Transport Insights

I’ve been looking at the Final stage Impact Assessment of the Highways (Financing) Bill published by the Lower Thames Crossing (LTC) team at the Department for Transport (DfT), which obviously tries to big up the legislation, but also flags a few pretty obvious risks.

The LTC appears in the assessment as an example of how the mechanism of a Regulated Asset Base (RAB) model might get private money to build highways infrastructure in exchange for (toll) revenue and how some highways infrastructure might be handed over to a private entity.

The section on Risks, unintended consequences and assumptions sets out a few things that might go wrong, all quite likely and very good reasons not to deploy the model.

The section on Risk of higher road user charges sets out the basic model:

Under the RAB model, the regulated company (RegCo) is entitled to recover efficiently incurred capital and operational expenditures associated with the asset. In addition, the framework can allow for the RegCo to recover costs that would not typically arise under conventional public delivery, such as private financing costs, transaction and administration costs, and, depending on the licence and transaction, certain tax costs. These costs would be recovered by Road User Charges (RUCs) and associated revenue mechanisms.

So already there are additional costs, with the obvious consequence:

As a result, there is a risk that charges could be higher, or structured differently, than those that might be set under a public delivery model.

But its ok because:

Regulatory oversight can provide cost incentives, prevent excessive charges, and ensure that RUCs remain proportionate over the life of the scheme.

Note that the mitigation imports the word PR “ensure”, albeit attached to can, which makes it meaningless as a statement of certainty.

There is also the risk of Private sector inefficiencies:

There is a risk that private delivery under a RAB model could result in weaker cost control than public delivery, potentially leading to higher road user charges.

But about that regulation. Oh look, a touch of realism:

Risk of regulatory failure

The RAB framework relies on the effective design and operation of the economic regulatory regime. There is a risk of regulatory failure if the ERR is poorly designed, inadequately resourced, or weakly enforced. If this is realised, the RegCo may be able to exploit its monopoly position, which could lead to user charges being set above efficient levels, inefficient investment decisions, or sub-optimal service quality. This could reduce value for money for users and undermine confidence in the regulatory framework.

And here’s the killer:

Risk of regulatory capture

In regulated sectors, there is a potential risk of regulatory capture. This is where, over time, the regulator becomes influenced by the interests of the regulated company rather than those of users and the wider public.

Given that the Office or Rail and Road is going to be the regulator, I would say that is more a certainty than a risk. Added to which:

Efficient and effective regulator

The appraisal assumes that the appointed regulator operates efficiently and enforces the ERR effectively, fully adhering to its statutory duties. This assumption underpins the expectation that robust regulatory oversight will safeguard user interests, ensure fair and proportionate charges, and uphold the quality and integrity of scheme delivery throughout its lifetime. The ORR presently oversees Network Rail and other railway networks, which differs from RAB regulation. There is a potential risk that the ORR may lack sufficient capability to regulate the RegCo(s) effectively.

That word “ensure” isn’t looking quite so reassuring now, is it?

And finally:

Risk of insolvency

Private ownership and operation of major road infrastructure introduces a risk that the RegCo could become insolvent and enter administration.

As the Cranberries said:

Don’t do it, don’t do it.