IEA Blog

The dismal economic returns on the Channel Tunnel Rail Link are a stark warning to supporters of a high-speed line to Scotland and the North of England.

The total cost of the link, now renamed “High Speed One” (HS1), is close to £10 billion in today’s money, when all the hidden subsidies and extras are included. And this figure does not include the substantial “deadweight” losses from the additional taxation required to fund the line. A commercial business would expect to make an annual return well above £500 million on such an investment, particularly since railways typically need to be substantially rebuilt after 30 or 40 years.

In this context, the return on HS1 is pitiful. Last year, the “investment recovery charge” levied on Eurostar was reduced by more than half to about £2,200 for each train service using the route. By my calculation, this adds up at most to about £40 million a year – a return of less than half of one per cent on the government’s original investment.

But even this return is questionable. Eurostar has made large losses during its sixteen year history and it remains to be seen whether the hidden subsidy of cut-price access charges will enable it to make sustained profits in the medium term. In other words, not just the infrastructure but the service itself has been heavily subsidised by taxpayers, meaning the overall economic return on HS1 has almost certainly been negative – even before inflation is taken into account. The local “Javelin” services to North Kent now using the line are also subsidised.

Of course, advocates of high speed lines may point to “wider benefits” such as regeneration. Indeed, the expensive re-routing of the Channel Tunnel link through East London was supposed to boost the area’s economy (as well as to facilitate currently non-existent through trains to the North of England). However, state-funded regeneration tends to be a negative sum game. Resources are inefficiently transferred from some areas to others, while social problems are displaced rather than reduced. Moreover, if nebulous “wider benefits” arguments were used consistently as a rationale for taxpayer support, just about every business activity would be entitled to subsidies and almost the entire economy would become socialised.

After sixteen years of support, the government should stop subsidising train services to the continent. Taxpayers could receive at least some compensation if the high-speed line were sold off to the highest bidder with the proceeds used for tax cuts and (unlike in current proposals for its “privatisation”) no restrictions imposed on how the route is used. Perhaps an unsubsidised international service could just about cover maintenance costs, with the sunk capital effectively written off. But far better returns could almost certainly be achieved by shutting down the line and disposing of the assets – which include substantial plots of land, tunnels under London and the Thames, and large amounts of scrap metal.

Simon Heffer made an interesting point in Saturday’s Telegraph about Dartford Tunnel tolls. He suggested that the main cause of congestion on the M25 near the tunnel and bridge was the existence of the toll booths. My experience suggests that he is almost certainly correct.

There are several economic justifications for road pricing, of which three are:

1. To ration scarce road space when it is highly congested and volumes have to be reduced.

2. To produce a level playing field with competing modes of transport that might be charged at the margin.

3. To make traffic pay the externality cost of congestion.

I shall ignore pollution/global warming arguments as, even under Stern’s projections, current petrol tax more than pays the externalities caused as a result of these effects.

If the toll booths are the main cause of congestion then clearly arguments 1 and 3 do not apply to the Dartford Tunnel. 2 also does not really apply because there is no meaningful competing alternative to driving round the M25 in your car (at least at this point). The further nail in the coffin for the tolls should be the realisation that the tunnel and bridge are connected to a network (inner London and the rest of the M25) which is more congested than the bridge and tunnel themselves and for which there is no charge. Thus the relatively uncongested bit of the network is the bit that bears the charge!

Quite clearly this charge is on the wrong bit of the network. I have a proposal that would involve no great change to the way in which road pricing was currently undertaken (though long-term change is necessary) and would involve a simple Bill.

We could take a bit (or bits) of the road network that are congested and the use of which leads to greater congestion elsewhere on the network. If these bits had few or no viable competing uncharged roads but did have competing public transport this piece of the network could be charged for on a congestion charge basis (free at night or when uncongested) without any knock-on effects on other bits of the network. It would be a simple “win-win” Act of Parliament that would impose a charge on this piece of road that would benefit from a charge and eliminate all bridge tolls where the charge is destructive. The Act could be designed to be revenue netural requiring that any excess revenue was used to reduce Vehicle Excise Duty (road tax). Revenue neutrality would also enable any outstanding PFI deals to be sorted out. The piece of road I suggest is the M4 Heathrow spur. A congestion charge on this would be highly efficient.

The cause of congestion on the Darftord stretch of the M25 would be eliminated; bridge tolls with no economic rationale would disappear; and a stretch of road which is highly congested would have a charge imposed. This charge would be easy to collect too. Cars that use the Heathrow spur can only end up in one place and there is bound to be somewhere where it is easy to collect the charge.

Not all cuts spell pain. The traffic control industry is ripe for reform that could bring massive savings as well as a transformation in road safety, congestion and quality of life. The industry is assumed to promote our well-being, but it operates to our detriment. With journey times at an all-time high, and 30,000 killed or hurt on our roads every year, the system is plainly unfit.

Most traffic control is a vain attempt to cure the symptoms of our problems on the road. Why do we have traffic lights? To break the priority streams of traffic so others can cross. Remove the cause of dangerous conflict – priority – and you remove the “need” for lights, and the need for speed, enabling everyone to do what is natural, safe and efficient: approach carefully and filter more or less in turn.

