FINAL CONFERENCE Revenue Use from Transport Pricing 29th – 30th November 2005

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FINAL CONFERENCERevenue Use from Transport Pricing

29th – 30th November 2005Hotel Métropole, BRUSSELS

From Theory to Practice

by

André de PalmaadpC

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Blog: Gary Becker-Posner & CBA

The decision to abandon or not cannot be left to the market. It could be if federal, state, and local government could credibly commit not to provide any financial assistance to the city’s residents, businesses, and other institutions in the event of another disaster--but government could not make such a commitment. Or if government could require the residents, businesses, etc. to buy insurance that would cover the complete costs of such a disaster. But again it could not; insurance in such an amount, to cover so uncertain a set of contingencies, could not be bought in the private market.

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The specificities of infrastructures

1. Infrastructures in our society:

transport, telecommunication, electricity, energy & water.

2. Infrastructure are expensive public goods usually provided by the Regions / the State

• But several exceptions exist (Europe, South-East Asia, South America)

• Case for privatization : need for financing

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The specificities of infrastructures

3. Unique specificities• Mobility is a basic right (positive freedom, Rawls)

• Externalities (congestion, pollution, accident and noise) a justification for State intervention (Pigou and pricing)

• Time horizon involved (e.g. concession for the Channel tunnel: 55 years; for the tunnel du Mont Blanc: 70 years, etc. )

(im) possibility to plan over such periods of time

Almost as a consequence ….

• Risk which could (not) be diversified (uncertainty) justification for State intervention: who bear the risk?

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Sources of randomness (adapted from W. Rothengatter)

• Risky and uncertain demand forecast (Keynes)• Production costs (construction, maintenance, etc.):

external risk and internal risk (execution time and human resources for project management).

• Industry structure and regulation• Macro-economic context (including Kondratiev

cycles), regional uncertainty• Political changes (re-contract) or political instability• (Im)perfect capital market (Friedman, Stiglitz &

Wise)

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A very controversial background

1. Large infrastructures: awkward investment for private sector

• Huge time periods• No return for a long period• High level of risk and (no) diversification

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2. Level of intervention

(Hayek) NONE ------------------------”FULL” (Keynes)

Partial (PPP)

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Involvement of public sector• The Pubic sector …

– Finance the infrastructure or not (then financed by private sector)

– Covers the operations costs or not (then covered by the private sector)

4 cases

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Involvement of public sector (adapted from Nijkmap & Rienstra)

Financing Financing

Private Public

Operation Private I : No public intervention

II: Gov. pays for the fixed cost

Operation Public III: Private S. finance the infrastructure

IV. Gov. control both

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Involvement of public sector

The private sector should:

Bear some “real” risk

Be able to levy a toll to get some revenue

Should provide the data as required.

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Different agents & different objectives

• Financial approach (Private)– Private firm (Profit)– Government (welfare, equity, regional level. ...)

• Cost-benefit analysis (Public)– Range of externalities (Pigou & Vickrey)– « Equity » (Rawls)

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3. Ways to finance investment projects

Equity ------------------------------------------------------- Debt

Theory of Coase, Williason on irreversible (or nonreployable) investments

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A controversial background

1. Theory: does optimal pricing & investment result in surplus, self-financing (break-even), or deficit?

(a) Does the cost recovery theorem hold?

(b) How robust are the theoretical finding on self-financing?

2. Empirical estimates: combined estimation of parameters, with calibration (cost, elasticity of substitution, VOT, VOR,…).

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Two different types of analysis

1. Descriptive analysis: determinant of revenue, identify robust key explanatory factors, sensitivity analysis

2. Predictive analysis: predict future revenues, flows, (etc.) for BAU and for different policies.

KEY 1: test for endogeneity - exple: forecast in PT and VOT

KEY 2: test for IIA, etc.

KEY 3: right level of aggregation? See next slide.

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In1 In2 In3 In4Out1 Out2 Out3 Out4

Ring 1

Ring 2

Ring 3

Ring 4

Road network

Radius 16 km.

