mean that all claimants would need to compete for the funding on merit. While the introduction of congestion charging would generally strengthen that case for the expansion of public transport, the discipline of actually competing for those funds is necessary for sound corporate governance. 91