Why can’t roads be more like utilities?

In a recent public service satisfaction survey, conducted by the Institution of Civil Engineers, only 54 per cent of respondents were satisfied with the current state of the UK’s roads and highways, down from 58 per cent measured in the previous quarter

Relative to other public services, roads performed badly. For example 73 per cent were satisfied with electricity and gas supplies to their homes; 84 per cent were satisfied with drinking water and sewerage services. Higher levels of satisfaction were also recorded with public transport services (65 per cent).
This result can be attributed to a number of factors. Traffic volumes have continued to rise in line with long term trends, while rates of new trunk road construction have fallen sharply since the mid 1990s, resulting in growing congestion and an increased incidence of delays. DfT surveys show that 88 per cent of drivers now consider congestion to be a ‘serious’ or ‘very serious’ problem. There is also evidence of a growing maintenance backlog affecting local roads.
The issues go deeper, however. In a recent paper for the RAC Foundation, I concluded that the present system of governance and administration for our roads network is not fit for purpose. It provides no effective means for planning to accommodate or manage future demands on the system. Without reform, user dissatisfaction is likely to grow and the economic costs of delays increase still further. The standard utility framework appears to offer a suitable model for reforming the current arrangements.
The past 20 years have seen a series of reforms in the way we manage the basic utility services – water, electricity, gas and telecoms – we rely upon to support everyday life. These services are now generally provided through infrastructure networks operated by privatised utility companies or new private operators. Reforms also extended to the rail network although the system continues to receive government support.

Governance framework
The basic frameworks for the privatisations of the 1980s and early 1990s have a number of common features. They include supply obligations for utility companies to meet customer demands; the establishment of independent economic regulators who undertake reviews every five years of investment requirements, efficiency and outputs and set price limits, under a medium term incentive framework. Regulators in turn operate under a financing duty to ensure that companies can properly finance their functions and are also subject to specific guidance under which they are required to contribute to the government’s social and environmental policies.
Over time, we have seen the development of competition and market liberalisation in telecoms and the energy market while water remains largely a monopoly supply. The result has been substantial improvements in customer service standards and efficiency in all these sectors. The water industry in England and Wales, since privatisation, has invested some £80bn in higher drinking water and environmental standards and Ofwat, the regulator, estimates that through efficiencies customer bills are now 30 per cent lower than they would otherwise be.

A framework for roads
The system we have for roads is very different. First, responsibility for the network is highly fragmented with the majority of the network the responsibility of local authorities. Within England, for example, responsibility for the 301,440 kms of road is split between the Highways Agency – an executive agency of DfT – and 82 local authorities. The Highways Agency is responsible for operating, maintaining and improving some 7,100kms of motorways and strategic trunk roads – representing only 2.5 per cent of the total network (and well under half that of Network Rail).
Second, there is limited accountability to road users. As an executive agency, the principal accountability of the Highways Agency is to DfT. It is also dependent upon government funding and, unlike utilities, it has no external borrowing powers to finance investment programmes. Performance standards for roads remain relatively under-developed and largely confined to reliability measures for the trunk road network.
Nor is there any obligation on road infrastructure providers to meet future demands on the network. By contrast, against the background of population growth and climate change, water companies are required to produce 25 year plans setting out how they intend to meet future demands.

