Financing better, safer roads | KPMG | Malta

Financing better, safer roads

Financing better, safer roads

The current administration has proposed to upgrade Malta’s road network within a relatively short time frame.

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The current administration has proposed to upgrade Malta’s road network within a relatively short time frame. To whoever has had enough of getting stuck in a traffic jam, this sounds like a most welcome and admirable proposal. Yet, from an economist’s viewpoint, a traffic jam is a queue to use road space, with the latter essentially characterised by limited supply, growing demand, and is still free to use.

The excess demand situation is managed through traffic jams – essentially rationing by queue, but the human and financial costs of this mechanism are too high.

The financial costs of improving Malta’s road system are considerable. Could they be recovered through tolls? This hardly seems likely, especially considering the significant number of urban and rural roads. At the moment, government raises its related revenue through fuel taxes and road tax.

The problem with this mechanism is that road tax is not a tax on a vehicle’s use of roads, but on the ownership of the vehicle. Revenue from fuel taxes obviously fluctuates with the price of oil, and gradually decreases with the fuel economy of modern engines.

This places the road network in a state where it is not supported by a steady budget, but rather depends on annual allocations in the budgetary process. Here we come to the core of the financing problem. As Malta’s population increases and becomes more affluent, the number of households is increasing and the average number of cars per household is likewise on the rise.

In addition, as people become more mobile, it appears that the number of car journeys is also increasing – at least, the commonly-held perception of more frequent and more intense traffic jams implies higher usage of our road network, at least during peak hours.

In truth, the road network is not extended at the same rate as the increase in road usage, hence the rise in the number of vehicles per road km, and consequently, the more intense traffic jams.

Yet, as motor vehicle-related revenues are collected on the basis of the number of vehicles and fuel consumed, there is no direct correlation between road use and revenue generated. This year’s Wolfson economics prize – which is the second most prestigious award in economics after the Nobel prize – called for ideas to bring more investment to the road network.

The finalists proposed the replacement of traditional taxes with pay-for-use systems supported by robust technology platforms. A mechanism was proposed to reward persons for changing their driving habits, which could have significant environmental and traffic management benefits. Technology could be harnessed to support the economics of road financing, with consideration of the treatment of road charging as countries move away from traditional models of car ownership into more modern models of ride sharing and increasingly autonomous vehicles.

Interestingly for Malta, an emerging debate is whether roads can be used to generate electricity. We all know that tarmac is warmed by the sun, and can even melt on very hot days. Could a system of heat pumps be used to extract energy, should systems making power from kinetic energy be tested?

There are multiple models of financing road use, and the general principle is that the user should pay for their share of the use. Payment for road use should cover the generation of congestion (charges apply at defined times or locations), the adverse environmental effects of road use (cleaner vehicles pay less), and road maintenance (vehicles pay according to the damage they cause to the road surface).

Perhaps such a model could take the form of a social contract. Should drivers be compensated, in the form of a rebate on charges, if the road network fails to deliver pre-determined journey times?

Giving drivers incentives to change their driving habits, to consider different routes or different timings for their journeys, could be part of a solution. The range of benefits, in terms of managing congestion, reducing environmental impact, and lowering the economic cost of people stuck in traffic jams, would be most welcome.

Clearly, such changes require a technological base. Incentivising drivers to change their habits requires an easily accessible information system that can inform, in real time, about levels of congestion on different routes, and, ideally, suggest alternative routes. Charging per use would also require an underlying technological basis, both with respect to measuring usage and with respect to generating claims for payment, and indeed collecting payment.

Importantly, a change in charging systems places the user in a decision-making position. The current models of charging and managing demand through traffic are several steps removed from direct user decisions. A system of published usage rates, transparent in determination and computation, and openly supported by technology and administering entities, with clear and well explained and documented incentives for drivers, would enable the user to understand a variable cost of car usage, and to decide on those parameters that drive total cost.

At the same time, a more efficient collection system reduces administrative costs, and could ring-fence the funds raised within the road network.

© 2017 KPMG, a Malta civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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