Finance

Car useFinance

The switch to electric vehicles (EVs) will result in the loss of revenue from road fuel duty, as is generally recognised. This prompts the question of whether to replace fuel duty with a charge for use of the roads, as many have suggested. This issue was ducked in the recent Transport Decarbonisation Plan from the Department for Transport, but it won’t go away.

The general replacement of road fuel duty, collected from the oil companies, by a charge collected from many millions of road users, would be a formidable undertaking. My suggestion is that this happens in stages.

First, it should only be EVs that pay a road user charge, the rationale being that they need to contribute to the costs of maintaining and operating the road network in the way that drivers of conventional vehicles do via fuel duty. But while the capital costs of EVs are higher than those for comparable internal combustion engine vehicles, it would be necessary to retain lower untaxed running costs to incentive uptake. However, it is expected that the purchase prices of EVs will fall as battery costs continue to decline. Road user charging for EVs could be introduced once purchase prices of EVs and conventional vehicles are similar.

Second, it would be sensible to stage the adoption of road user charging spatially by starting in London. The congestion charge in London has been operating successfully for nearly twenty years. The technology works, useful revenues are generated to support public transport, and the system is publicly acceptable, with no significant concerns about privacy despite the ubiquity of enforcement cameras. The technology has been used to charge older polluting vehicles, initially in the congestion charging zone, and subsequently within the area bounded by the North and South Circular Roads.

The London congestion charge system levies a daily charge on entry to the charging zone, subject to a variety of exclusions. A more flexible system would be needed for EV user charging. The first step might be to migrate the charging mechanism to a smartphone app, which knows where it is in time and space and so knows if it is subject to user charging. The app would need to know in which vehicle it is located since enforcement of the charging system depends on automatic number plate recognition by fixed cameras.

The incentive for users to migrate to their smartphones would be a reduced daily charge, compared with the present £15. Then it would be possible to flex the charge, for instance to reflect duration in the charging zone, or whether at times of peak use or location within the zone. Such flexing should be publicly acceptable if charges never exceed the standard daily charge. Experience would be gained of how road users respond to varying charges. The congestion charging could be extended beyond the present central zone if that seemed useful to manage traffic and was publicly acceptable.

Once a flexible charging scheme had been proven in London, it could be adopted by other cities that wished to manage traffic and raise revenue to fund public transport and active travel, subject to electorates being willing. Once the charging scheme had been adopted by a number of cities for the generality of motorised vehicles, it could be extended nationally to EVs. Charges would then have two elements: that levied by the local road authority and that levied by central government. There would be scope for local authorities to vary charges to meet local needs, for instance to generate more revenue to fix potholes, or, more ambitiously, to deter car use in town centres and subsidise public transport. More generally, an appropriate apportionment of road user charging between local and national government would facilitate devolution of responsibilities for transport to localities.

Car useFinance

The House of Commons Transport Committee is holding an inquiry into zero emission vehicles and road pricing. I submitted evidence set out below.

Main points

  • There is a case for road pricing both to replace fuel duty revenues lost as ZEVs replace conventional vehicles and to help manage road traffic congestion.
  • The charge for road use might comprise two elements: one generating a revenue stream for the Exchequer and another for the local authority, which would allow substantial devolution of responsibilities for transport provision.
  • There would be attractions in the incremental introduction of national road pricing, building on the successful congestion charging arrangements in London.

Rationale for road pricing

The move to ZEVs will result in the loss of revenue from road fuel duty, as well as from VED were ZEVs to remain zero rated. Revenue from the former amounts to some £28 billion a year and from the latter some £6 billion. This prompts consideration of some form charging for road use to make up the loss.

The case for zero VED for electric vehicles (EVs) is to incentivise their uptake, a reason that will become irrelevant as the capital cost of EVs falls and as sales of new conventional vehicles are phased out. So, in due course VED could be applied to road vehicles generally, and if set at a rather higher rate could cover the annual cost of capital and current expenditure on national and local roads of £8 billion, obviating the need for road pricing to ensure that drivers pay for the roads they use.

