UK: Roads Briefing - Summer 2011

Last Updated: 15 August 2011
Article by Ian McCulloch

Welcome to our Roads Briefing, in which we examine and comment on topical issues affecting the roads industry. In this edition we focus on developments in lorry road user charging, and prospects for funding new roads. Please do not hesitate to contact us if you would like to discuss any of the topics raised.

Lorry Road User Charging does it stack up now?

Twelve months ago, persistent campaigning by the UK haulage industry for charges to be imposed upon foreign hauliers using Britain's roads looked set to pay off. The Coalition's 2010 Programme for Government committed the Government to work towards a new system of lorry road user charging (LRUC) to 'ensure a fairer arrangement for UK hauliers'. Transport Secretary Philip Hammond went further, telling the Transport Select Committee that the aim was to introduce LRUC by April 2014.

UK hauliers might seem unlikely lobbyists for the introduction of a new HGV levy. However, whilst LRUC is used throughout Europe to ensure HGV operators pay for infrastructure damaged by their vehicles, supporters (including the Freight Transport Association and the Road Haulage Association) believe charging is required in the UK to deliver 'a level playing field' between UK and overseas hauliers.

The scheme was expected to raise £319 million annually, with a rebate being offered to UK operators.

UK fuel and vehicle excise duties are considered to place British lorry drivers at a competitive disadvantage to their European counterparts. They enjoy cheaper fuel and lower taxes. Further, many European countries impose blanket road tolls or levies ensuring maintenance costs are shared by all road users, irrespective of their origin.

The DfT's recent Survey of Foreign Road Goods Vehicles supports the view that HGVs from overseas use UK roads without proportionately contributing to their upkeep. During 2009, foreign vehicles clocked up 948 million kilometres on UK roads. The average trip for such vehicles involves a distance of 649 kilometres yet, through use of 'belly tanks' to store cheap continental fuel, only purchases of 10 litres of UK diesel.

LRUC can address this anomaly by imposing a levy on all hauliers operating on UK roads whilst offering UK drivers an appropriate rebate of UK fuel or vehicle excise duties, delivering a revenue neutral result. Such a scheme reflects the Coalition's stated objectives for LRUC. Hauliers welcomed the proposals to develop a LRUC regime, being led by Mike Penning MP, Parliamentary Under Secretary of State for Transport.

Of course, UK hauliers have been here before. The Labour Government introduced preliminary legislation for LRUC in 2002. At that time, a distancebased charging scheme was favoured. The scheme was expected to raise £319 million annually, with a rebate being offered to UK operators. However, concerns grew over the set up and operating costs involved. Ultimately, the Transport Select Committee, in studying the LRUC proposal, concluded that 'the sums may not stack up. The government should be wary of committing itself to implementation of a potentially very expensive and overly-sophisticated system'. Much to the anger and frustration of UK hauliers, LRUC was ultimately scrapped.

Whilst the Coalition's promise to return to the agenda of 'fairer arrangements for UK hauliers' was welcomed, concerns are growing that the devil may, once again, appear in the detail.

Any UK LRUC scheme must comply with the European Eurovignette Directive which lays down rules for EU member states who introduce motorway tolls or charges. User charges should be scaled according to the duration of the use made of the infrastructure and to vehicle emission classes. The Directive also fixed a maximum daily user charge of €11 for all vehicles categories. To add further complexity, the European Parliament has just agreed to extend the scope of the Directive to allow charging to reflect a portion of the external noise and pollution costs generated by HGVs and for infrastructure costs to be varied by up to 175% to take account of congestion.

It is rumoured that the UK's proposals will involve a charge of around £9 per day with foreign vehicles paying by means of a vignette system, reflecting schemes already operated by other European countries. But it is not yet clear how British vehicles would be charged, what form the rate rebate might take or whether the funds raised would be sufficient to meet the costs of implementing and administering the scheme.

