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PPIAF ExecBrief TollingPrinciples PDF

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135 views7 pages

PPIAF ExecBrief TollingPrinciples PDF

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Nia Magdalena
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OCTOBER 2014

EXECUTIVE BRIEF

TOLLING PRINCIPLES
by Matt Bull (Acting PPIAF Program Manger) and Anita Mauchan (PPIAF Senior Transport Sector Advisor)

PPIAF is supporting a number of developing country clients who are looking to use public-private partnerships
(PPPs) as a means of financing highway construction, rehabilitation and maintenance. However, before
government decides on if and how to structure a PPP for a highway project, it needs to tackle the more
rudimentary policy question of whether it is possible to charge tolls to highway users so as to create a more
reliable and dedicated funding source for improving highways. This can be a challenging policy area and PPIAF
is currently working in both Laos and Uganda with central government to help formulate policy and strategy
towards tolling in advance of launching major highway PPP projects in both countries. PPIAF’s technical
assistance in this area has a key role in helping government understand the inherent policy trade-offs and risks
associated with charging road-users.

INTRODUCTION

M ost countries find it difficult or even impossible to provide sufficient resources for the optimal maintenance
and rehabilitation of their highways. Highway infrastructure has a very long life if maintained properly.
However, rapid growth of traffic, and goods vehicles in particular, which make the highest contribution to the ‘wear
and tear’ of the highway, exert pressures on both the highway capacity and pavement performance. Highway
deterioration is costly to existing highway users, whose vehicle operating costs increase and suffer from the
negative effects of increasing congestion, and on social and environmental grounds as highway safety deteriorates
and vehicle emissions rise.

1
Traditionally the public sector repairs deteriorating • Facilitates Private Sector Development. Some
highways from its fiscal budgets. However, if governments have sought private sector
fiscal budgets are constrained, highways will participation in highway provision and to develop
continue to deteriorate and economic, social and the private sector within their economy. The
environmental costs will increase. Many countries involvement of the private sector can allow
have tried to combat this by levying tolls on users the government to finance at least part of the
of highways. In fact, toll revenues already provide highway development ‘off balance sheet’.
a much-needed source of revenue to expand and
maintain highway networks in countries as diverse as Toll revenues can also be used to promote regional
Argentina, Australia, Austria, Brazil, Canada, Chile, equity through cross-subsidization of highway
China, France, Germany, Ghana, Greece, Hungary, construction and maintenance. Some countries,
India, Indonesia, Italy, Japan, Malaysia, Mexico, including France and Japan, have introduced tolls on
Mozambique, Nigeria, Peru, Philippines, Paraguay, one highway in order to support the development of
Poland, Portugal, Russia, Senegal, Spain, South Africa, infrastructure networks in less developed regions.
Sri Lanka, Switzerland, Thailand, United Kingdom and
the United States of America. It is crucial that a government considering highway
tolling has established clear objectives in pursuing a
WHY TOLL? highway tolling policy as these objectives will direct
Charging highway users provides the following all activities undertaken, both in the early years and
benefits to the public sector1: during the operation of the highway as regulatory
questions arise. The objectives of tolling directly
• New, Stable and Dedicated Source of Funding and influence the final toll tariffs charged to highway users.
Finance. Toll revenues represent a “new” source
of revenue, where previously highways were POTENTIAL CONSEQUENCES OF TOLLING
supported out of general government revenues The introduction of a toll charge on new or upgraded
(and were free at the point of use). Tolls provide highways can have far-reaching consequences. Some
an incremental and ongoing revenue source, of these consequences will be deliberate, such as the
which is not tied to the annual government generation of revenue, but others may not have been
budgetary process; and importantly can be used foreseen. Intentional and unintentional consequences
as collateral to raise third-party finance (e.g. of tolling may include:
project finance/PPPs) that can fund further
expansion of the road network. The funds from • Cost Recovery. Traffic and toll tariff levels may not be
toll revenues are dedicated to support the sufficient to cover all costs, including construction,
construction and maintenance of a particular operation and maintenance. In developing countries
highway and therefore do not compete with the where traffic levels are low or where construction
requirements of other highways in the network. costs are high, it is unlikely that the toll revenues will
• Applies the ‘‘User Pays’ principle and the ever cover more than operation and maintenance
Internalization of External Costs. Some and perhaps a part of the construction cost. Tolling is
governments have introduced tolls in pursuit of therefore not a complete solution for low-trafficked
a general policy to increase the extent of “use highways requiring significant capital expenditure.
related payment” or with the goal of reducing Additional funding will be required from sources
highway use and internalizing the negative such as government subsidy, public (e.g. from
effects of highway usage (e.g. congestion, air development banks) or private borrowing.
pollution and accidents). Charging for highway • Revenue Risk. Whether the risk is held by the
usage is central to a ‘sustainable’ transport public sector, the private sector or shared, there is
policy. The “user-pay” principle is considered always a risk that outturn toll revenues may be
a fair and precise way of paying for insufficient to cover debt payments and operating
transportation facilities. costs which may lead to bankruptcy or sovereign
debt guarantees to banks for payment of the debt.