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(a) (c) 25% 99% 26% 0% 20% 0% 17% 0% 22% 28%(b) (d) $0.20 $0.43 $0.07 -$0.63 -$0.22 -$1.54 -$0.32 -$1.45 -$0.05 -$0.7439% 78% 29% 83% 33% 0% 30% 0% 31% 0% 31% 22%

$0.33 $0.06 $0.04 $0.24 $0.02 -$0.94 -$0.23 -$1.87 -$0.25 -$1.77 -$0.09 -$1.0544% 0% 31% 1% 30% 3% 28% 0% 28% 0% 30% 1%

$0.17 -$0.93 -$0.12 -$0.79 $0.04 -$0.42 -$0.19 -$1.41 -$0.20 -$1.34 -$0.12 -$1.0145% 0% 28% 0% 28% 1% 38% 0% 30% 29% 31% 8%

$0.49 -$1.59 $0.02 -$1.41 -$0.10 -$0.94 $0.23 -$0.31 $0.03 -$0.19 $0.05 -$0.7450% 0% 27% 0% 23% 0% 28% 0% 32% 31% 28% 6%

$0.66 -$1.98 -$0.05 -$1.80 -$0.05 -$1.38 -$0.02 -$0.69 -$0.01 -$0.17 -$0.01 -$1.05All 44% 27% 29% 29% 29% 1% 30% 0% 29% 12% 30% 11%

destins. $0.37 -$0.90 -$0.02 -$0.74 -$0.01 -$0.89 -$0.09 -$1.21 -$0.13 -$1.00 -$0.05 -$0.96

Ring 1 Ring 2Destin.

OriginAll originsRing 3 Ring 4Ring 0

Ring 2

Ring 3

Ring 4

Ring 0

Ring 1

(d) Mean change in consumer’s surplus/trip from flat tolls

(a) % travelers gaining from step toll(b) Mean change in consumer’s surplus/trip from step tolls(c) % travelers gaining from flat toll

Distributional impacts of comprehensive tolls

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Regime 1 (BAU) 2 3 4 5

Welfare levels

Construct NEW tunnel? No No Yes Yes Yes

Tolling of tunnels None OLD, optimal None NEW, break evenOLD+NEW, optimal

Auto travellers' surplus Work trips 24,728,541 -694,943 1,604,221 786,603 1,191,196 Other trips 12,131,229 -366,582 431,486 57,876 274,971Freight users' costs Local traffic 30,328,753 -786,929 807,656 274,446 -16,169 Transit traffic 14,938,043 -387,592 397,801 135,175 -7,964

External costs other than congestion 1,367,587 283,525 -163,238 22,407 67,458

Toll revenues OLD tunnel 0 2,559,706 0 0 1,519,475 NEW tunnel 0 0 0 1,035,077 388,803Tax revenues Regional government 344,188 -67,027 41,192 -5,088 -6,438 Central government 1,809,742 -356,431 216,487 -27,262 -43,593Maintenance & construct. costs OLD tunnel 1,091,096 283,077 344,651 147,780 541,523 NEW tunnel 0 0 -2,491,796 -2,141,006 -2,367,656Salvage value: NEW tunnel 0 0 751,055 751,055 751,055

Welfare gain N/A 466,804 1,939,515 1,037,063 2,292,661Welfare gain relative to Regime 5 0 20% 85% 45% 100%

Welfare changes

Welfare measures: examples

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Concluding remarks (1)

• Do not hide the underlying controversy

• Use more heavily econometrics

• Interdisciplinary approach : engineering, computer science, accounting, economics,..

• Develop a collaborative research (platform) to develop a tool (open sources, etc.) to perform high quality CBA

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Concluding remarks (2)

• Experimental economics: to evaluate new transport systems, measure willingness to pay, measure the equity versus efficiency trade-off

FINAL CONFERENCE Revenue Use from Transport Pricing 29th – 30th November 2005

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