Road Investments and the Trade-off Between Private and Public Funding



Road Investments and the Trade-off Between Private and Public Funding

Authors

Morten Welde, NTNU - Norwegian University of Science and Technology, Svein Brathen, Molde University College, Jens Rekdal, Moreforsking Molde AS

Description

This is a study of how road tolls are treated in economic appraisals of road projects in Norway and what impact tolls have on the value for money of new roads.

Abstract

Road tolls have been used throughout the world to finance new transport infrastructure for decades, and a substantial body of research exists into the effects of tolls on traffic. However, research on optimal tolls and the combination of public and private funding is scarce. From an economic perspective, the appropriate toll level is a trade-off between the need to maximise revenues on the one hand and to minimise the dead weight loss due to tolls on the other. Thus, toll projects should balance financial objectives and economic objectives.

Toll financing in Norway has a long tradition and today it is an integral part of the financing of national and county roads. Almost 40 per cent of the total funds available for road funding is made up of tolls. Yet, despite the extensive use of tolls and an efficient and standardised planning framework, the economic effects of tolls have not been studied in detail. The paper demonstrates that while the majority of Norwegian road projects over a certain size are financed partly by tolls, the treatment of tolls in the ex-ante appraisals is inadequate. Projects are treated as if they will be 100 per cent government funded. This implies that the net benefit of the projects may have been over- or, in some cases, overestimated. This may have affected both the ranking and economic viability of the projects.

Furthermore, the paper addresses how funding of transport infrastructure can be considered in a first and second-best perspective. Firstly, some theoretical considerations will be provided. As a part of this, a discussion of e.g. whether and how constrained public funds and economically profitable transport infrastructure projects may give a good case for private funding by means of road tolls as a second-best option will be given. Secondly, the paper provides an empirical assessment of how to determine optimal funding given a set of financial and political constraints. A transport network model developed for the Norwegian transport network will be applied for this purpose and used in four road investment projects, which have combined public and private funding. Two of the projects are located in areas with some congestion, whereas the remaining two are in rural areas. The paper concludes with a discussion of the main findings and some generic recommendations on how to address the question of optimal funding and road toll charging of transport infrastructure.

Tolls relieves public budgets and provides greater flexibility than if we were to depend on government funding alone. Potentially, less government financial flexibility in the future could limit the possibilities for further investment in roads and public transport. In that case, the extent of toll financing could increase. The issue of how road tolls affects the benefits of proposed road schemes should therefore be of interest to planners and decision in all European countries that use this source of finance. Despite the extensive use of toll financing, we are not aware of any studies that have studied this specifically.

Publisher

Association for European Transport