One argument some make for road pricing is that without fuel taxation or a similar charge related to distance travelled, the running costs of EVs would be substantially lower than that of conventional vehicles, which would result in more miles travelled and thus more congestion, carbon emissions and other externalities. One scenario of the Department for Transport’s (DfT) 2018 Road Traffic Forecasts illustrates this expectation[1]. However, in recent years the average distance travelled by car has remained stable, being limited by the time available for travel, the speed of travel and the proportion of households owning cars, none of which have increased in this century. It is therefore not to be expected that the replacement of the internal combustion engine by the electric motor would have much impact on vehicle use.

Another argument for road pricing is to alleviate road traffic congestion, the intention of the London congestion charge. Experience has shown that reduction of congestion is quite limited at the level of charging typically employed, particularly in a prosperous city like London where many are able to afford the charge[2]. Charging for road use benefits those who can readily afford to pay by displacing those who are less able, generating increased inequalities in use of the road network that historically has been a relatively egalitarian domain. Nevertheless, congestion relief is in principle a possible aim of the road pricing regime, although the magnitude of the charge would need to reflect both the level of congestion and affordability in the locality if congestion is to be effectively ameliorated. Related to this is charging polluting vehicles, as in London’s Ultra Low Emission Zone (ULEZ), the rationale for which will diminish over time as EVs are increasingly used, yet which may remain relevant in respect on non-tailpipe particulate releases from vehicles.

Revenue from the London congestion charge and the ULEZ are retained by the city authority, as are charges for low emission zones planned elsewhere, ring-fenced for expenditure on transport services, and likewise revenues from parking charges. A national scheme for road user charging might comprise revenues both for the Exchequer as well as for local authorities, the latter setting levels of charges to reflect local conditions, including congestion and other environmental impacts of traffic, as well the need for revenues for road maintenance. There would be attractions in allowing local authorities to set their share of the road user charge to cover the full cost of local transport provision, obviating the need for grants from the DfT (other than perhaps for ‘rebalancing’ purposes). The Exchequer element of the charge could depend on the type of road, for instance higher for motorways that are funded nationally, and could vary by region to aid ‘rebalancing’ policies.

Introduction of road pricing

There would be attractions in introducing road pricing for EVs alone, on the rationale that they should pay their fair share of the costs of the road network that conventional vehicles are paying via fuel duty. However, the lower operating costs of EVs are a necessary incentive to purchase while capital costs remain higher. As capital costs fall, as is expected, scope would develop to charge users of EVs by introducing a road pricing regime from which conventional vehicles were exempt.

Introduction of general road pricing on top of fuel duty would be invidious for lower income motorists who are likely to continue to use conventional vehicles for longer than the better off. Accordingly, one possibility would be to introduce a general road pricing system but crediting conventional vehicles with the fuel duty they pay. This is the basis of a voluntary pilot scheme in Oregon[3]. Because this scheme is voluntary, uptake is incremental, in contrast to an obligatory scheme that would have to be imposed all at once.

It is worth considering options for incremental roll-out of national road pricing, given the potential difficulties of overnight national implementation of charging and enforcement technologies. In London, the existing congestion charging system functions sufficiently well and is publicly acceptable, but its scope is limited by the fixed charge for entering the charging zone.

There are a number of incremental developments of the London scheme that might be feasible:

  • Encourage participation via a smartphone app by offering a discount from the standard daily charge;
  • Take advantage of location awareness of smartphones to identify when the user is both in a vehicle registered for the charge and in the charging zone, backed up by camera enforcement as at present;
  • Encourage entry and exit from the charging zone outside times of peak congestion by offering a discount from the standard daily charge;
  • Increase the standard charge but offer discounts to encourage use when and where traffic is less congested;
  • Extend the charging to other areas of London where congestion is a problem;
  • Make the charging and enforcement systems available to other cities that wished to manage local traffic, incentivised by the revenues that could be used to provide alternatives modes of travel to the car.