1
http://www.worldbank.org/transport/roads/toll_rds.htm

PPIAF EXECUTIVE SUMMARY: TOLLING PRINCIPLES 2


• Diversion of Traffic away from the New Highway. A highway network has very high economic and
Price elasticity of demand and the provision of social benefits and is typically provided by the
toll-free alternatives to the tolled highway, will public sector either toll-free or at minimal cost in
affect the level of traffic on the facility. In turn this the same way as basic health care and education
may mean that some potential economic benefits is provided in many countries. However, most
of the new highway are lost since the objective other infrastructure networks such as railways,
of new highway provision is to move people and pipelines, power grids, water, broadcasting and
goods more reliably and quickly. broadband networks are all charged for. Many of
• Social Impacts. Just as with any highway, toll these networks are provided by the public sector
highways can have positive and negative social that would (and could) not provide these services
impacts in the manner and location of their free of charge.
construction and in their operation. Of particular
concern is the potential inequity that can result The ‘user-pay’ economic principle recognizes that
from charging low-income users, particularly those responsible for the expenditure of scarce
those who use the road frequently. resources should bear at least part of the costs
• Political and Public Opposition. Political opposition they impose. A second principle of ‘competitive
to highway tolling has been significant in some neutrality’ suggests that the provision of one free
countries. There is also a common misconception transportation network, such as highways, leads to
that tolls are a form of double taxation. Motorists a distorted traffic allocation away from other modes
often perceive that they are paying for the highway of transport, such as rail.
twice, by paying a toll and through their taxes,
when in fact their taxes are being used to fund Transport costs can be categorized as internal
other highways. or external.2

WHAT IS THE USER PAY PRINCIPLE? • Internal costs: are incurred from the provision
Tolling is a method for a motorist to pay only for the (construction, maintenance) and use of transport
section of highway that they are using. This concept infrastructure. These costs are recovered from
is often referred to as the “user-pay” principle infrastructure users (“user-pays”) or from the public.
because the toll highway is partially or completely • External costs: stem from (mostly negative)
funded by those choosing to pay for the use of the side-effects of transportation, such as congestion,
facility. Motorists using a toll highway pay directly accidents, emissions and pollution, noise, and
for the benefits it offers whereas traditionally funded aesthetic factors which all negatively affect people
highways receive budgetary funds collected from all and/or future generations. They are rarely borne
tax payers regardless of their use of the highway. by highway users.

2
The challenge: sustainable road transport http://www.unescap.org/ttdw/Publications/TPTS_pubs/pub_2216/roadprice_ch1.pdf

PPIAF EXECUTIVE SUMMARY: TOLLING PRINCIPLES 3


The toll system design has a strong influence on the potential for
the operator to toll equitably and the types of measures which
may be required in order to charge motorists proportionately for
their highway use.
The ‘User Pay’ principle is a ‘sea change’ in the The level of tolls to be set by a government is highly
economics of transport supply and demand. It relies dependent on the level of cost-recovery desired by
on the user paying a fee for all the internal costs of the that government. Toll tariffs can be:
transport supply facility including the construction,
operation and maintenance as well as vehicle • Revenue-maximizing. To recover as much of
operating costs. Internal costs can be quantified and the cost, operation and maintenance of the toll
attributed to those who benefit - highway users. facility as possible. Empirical evidence from
South Africa has found that the point of revenue
Charging for the external costs of transport maximization has been found to occur where the
infrastructure is still rarely undertaken. Congestion- toll tariff is about 75% - 80% of the perceived
charging in large cities goes some way to address the benefit to the user resulting in the traffic
costs of the side-effects of transport. The German attraction to a rural toll highway of about
truck tolling system ‘Toll Collect’, which charges tolls 80% - 85% of the total corridor traffic3.
according to the emission category of a vehicle, has • Welfare-maximizing. To recover a contribution
been responsible for a dramatic improvement in fleet to the operating and maintenance costs of the
efficiency in Germany and its neighboring countries. toll facility whilst maximizing the economic and
Whilst effective, these measures do not fully recoup all social benefit of the infrastructure. Tolls designed
external costs which are often difficult to fully quantify. to maximize the social and economic benefits
of a toll highway are lower than the revenue-
WHAT TOLL TO LEVY? maximizing tariffs in order to attract high volumes
In reality, toll tariffs are a compromise between of traffic to the facility, thereby promoting the
financial needs and economic benefits i.e. they provide movement or people and goods. However a lower
sufficient revenue to service loans or recover budget contribution of toll revenues will result in a higher
but are not so high to make them unaffordable or to contribution from government budgets towards
seriously discourage their use by motorists. the cost of construction, maintenance and
operation of the facility.

