Background EG 6 Revenues

Revenue raising and use has implications for economic efficiency, equity and acceptability. Clearly, revenue is already raised from existing transport systems, through a mixture of taxation and charges, and accrues to the state and the transport operator. National governments use this tax revenue along with other tax revenue (e.g. income tax) to fund their activities which may include further changes in the transport system. Marginal social cost pricing in the transport sector implies a significant reform of transport pricing. Such a significant reform appears very likely, for acceptability reasons, to have to be linked to how the revenue raised is used for instance with the surplus revenue being hypothecated for further investment in the transport sector.

Research suggests that marginal social cost pricing for infrastructure use will generate at least as much if not more funding than is required for cost recovery, including servicing of capital costs (CEC, 1998; ECMT, 2003). However, this is at an aggregate level and revenue surpluses will occur for some modes and in some areas, whilst revenue deficits will occur in others. Typically we would expect surpluses for road networks and deficits for public transport systems that have high sunk costs (e.g. rail). Congested areas (e.g. urban environments) are likely to generate surpluses, whilst uncongested environments may be in deficit. The problem in financing new infrastructure therefore occurs if the new infrastructure operates with a revenue deficit. The Commission’s 2001 White Paper proposed national or regional transport infrastructure funds as a mechanism by which surplus revenue could be hypothecated to facilitate transport projects that lessen or offset the external costs associated with transport. The White Paper envisages that surplus revenues from one mode (or area) may be used to finance projects associated with a different mode or in a different area.

Clearly, such a policy of revenue use will raise efficiency, equity and therefore ultimately acceptability issues. If revenue is to be hypothecated to the transport sector this may result in a lowering of economic efficiency. This is because either there are insufficient economically efficient transport projects, or transport projects are less efficient than other types of project (e.g. education) which could have been financed through the revenue surplus. Issues associated with equity may occur as the surplus revenue may well be directed to modes or areas which do not benefit those who contributed to the revenue surplus – thus one sector of the population may experience an increase in costs whilst another sector experiences the benefit. This may be unacceptable to those who bear the majority of the costs. Prices for transport infrastructure in areas or modes where revenue deficits exist may therefore need to set at a level higher than marginal social costs would suggest in order to raise the necessary finance for new projects. Alternatively more local infrastructure funds (e.g. regional funds) may give the required degree of acceptance. However the success, in terms of economic efficiency and equity, of such funds depends upon how they are administered – i.e. who decides the prices to be charged, who decides which projects are to be invested in and what constraints the fund administrators are subject to.

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