Once a number of cities were using road pricing, there would exist the basis for national adoption in the form of an established charging system, which would need to be supported by the national roll-out of camera enforcement (unless a better enforcement system could be devised). This would be accompanied by the reduction and eventual abolition of road fuel duty, perhaps with the public assurance of no net increase in revenues from road users. There would need to be a daily penalty charge for those evading payment for road use, which, if not paid when requested, might be added to the annual VED charge, failure to pay which could result in clamping.

Whichever way to bring it about, a decision to adopt national road pricing would need to be strategic, commanding wide acquiescence, analogous to the decision to phase out internal combustion engine vehicles.

Conclusion

Adoption of a scheme of national road pricing would allow loss of revenue to the Exchequer from road fuel duty to be offset. A scheme that generated revenues for both central government and local authorities would allow substantial devolution to the latter of responsibilities for funding the provision of their transport services in the light of local needs. A national road pricing scheme might be developed incrementally from the congestion charging arrangements in London.

21 January 2021

[1] Department for Transport, Road Traffic Forecasts 2018, Scenario 7.

[2] Metz, D. Tackling urban traffic congestion: The experience of London, Stockholm and Singapore. Case Studies on Transport Policy, 6(4), 494-498, 2018.

[3] https://www.myorego.org/

EconomicsFinance

The Treasury is consulting on ‘VAT and the Sharing Economy’. This is prompted by concerns for a level playing field between traditional businesses and newer models made possible by the internet, and also about loss of tax revenue.

The innovative approach of Uber, and to a lesser extent other providers using digital platforms, has made a significant improvement to the quality of transport services. The market for taxis is competitive, involving black cabs driven by owner-drivers as well as ‘minicabs’ whose owner-drivers taking bookings via a local agent. There is no evidence of tendency to monopoly by the dominant digital platform. In general, no taxis charge VAT so that providers of taxi services via digital platforms have no competitive advantage.

Accordingly, charging VAT on taxi fares collected via a digital platform would distort competition, at least while the VAT threshold applies to owner-drivers. There may be a case for abolishing the threshold for all taxi services to achieve a level playing field, although this would be onerous for those drivers who work part time to supplement earnings from their main employment.

If the VAT threshold were retained for owner-drivers other than those operating through digital platforms, the platforms might seek to preserve their competitive position by absorbing the tax through taking more commission from the drivers, although that would be limited by the need to pay enough to recruit drivers. In this situation, drivers offering taxi services via digital platforms would be disadvantaged. Alternatively, were VAT not to be absorbed by the platforms, fares would be higher to the detriment of consumers, leading to the platforms likely exiting the market, again to the detriment of consumers.

More generally, public transport fares are zero rated for VAT, so levying VAT on taxis would distort the market for non-private travel.

In short, were VAT to be levied only on fares charged by taxi services provided via digital platforms, the existence of the VAT threshold would distort competition, to the detriment of consumers.

There are suggestions, unconfirmed, that HMRC has already raised a £1.5 billion VAT assessment on Uber.

Note added 22 February 2021: The recent judgement of the Supreme Court that Uber drivers must be treated as workers, not as self-employed, may increase the likelihood that Uber would be obliged to charge VAT on fares.

Car useEconomicsFinance

The National Infrastructure Commission has been consulting on a number of questions, including how  the Government could best replace fuel duty in a way that is fair.

 The prospect of a complete switch to electric propulsion for cars and vans will lead to loss of most revenue from fuel duty, currently about £28 billion a year (HGVs might still require taxable fuel), offset to a small degree by VAT of 5 per cent on electricity. Vehicle Excise Duty raises some £6 billion a year, rather less than the annual capital and current expenditure on national and local roads of £8 billion in total. So VED could be raised to cover the full cost of the road system. But that would leave a major gap in public revenues and would, in the long run, imply much cheaper motoring – welcome to motorists but problematic in respect of the detrimental impacts of the car.

To fill the revenue gap it would be logical to levy a charge on the use of electric vehicles (EVs). This would be a charge related to distance, weight of vehicle (which determines damage to carriageway), location and (possibly) time of day (reflecting congestion which imposes costs on other road users). It would also be possible to relate charges to the cost of the vehicle when new, so that the better off road users paid more than those who could only afford a reasonably priced family car.