3
Specialist Study on the Potential Impact of the Proposed N2 Wild Coast Toll Highway on Traffic Diversion, Tolplan (Pty) Ltd,
22 April 2008

PPIAF EXECUTIVE SUMMARY: TOLLING PRINCIPLES 4


• Operation and Maintenance Cost Recovery. To Toll systems are classified as either ‘open’ or ‘closed’.
recover the ongoing operating and maintenance
costs of the toll facility (the construction cost • Open System. A system is typically described
having been paid out of government budgets). as ‘open’ when there are no toll booths on the
Many toll highways and bridges in the USA entry or exit ramps to the highway. The tolls are
recover their operation and maintenance costs collected at points along the highway and are
only, the capital cost of the facility being funded therefore not directly related to actual distance
by the State Government. traveled by the user.
• Closed System. All exit and entry points are
Toll tariffs will also vary according to: monitored and tolls collected on exit, so that all
travelers make payments and the payments are
• Vehicle classification. In general, the larger the directly related to distance traveled.
vehicle, the more damage that it inflicts on the
road pavement and the higher the toll tariff. The toll system design has a strong influence on the
• Time of day or day of week. Variation by time of potential for the operator to toll equitably and the
day is typically used where congestion causes types of measures which may be required in order to
considerable delays to travelers. charge motorists proportionately for their highway
• Cost of highway construction. Tolls vary across a use. It is more equitable to charge per distance
country or region because of the different costs of travelled on a toll highway and distance-based
highway construction through different areas (e.g. tolling is easily implemented for a closed toll system
for toll highways that include expensive structures where no movements can be made toll-free. If the
like a tolled tunnel, tolls tend to be significantly toll system is open, local discounts may be needed
higher on a per km basis). to ensure that relatively short trips that straddle a
• Social considerations. Some countries make plaza are not charged at the same toll tariff as much
political decisions to encourage the use of new longer trips. Under an open system, there may be
facilities by specific types of users or vehicles, for local trips that take place on the highway between
example High Occupancy Vehicles. plazas which are intentionally or unintentionally not
• Geographical area. Area pricing schemes exist in charged for at all.
Singapore and London. Both systems are fully
automated and tolls vary by time of day and day of HOW TO TOLL EQUITABLY
the week to reflect congestion levels. AND PROPORTIONALLY?
• Loyalty programs and other discounts. With the A tolling strategy should be designed to ensure that
introduction of electronic tolling systems, social no users are severely disadvantaged in comparison
and commercial discounts and loyalty programs with other users of the highway. Various strategies
are becoming easier to administer. are used in practice to promote tolling on an
equitable basis including:
Other systems of area tolling rely less directly
on highway use. Vignette systems are generally • Level of Service Improvements. Tolls should only
economical to operate, overcome criticisms of toll be introduced on highways which have received
variability by charging flat fees for access to the significant upgrading or on new highways of a
highway network and provide an incentive to users to high standard.
maximize their use of the highways rather than use • Local and frequent user discounts. For highways
less safe and more congested highways. The main with high volumes of local, frequent traffic
disadvantage of vignette systems are that the cost to passing through the toll plazas, local and
the highway user is not directly related to their use of frequent discounts should be considered to
the highway and users are charged the same amount reduce the financial burden on these users.
regardless of distance travelled.