The Government has promised that getting the rebate right is a top priority. But this could prove complex and expensive, particularly if it is necessary to look at fuel duty, as in 2003. Identifying a viable structure for LRUC, which stacks up in monetary terms, delivers a tax neutral result for UK hauliers and complies with changing EU rules remains the challenge.

The development pool – sink or swim?

By Tom Henderson

A quick 'armchair analysis' of the 45 development pool schemes suggests that at least 50% of the projects are highway schemes, or mixed schemes involving significant highway improvements.

9 September 2011 is a date looming large for the promoters of 45 local authority major transport schemes, many of which are road schemes. This is the date by which they must submit 'best and final' bids to the Department for Transport (DfT) for funding. The DfT's funding decision will then be issued December 2011.

The 45 schemes make up the DfT's 'development pool'. Following the Comprehensive Spending Review in October 2010, the 'development pool' was established to categorise schemes which the Government was prepared to consider for funding in the period 2011-2015, subject to improved funding bids. In February, the development pool was expanded to the current 45 schemes, when 23 'pre-qualification pool' schemes were added. The 45 schemes, and their initial 'expressions of interest', can be viewed and downloaded at: http://www.dft.gov.uk/pgr/regional/ ltp/major/transportschemesupdate/ .

As at February 2011 the total likely funding request from the development pool schemes was around £950m, with an available funding pot of £630m. The DfT's guidance states that 'the process remains competitive' and that they 'do not expect that all these schemes will be funded'. Scheme bids will be judged on:

  • value for money;
  • the proportion of overall funding coming from non-DfT sources;
  • deliverability;
  • strategic importance; and
  • a consideration of modal and regional balance across the programme.

Thus the difficult task currently facing the 45 development pool schemes is to revise their business cases to come up with a best and final offer that not only meets the above criteria but does so in a way that prioritises their scheme above competing bids. Savings will need to be identified so as to maximise value for money, but without compromising deliverability. Changes to schemes may require re-consultation with key stakeholders and the public. Identifying non-DfT sources of funding will be a challenge for cash-strapped local authorities, who will either have to make some difficult spending decisions, or alternatively look at introducing new mechanisms for generating local funding.

The criterion concerning regional and modal balance presents a further interesting dimension, given that to a great extent it is outside of the control of the promoter.

A quick 'armchair analysis' of the 45 development pool schemes suggests that at least 50% of the projects are highway schemes, or mixed schemes involving significant highway improvements. The government may not wish to be seen to be favouring highways investment above public transport schemes, so this immediately raises a question mark over the prospect of all of these road schemes receiving DfT funding.

Further, there is some regional imbalance among the 45 development pool schemes – some 25% are located in the North East (including Yorkshire) alone, whereas East Anglia, the South and South East combined account for 25% of the schemes. The 'strategic importance' criterion may well favour investment in less economically favoured and more populous regions, but equally it is likely that schemes that are clustered together may find the process particularly competitive. Developing a winning best and final offer will be no mean feat, requiring reconsideration of all aspects of schemes, and an innovative approach. It seems inevitable that some schemes – and in all likelihood a number of proposed new road schemes – will be disappointed come December 2011.

Road funding – What are the Options?

By Nick Maltby

The Government is committed to prioritising capital investment in economic infrastructure that supports growth. In the Comprehensive Spending Review in autumn 2010, the Government approved a number of road schemes concerning motorways and major trunk roads and confirmed that a smaller number of schemes in the Supported Pool will be funded following receipt of bids. As outlined above, the roads schemes in the Development Pool and those cancelled in the CSR remain problematic in terms of funding as there will be no public funding for unsuccessful schemes prior to 2015. The question remains how if at all these schemes might be funded?

Current funding options

At present, the options for funding new roads are limited. In theory, local authorities could fund new roads from their own resources or by borrowings either from the Public Works Loans Board or through a bond issue. In the 1990s a significant number of roads were funded by PPP/PFI but PPP/PFI is not currently flavour of the moment and the Highways Agency has adopted other approaches (the M25 PPP aside).