The public rationale for such a charge would be that it is right that EVs should contribute their fair share of the revenues raised from road users, both to cover the costs of operating, maintaining and developing the road network, and to meet the wider needs of society.

EVs could only be charged for road use once their costs permitted this. At present, the lower cost of electricity goes part way to offsetting the higher capital cost of EVs. However, capital costs are expected to fall as battery technology advances, so that over time cost headroom will develop that will allow EVs to be charged for road use while maintaining their economic attractiveness in relation to conventional vehicles.

Devolution

Road user charging would allow devolution of revenue raising to fund the road system. One tranche of revenue would be taken by the Treasury to support general government expenditure. The remainder would be retained by road authorities to fund their expenditure on roads and other transport provision. The Department for Transport would decide charges for the Strategic Road Network, while local authorities with responsibility for roads would set charges for their networks. There would need to be some coordination of approach to minimise diversion of traffic onto unsuitable roads, perhaps a responsibility for the Office of Rail and Road.

Road authorities would set charges according to their revenue and investment needs: problems with potholes would justify raising charges, as would plans for additional capacity. The income stream from charges could be used to raise finance for capital projects. Devolution of revenue raising to road authorities would largely obviate the need for grants from central government, other than perhaps for regional ‘rebalancing’. If, like London, local authorities chose to manage demand by means of a congestion charge, the revenue could be used to fund public transport. This would provide an important tool to influence the pattern of urban transport.

The London congestion charge is well accepted by the public, is technically reliable and raises useful revenue. It is, however, based on a daily charge for entering the charging zone within the charging hours, regardless of level of traffic or distance travelled. The Mayor’s draft Transport Strategy indicates that consideration will be given to the next generation of road user charging systems, to help achieve policies for mode share, road danger reduction, environmental objectives, congestion reduction and efficient traffic movement. It would be sensible for consideration of technology options to be a joint effort between TfL and DfT, so that London could act as a test-bed for arrangements that are capable for national use in due course.

The technology for road user charging would comprise a digital platform with a vehicle-based device displaying an app. Other facilities could be offered on the device including route guidance to avoid congestion, journey time information, indication of available parking, facilities for sharing trips with those travelling in the same direction, and information about non-car modes of travel where these are practicable alternatives. The menu of options would trade off speed, quality and cost. This technology would allow the operation of the road network to be optimised, reliability to road users to be improved, and the costs of maintenance, operation and development to be recovered through charges that reflect costs.

Car useFinanceUncategorized

Lord Wolfson offered a prize worth £250,00 for the best proposal in response to the question: ‘How can we pay for better, safer, more reliable roads in a way that is fair to road users and good for the economy and the environment’.

The winner was Gergely Raccuja, a recent UCL graduate, now a transport planner with Amey Consulting. His proposal has the merit of simplicity: replace Fuel Duty and Vehicle Excise Duty, receipts from which are declining as vehicles become more fuel-efficient, with a per-mile charge that would depend on a vehicle’s weight (reflecting the damage caused to the road) and emissions (damage to the environment). The charge would be collected by the insurance companies, the new charge being in effect a supplement to the insurance premium.

The impact of congestion caused by a vehicle is captured in a crude way by a distance-related charge. However, the opportunity to relate the charge to the level of congestion was not taken because of the perception that it would be unpopular and hence prevent the new charging scheme being adopted.

Some of the other finalists for the prize proposed schemes involving charging that reflected in part the contribution of vehicle users to congestion, but these were not favoured by the judges.

Assessment

It is very welcome that a new entrant to the transport planning profession was the prize winner, with a relatively simple proposal. But is it likely to be taken up? My sense is that implementation would not be seen as worth the effort and upheaval. Perhaps the main advantage is that electric vehicles would contribute to the costs of the road system, but for that purpose the proposal might be applied to EVs only, leaving Fuel Duty in place for vehicles with internal combustion engines.