PPIAF EXECUTIVE SUMMARY: TOLLING PRINCIPLES 5


• Provision of a parallel toll-free highway. A free TOLL EVASION AND ENFORCEMENT
parallel highway ensures that those unable or There are many ways to avoid tolls. However with good
unwilling to pay a toll can still have access to the policing, sensible design and rule of law the problems
highway network. It is generally preferable to can be overcome. Typical techniques to defraud toll
locate toll plazas away from population centers highway operators of toll revenue include:
and offer local users toll discounts rather than
provide a toll-free alternative route. • Abuse of local discounts and exempt vehicle status.
• Discounts by payment method. The cost of toll Strong safeguards must be in place to ensure
collection varies significantly according to the that only those meeting strict criteria receive a
technology installed. Many toll concessions discount or exemption status.
reward their users with discounts when they use • Unregistered vehicles. A small but common
more cost-effective payment techniques such as problem for electronic toll highway operators is
electronic tags. the cost and ability of operators to trace drivers
• Distance between toll plazas. Some countries of unregistered vehicles which can result in both
specify the distance between toll plazas to ensure significant revenue losses and high collection
that users are not over-burdened with toll payment enforcement costs.
requests, to allow local toll-free movements • False/unreadable/obscured licence plates. Systems
between plaza locations (if the toll system is open) that rely on licence plate matching can be liable
and to minimize the cost of toll plaza construction to toll evasion by the use of false, unreadable or
and operation. obscured licence plates.
• Cross subsidy between different parts of the network. • Pilferage of the toll revenues. Often governments
Some existing highways have been tolled in have considered privatization of toll collection
order to provide revenue for construction of new because of the difficulty of ensuring that toll
segments of the network. revenues are not removed illegally by members of
the collection or counting team.
WHICH TOLL TECHNOLOGY TO USE? • Informal Tolls. In some countries “informal tolls” or
Getting the approach to tolling right, given the situation fines/fees levied by police, bandits, or others, can
of the particular highway and the options available, be considerable, and make a significant difference
is important in terms of public acceptability, revenue in driver’s behavior.
yield, ease of implementation and operating costs. • Diversion around toll plazas. If a parallel highway
Where schemes are poorly designed leakage through exists, some diversion around toll plazas is
toll avoidance, pilferage or fraud can be significant. expected. However diversion around plazas on
informal roads such as farm accesses can take
There are three basic toll collection options: manual place resulting in safety concerns and loss of
tolling; mixed tolling; and fully electronic tolling. The toll revenue.
traditional method of collection is manual payment of • Toll ticket transfers. Drivers have been caught
cash or coins at a toll plaza. The main drawback of this using toll tickets for shorter distances than
system is that it is slow and therefore requires more actually travelled.
toll booths/lanes than any other to achieve the same
traffic throughput. Toll fare evasion levels on highways are rarely
published and can vary significantly by highway project
Successful fully electronic systems are now operating depending on the location of the project, the ease of
worldwide. The latest new generation of tolling is fare evasion and enforcement practices. One method
known as ‘Open Road Tolling’ (ORT) where drivers do of mitigating the revenue lost due to toll evasion is to
not need to slow down to pay their toll and there is no pass the risk to the toll highway operator. This puts
toll barrier. Electronic systems require all users to carry the onus on the Concessionaire to ensure that its
tags in their vehicles or the vehicle registration plate to system is robust with respect to toll evasion. Most
be registered to an account. As toll gantries are passed, concessionaires charge an administration fee that
the tag or registration plate is identified and the toll covers the cost of tracing the violators and the revenue
account of the highway user instantly debited. lost from untraceable violators.

PPIAF EXECUTIVE SUMMARY: TOLLING PRINCIPLES 6


Failure to properly enforce toll evasion can threaten Potential consequences of tolling include the
the financial viability of a toll highway. Most uncertainty that toll revenues will be sufficient to cover
governments permit a charging authority (public all the costs of construction, maintenance and operation
or private) to take civil enforcement action against (revenue risk). Toll highways are rarely self-financing,
drivers who fail to pay a highway user fee. Tolling often still requiring substantial public subsidy and may
Regulations are generally passed in law to establish create long term liabilities for governments. High toll
the ‘right to toll’, define an ‘offence’ and prescribe tariffs can result in diversion away from the highway
measures to enforce payment. A charging authority onto less suitable routes, resulting in the loss of some of
is typically permitted to recover an unpaid toll as a the potential economic benefits of the highway accruing
contract debt including any collection fees, penalty or from improvements in travel time reliability, time
costs that may apply. savings, vehicle operating costs and highway safety.

SUMMARY The financial feasibility of a toll highway is directly


Highway tolls can provide a new, stable linked to its revenue-generating potential which, in
and dedicated source of funding of highway turn, is directly related to the toll tariffs charged to
infrastructure. By applying the ‘user pays’ principle, users. These tariffs are a balance between social,
governments can direct scarce budget resources environmental and financial constraints ranging from
elsewhere and the highway user pays for the revenue-maximizing tariffs to welfare-maximizing
service offered by the highway in the same way that tariffs. Potential techniques to promote tolling on an
railways, pipelines, power grids, water, broadcasting equitable basis should be considered and will vary
and broadband networks are paid for. according to the nature and location of the toll highway.

Cover Photo, Toll plaza in China, © PPIAF; Page 3, Toll plaza in Macedonia, © PPIAF; Page 4, Toll plaza in Lao PDR, © César Queiroz,
Former World Bank Consultant; Page 7, Toll plaza in China, © PPIAF.

ENABLING PPIAF is a multi-donor trust fund that provides technical assistance to governments
in developing countries to develop enabling environments and to facilitate private
INFRASTRUCTURE investment in infrastructure. Our aim is to build transformational partnerships to enable
INVESTMENT us to create a greater impact in achieving our goal.

© 2014 Public-Private Infrastructure Advisory Facility (PPIAF)


1818 H Street, NW | Washington, DC 20433 | www.ppiaf.org | E-mail: [email protected]

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