Another source of funding is tolls, which have not been widely used apart from the M6 toll road other than in relation to bridges and tunnels. New roads may also be paid for out of s106 or CIL contributions. More esoteric forms of funding include road user charging, the workplace parking levy and the newly created Regional Growth and Sustainability Funds. London aside, road user charging has not proved politically possible with substantial defeats for schemes in Edinburgh and Manchester. The current London mayor also reversed the western extension of the London scheme. On the workplace parking levy front, the Nottingham scheme is due to start in the autumn and it is understood other authorities are looking seriously at this option. No road schemes were successful in the first round of applications to the Regional Growth Fund.

Prospective funding options

So what of the future? The two significant proposals which could drive road funding over this decade are Tax Increment Financing and the extension of the Regulated Asset Base (RAB) concept to the road network. TIF works by allowing local authorities to borrow against future business rates and thereby invest in infrastructure. The Scottish Government introduced TIF legislation in late 2010 and among the schemes that are being piloted is North Lanarkshire's £73m bid for a 7 mile dual carriage way linking the fringes of Hamilton with the M8. Construction of the road is seen as the likely catalyst for ambitious plans to create a new town on the Ravenscraig site. The project will be funded through a TIF scheme. The limitation of TIF is that it needs business rates to be generated to work and unless there are significant business rates it is difficult to see new roads happening. DCLG issued a consultation document on the introduction of TIF in July.

Of possibly more significance for the future is the RAB concept. In 2009, Policy Exchange published a paper, 'Delivering a 21st Century Infrastructure for Britain'. This argued that the RAB concept, currently used in the utilities and rail sector and which tends to produce a lower cost of capital than PFI, should be extended to include road transport. To work this would involve the public paying charges to a roads authority which would then raise money on the back of this. Given the fate of road user charging in recent years, one suspects that such an extension of the RAB concept would be difficult politically. However, while road user charging appears to have been ruled out in this Parliament, it is clearly an issue that will not go away, particularly given current constraints on Government funding. Treasury was due to issue a paper on this in the Spring, which is still awaited.

However, while road user charging appears to have been ruled out in this Parliament, it is clearly an issue that will not go away, particularly given the current constraints on Government funding.

Round-up of other news...

Independent review into the Strategic Road Network – Alan Cook, non-executive Chairman of the Highways Agency board, has been commissioned by the Secretary of State motorways and major A roads to consider whether they could be more effectively operated, maintained and enhanced. Cook will report his findings to the Secretary of State for Transport in October.

http://www.dft.gov.uk/news/press-releases/dft-press-2011040

See what Bircham Dyson Bell's Ian McCulloch had to say about the review:

http://www.bdb-law.co.uk/content/v2/cook-review-highwaysagency- needs-go-extra-mile-says-infrastructure-lawyer

Inquiry into effective road and traffic management – the Transport Committee is currently undertaking an inquiry into effective road and traffic management, in the light of the Government's decision not to introduce road pricing on existing roads except in relation to HGVs. Written and oral evidence has been taken between March and June, though no date has yet been set for the inquiry's report.

http://www.parliament.uk/business/committees/committees-a-z/ commons-select/transport-committee/inquiries/roads/

'Corridors of Choice' – Steer Davies Gleave, in association with Bircham Dyson Bell, have published a report examining the potential for generating revenues from low-level road network in the UK.

http://www.steerdaviesgleave.com/sites/default/files/ newsandinsights/Corridors%20of%20Choice.pdf

Advisers to the Welsh Assembly have published a 'discussion document' titled 'Key Issues for the Fourth Assembly'. Coming at a time of reduced public expenditure, it advocates consideration of alternative forms of finance for transport infrastructure, including public private partnerships and road pricing.

http://www.assemblywales.org/11-026.pdf

On 7 June 2011 the Parking & Property Conference 2011 was held at Bircham Dyson Bell's offices. It looked at current issues in the parking sector, including wheel clamping and workplace parking levies. The presentations can be downloaded at:

http://www.box.net/shared/aibb79przvmil0af8cyg

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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