The main shortcoming of the prize-winning proposal is the failure to address the problem of road traffic congestion and how it might be mitigated by charging. Public perceptions are important, of course, but I found it odd that there is no mention of London congestion charging, which has proved quite acceptable.

Any change to how we pay for roads should take the opportunity to ameliorate road traffic congestion, which is the biggest problem of the transport system. Arguably, the question set for the prize was misconceived, with its opening emphasis on ‘How can we pay for….’. It might have been better to ask ‘How can we achieve better, safer, more reliable roads….’

 

EconomicsFinanceTransport

My new book, Travel Fast or Smart?, is one in a series of short books on policy and economics topics described as ‘essays on big ideas by leading writers’. My contribution is a critique of the inconsistencies of transport policy in recent decades, which I attribute to the shortcomings of conventional transport economic appraisal in identifying the benefits that arise from investment.  This book is available both in print and as an ebook from Amazon Books

Transport for London (TfL) has published an illuminating report on the topic of Land Value Capture (LVC) – the way in which transport investments could be funded from a share of the increased value of land and property that follows when access is improved as a result of the investment. This study was carried out in response to a request from the Government for detailed proposals.

The range of possible approaches to LVC is wide, and overseas experience is relevant. A conclusion is that of past projects, the Jubilee Line Extension to Docklands resulted in land value uplifts of 52% relative to controls, and the Docklands Light Railway extension to Woolwich, 23%. For eight prospective TfL projects costing around £36bn, land value uplifts could be £87bn. So plenty of value that could help fund these new investments.

The Annexes to the main report are interesting, particularly Annex 7, the literature review of the theory and practice of the relationship between transport and land value, a relationship which does not form part of the orthodox approach to cost:benefit analysis of transport investment. The orthodox approach is concerned with benefits to users, particularly time saved through faster travel. The orthodox view is that to include the uplift of the value of land made more accessible by the investment would double count benefits that accrue to users. However, the user benefits are notional, based on the outputs of transport models, whereas the land value uplifts are real and observable.

Assessment

The TfL report is important, both to identify possible ways of using LVC to fund new projects, and also to assert the relevance of land value uplift as a measure of the economic impact of transport investments. Chris Grayling, Secretary of State for Transport, in a speech on 6 December 2016, recognised the case for LVC:

I want to look at innovative ways of funding infrastructure development. Often the opening of a new road or a new railway line or station can transform the value of development land. It is right and proper that the government gets back some of the value it has created to invest in infrastructure. We have seen this happen for Crossrail through the mayoral community infrastructure levy.

FinanceTransportTravel

My new book published on 1 September is one in a series of short books on policy and economics topics described as ‘essays on big ideas by leading writers’. My contribution is a critique of the inconsistencies of transport policy in recent decades, which I attribute to the shortcomings of conventional transport economic appraisal in identifying the benefits that arise from investment. A column in The Spectator magazine of 26 September described my book as ‘excellent throughout’. My book, Travel Fast or Smart?, is available both in print and as an ebook from Amazon Books.

Yesterday the Government endorsed the proposal to build a third runway at Heathrow, as recommended by the Airports Commission in its final report of July 2015.

There has been much agonising, mainly on account of the environmental impact – noise and local air pollution – of adding capacity to an already large airport within the bounds of London. MPs representing affected constituencies are generally opposed, with Conservatives reportedly to be given some licence to speak their minds. The Mayor of London, Sadiq Khan, is also opposed, preferring expansion at Gatwick, well away from his domain.

But yesterday’s decision is less the beginning of the end, more the end of the beginning. The process for delivering planning consent for airport expansion will include an ‘Airports National Policy Statement’ (NPS), following which the scheme promoter would need to apply for a development consent order. Such National Policy Statements for infrastructure developments are a statutory requirement, involving a process of public consultation of a draft document and parliamentary scrutiny, before being finalised. They provide the framework within which Planning Inspectors make their recommendations on specific planning applications, and are intended to prevent national issues being reopened at planning inquiries.