A reform agenda
Any reform to the current framework faces two main obstacles – the lack of a customer billing relationship between service provider and road user, and around which customer service standards could be set; and linked to this, the absence of an independent revenue stream for the Highways Agency, and other road infrastructure providers, which would provide a basis for financial self-sufficiency and for borrowing to finance investment.
In the absence of road pricing, one possibility would be to adopt the principle of earmarked road funds that have been used in a number of countries including New Zealand and the USA. In the UK context, this would involve assigning either Vehicle Excise Duty (currently around £7bn) or an element of fuel taxation, to the Highways Agency and potentially other road authorities.
Against the background of rising public debt, the government recently announced the sale of some £16bn of public assets over the next two years. These included the Dartford Crossing and the Channel Tunnel Rail Link. In this context, it should be noted that the Highways Agency network in England, limited as it is, is attributed a value of £85bn. On the basis of a secure revenue stream, there would be scope for selling a stake to private sector investors. Currently, only the M6 toll road is privately owned.
Other elements of the architecture are more straightforward. Within the transport sector, we have an Office of Rail Regulation (ORR) and a Civil Aviation authority, both with responsibilities for economic regulation and safety. Thus a reform package might involve either establishing a new roads regulator or extending the current remit of the ORR. Similarly, we have in Passenger Focus a national rail consumer watchdog whose remit is now being extended to cover airport passengers.
A new corporate highways body (‘English Road Networks’) would have duties relating to supply, safety and the environment and be responsible for the majority of the trunk road network. As a regulated business, like Network Rail, it would be subject to regular five yearly funding reviews that would take place in the context of an overall roads strategy set by government.
For railways, under the new framework established in the 2006 Railways Act, DfT publishes every five years, in advance of the regulatory review of Network Rail funding and outputs, a High Level Output Statement (HLOS) and a Statement of Funds Available (SoFA). The latter sets out the level of government support envisaged for the industry.
In the water sector, Defra published in 2008 a water strategy for England setting out a long term view of what it wants from the sector over the period up to 2030. It is against this background that Ofwat, the economic regulator, has conducted the current PR09 review of investment and funding for the next five years.
Adoption of a comparable approach for roads would offer for the first time, secure medium term funding and committed outputs for the English trunk roads network. Given the long gestation period for new trunk roads, there would also need to be provision for longer term planning and funding of major projects across five-year review periods. We see elements of this with Network Rail and the approval earlier this year of major electrification schemes and the studies commissioned into the case for high-speed rail.

Road user charging
The missing piece of the jigsaw remains user charging – and establishing a conventional commercial relationship with road users. Over the years, with the notable exception of the London congestion charge, various attempts at introducing road tolls have failed. Recently, the Committee on Climate Change, the government’s advisory body, recommended that Ministers should introduce road pricing, as a complement to fuel duty, to reduce carbon emissions.
Currently, we see initiatives under way to improve water and energy efficiency. Sustainability is a key theme in water where the combination of climate change and population growth is producing areas of water stress, and leading to acceptance of the case for the extension of water metering as one element in a package of demand management measures.
In the energy sector, a range of government initiatives is underway to improve energy efficiency in the home and so reduce both fuel bills and CO2 emissions. Energy companies are conducting trials of smart metering to assist customers reduce their energy consumption.
In both sectors there is acceptance of the role that charging policy and tariffs can have in influencing consumer behaviour. A comparable debate has yet to take off on with roads – both as a means of mitigating climate change impacts and to also better manage demands on the network. We continue to ration road use through congestion.

Future challenges
Over the next 30 years, we can expect to see continued growth in numbers of cars and road traffic volumes – of the order of 40 per cent, a sustainable strategy for the road network will require a mix of cleaner vehicle technology, investment in new capacity combined with effective demand management through user charges.
To deal with these challenges, it will be necessary to establish a more conventional relationship between road users and infrastructure providers along the lines described above. Against a background of severe pressures on public finances, government will want to consider the case for selling a stake in the new English Road Networks to the private sector and for further investment in system capacity to be financed through external borrowing, on a similar basis to Network Rail. In these circumstances, the regulatory system would play a key role in protecting road users through price controls and ensuring that service standards are met.

John Smith biography
John Smith is an independent consultant with special interests in utility regulation, transport, and infrastructure financing. He is also a member of the Competition Commission. He left the Government Economic Service to join Anglian Water where he became director of regulation and subsequently held a similar position with Railtrack. John recently authored a report for the RAC Foundation on the ‘Governance and Administration of National and Local Roads in Great Britain’ which is available freely to download on the RAC Foundation website www.racfoundation.org

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