Consultation on the Airports NPS would probably take around a year, given the range and contention of the issues involved, and would allow all parties to have their say. Concerns about local air pollution will be prominent. Unpublished (and disputed) research at Cambridge University is reported as arguing that the marginal increase in NO2 associated with airport expansion would be against the background of reduced NO2 from other traffic, because of Euro 6 engines and electrification of the traffic fleet.

There are also questions about the affordability of a third runway at Heathrow. Willie Walsh, chief executive of British Airways, has questioned the costs of expansion and the impact on landing charges: “I honestly can’t see how you can spend that much money on an airport and not discourage people from flying there.

Gatwick Airport has been arguing vigorously that it should be allowed to add another runway, which would be built faster, be less costly and have less environmental impact than Heathrow. An issue for the Airports NPS is whether Gatwick should have the option of expanding, as well as Heathrow, to achieve more competition. However, the owners of Stansted say they would launch a legal challenge were both Gatwick and Heathrow to be given the go-ahead, on the grounds that they had not been given the opportunity to present their own case for expansion.

When the draft NPS comes to be scrutinised in Parliament, there will be probing questions, not least from the All Party Parliamentary Group on Heathrow, which has identified sixteen serious risks that could stop or delay expansion. There is bound to be a vote to ratify the NPS, which likely to be a free vote to allow dissenting Conservative MPs to register the unhappiness of their constituents – so no assured outcome.

Evidently, there is a long way to go before construction could start at Heathrow. The timeline includes publication of the draft Airports NPS, public consultation, the Government’s response, parliamentary scrutiny and endorsement (all of which could take a year), a public examination by a Planning Inspector of the detailed plans (which could take another year), the Inspectors report, and the Secretary of State’s decision. In the meantime the finances would need to be agreed, including the necessary increase in airport landing charges to recover the costs, and the financing of surface transport provision.

It is worth recalling that planning consent for the Hinkley C nuclear power station was originally given in 1990, following a year-long public inquiry, but agreement to begin construction was reached only in September 2016. The delay was mainly due to difficulties about financing a plant that generates high cost electricity – a salutary warning of the length of time it can take for large contentious infrastructure proposals even to get to the point of starting construction.

A version of this article was published in The Conversation

 

 

 

 

FinanceTransportTravelUncategorized

‘Transport modelling – fact, forecast or fiction?’ was the topic of a well-attended meeting of the Transport Planning Society at which I was a panelist. I argued that there was occurring quite a lot of change in travel behaviour as we moved into the twenty-first century – not least the Peak Car phenomenon – which made the task of the modeller more difficult. Modelling of any kind assumes continuity between past and future, that past relationships (estimated as elasticities) will apply in the future, subject to changes in parameters exogenous to the model, such as growth in GDP, population and oil prices. If behaviour is changing, the best approach is to widen the range of forecasts by adopting scenarios which allow the model to explore the impact of a wider range of travel behaviour. An example is the generation by Department for Transport modellers of road traffic forecasts based on five scenarios applied to the National Transport Model.

I also drew attention to the experience of the Actuarial profession, which after the failure of a life assurance company had prompted a government inquiry,  had put in place formal standards for actuarial analysis and a means for professional oversight of compliance. One standard deals with modelling, the language of which is quite general and would be relevant to other kinds of modelling, including transport modelling. So the actuaries’ arrangements show that it would be possible to put in place formal standards for transport modelling. However, for this to happen, there would probably need to be some kind of scandal, as happened to the actuaries.

One kind of scandal involving transport modelling has occurred in Australia, where a number of privately-funded toll roads have experienced usage far below the forecasts made when investors were approached to finance construction. This has resulted in litigation that in at least one case resulted in the transport consultant responsible for traffic forecasts paying out $200m. Were something similar to happen in Britain, I would expect a call to put in place standards for transport modelling.

My fellow panelists had their own concerns and solutions to achieve better transport modelling. My feeling from the meeting as a whole is that there is a needed to  review systematically the current state of the art and to identify ways to improve. I hope the Transport Planning Society might act as a thought-leader, given the centrality of modelling to planning.

FinanceTravel

The Government is struggling to reach a view on the recommendation of the Airports Commission that another runway be built at Heathrow. Both the main political parties are divided on this issue. Local MPs are generally against, as are the candidates in the 2016 election for Mayor, on account of environmental impacts.

The Airports Commission forecasts a doubling of passenger numbers by 2050, hence the need for new runway capacity. I have argued previously that there is much more downside uncertainty in this forecast than the Commission believes, in part because the market for air travel may be more mature than generally supposed.

Quite apart from forecasting questions, there are reasons to suppose that we could cope quite well without a further runway in the southeast England, whether at Heathrow or elsewhere. To start with an argument by analogy.

Road capacity constraint

In the 1970s London decided not to enlarge the road network to accommodate growing car ownership. The retained historic street pattern has constrained car use such that car traffic has not increased over the past 20 years, a period of population and income growth. So the share of journeys by car has fallen, while investment in public transport, rail in particular, has met the mobility needs of inhabitants and visitors. London has thrived economically, culturally and socially despite a major transport capacity constraint – the road system. We have worked around this by investment in rail that provides speedier and more reliable travel than the car on congested urban roads.

Airport capacity constraint

If we did not construct another runway, how would we cope? What would be the workaround? For air travel this lies within the system. Three–quarters of passengers are on leisure trips. Even at Heathrow, 70% of passengers are tourists or visiting family and friends. Yet the arguments for more runway capacity are very largely about the need to allow for the growth of business travel – to help British businesses develop new markets and to foster inward investment into the UK.

The case for more airport capacity to support tourism is weak. While London’s hospitality, entertainment and retail sectors would welcome more inbound visitors, Britain has a negative balance of trade in tourism, the British abroad spending a lot more each year than overseas visitors to the UK. Moreover, London, the inevitable destination of first time visitors, is essentially a working city where excessive numbers of tourists arguably detract from the quality of life. Promotion of inbound tourism might better focus on places outside the capital, accessible from regional airports.

Market response

If we decided not to construct a further runway at Heathrow, the market would respond to this capacity constraint. Business travellers would command priority since they would be willing to pay for the convenience, connections and direct flights at Heathrow. Growth of business travel would displace leisure travel, both within aircraft on existing routes and between routes, where there are trade-offs of time against money. For instance, if I need to travel to India on a business trip for which others are paying, then if possible I would fly direct from Heathrow. But if I am on a holiday visit, paying out of my own pocket, than I may choose the cheaper alternative via a Middle East hub, the inconvenience of the change of aircraft being acceptable for the more attractive price.

At present, both routes to India start from Heathrow. If business travel grew, the airlines would serve the routes with larger aircraft. If demand grew yet further, then alternative departure points for leisure travellers would be offered, such as Stansted, which has plenty of spare capacity.

Growth of business travel in conditions of capacity constraint would be profitable for both the airlines and Heathrow airport. If profits were judged excessive, there are regulatory interventions that could be considered to prevent users from being exploited.

Assessment

There is a case for an additional runway in southeast England, as argued by the Airports Commission. But if it proves too difficult to agree where to build it (and how to finance it, given the uncertainty of forecast usage), then we could manage without. The market would give priority to business travellers. Leisure travellers are more flexible and would take advantage of alternative routes that the airlines would offer.

A version of this article appeared in The Conversation on 11 December 2005

 

 

 

 

FinanceTravel

The Financial Times reports that Crossrail, the new east-west underground rail line currently being constructed in London, is sparking office development near stations on the route, with expectations of rents rising 10% over the next decade above the baseline projection. While a business levy is contributing to the construction cost, this captures only a fraction of the rise in values from Crossrail. This office construction is part of a trend for companies to move back into central London, reversing a 20-year exodus aimed at cutting costs. Businesses find that they can’t attract quality staff outside the capital.

The general point is that new transport infrastructure, well located, enhances access and prompts the construction of commercial and residential property, the source of employment and homes. This is how the benefits of transport investment materialise. Property owners who benefit from enhanced values should be expected to contribute to the cost of construction.