At major junctions at peak times, traffic control can be useful. Otherwise, the best guide to action is our natural ability to negotiate movement based on context. In negating that ability, the current system squanders infinite filtering opportunities and infinite expressions of fellow feeling…

Read the rest of the article on ConservativeHome. Martin Cassini’s article for Economic Affairs, “Traffic Lights: Weapons of Mass Distraction, Danger and Delay”, can be downloaded here.

Here are three propositions which may be true of BP and the fatal Macondo blow out and oil spill. I hope they are and anyway they suggest that at this moment we know little about what BP did and next to nothing about what will happen to it. Some of these questions will take a couple of years to answer and it’s unlikely that any will be answered within months.

(1) BP may not have behaved very badly;

(2) BP may not have caused an ecological disaster;

(3) BP may survive this whole event financially intact.

(1) BP may not have behaved very badly

At this moment, it is easy to condemn BP for having opted for cheap and risky rather than expensive and safe options in its management of the Deepwater Horizon well. But that’s still largely guesswork. With respect, even the forthcoming Panorama expose is unlikely to settle matters.

Of course, BP seems almost as unattractive as possible just now. Corporations in BP’s current position simply cannot risk mea culpas. After its awful record of accidents in the US, one would have thought that the CEO might have been all over the work in the Gulf. Instead, Tony Hayward’s pleas of ignorance look like indifference, which they surely aren’t. Equally, it is easy to say that BP’s choice of a chairman from Sweden seems crass granted that it did so much business in the US, and had an awful reputation there. There is talk that a policy of self-insurance did it no good.

But, as Mr Hayward kept telling the House energy subcommittee on 17 June, much of this will be dealt with when the evidence is solidly available. In the meantime, as was little reported, he told the committee that the ultimate responsibility rests with him. No-one would have wanted him to be sharing blame with partners, contractors, regulators or politicians.

The point here is that it will take months before it is possible to apportion blame.

(2) BP may not have caused an ecological disaster

An ecological disaster has to be wide-ranging, long-lasting and deeply-serious to count. I don’t think any of the historically well-known oil spills have qualified. This one may break the mould. But I would hazard a guess that it hasn’t yet. We are praying or crossing our fingers, of course. Storms and hurricanes may be the factor that makes things much worse, but they also have demonstrated their own clean-up potential. 

The point here is that it will take months or years before we know the ecological impact.

(3) BP may survive this whole event financially intact

In times of crisis share prices fluctuate very wildly and often don’t reflect the real value of a firm or its assets. It is at least possible that BP will be able to draw a line under its liabilities following this fatal accident and spill. Even if these are framed as pessimistically large, but are at least framed, the firm may re-emerge as viable and strong. I am no expert, but it seems unlikely that any rival would bid for BP in the present state of uncertainty. Presumably any such bid would raise the share’s price very quickly. 

I don’t suppose the firm’s survival matters, provided its shareholders and employees come out of the chaos in fairly good shape. But I wish I were rich or bold enough to buy BP shares now.

The point is that we perhaps won’t know the financial effects of this accident for months or years.

Declaration of interest: In 1996 BP paid for my expenses as I investigated charges that it was behaving badly in Colombia. My conclusion was that it was a responsible firm doing good in the country. (Shell had earlier paid my expenses for an investigation of its operations in the Niger delta of Nigeria, which reached similar conclusions.)  I often wrote damning BP’s “Beyond Petroleum” mantra which distracted its audiences from the firm’s real obligation to be competent.

Concorde could fly you to New York and back faster than a speeding bullet – with a glass of champagne and bragging rights to boot – for 83p per mile (about £1 per mile adjusted for inflation). The common-or-garden Hackney cab may cost about five times as much (for example, Heathrow to Warren Street is 17.9 miles and can cost £84 = £4.69/mile). Indeed, a one-way trip in a black cab from Heathrow to Fitzrovia may cost more than a return flight to Vienna on a budget airline. This is the result of market-distorting preferential rules.

Hackney cab drivers inexplicably enjoy a rule stating that no one else can describe a taxi service as a “taxi” in their marketing, and the important restriction that no one else can pick up passengers on the street. These regulations have deep historical foundations, dating back to the days of Dick Turpin. In today’s world, they are anachronistic, anti-competitive and pointless.

When there are price comparison sites for insurance, airlines, hotels, holidays and office supplies, where we can buy the same product from a myriad of suppliers at different prices, how is it that there are very strict rules requiring that Hackney drivers receive a minimum wage for every mile driven yet private hire drivers do not? Why is it good for certain stripes of taxi driver to be able to oblige people in London to pay higher rates than the market would support if such a law was not in place?  

Why do the same drivers, who expect to be able to choose what clothes they wear (and how much they pay for them) and which airlines and car insurance firms they use, want to deny travellers in London the basic freedom to choose another vehicle service they can hail at the airport or on the street?

If people want to pay for the superior knowledge that the Hackney drivers clearly possess, they will do so. If they do not care, they will find cheaper alternatives until the market has informed the black-cab community what customers really think and what price they are willing to pay.

Many people are disgusted with the special treatment bankers received, but through the price controls and regulations on taxis in London, transport markets are being distorted to favour one type of vehicle provider.

Anthony Hilton was certainly right to call my comment about the government’s proposed green investment bank “waspish” in the Evening Standard yesterday. He also suggested that it was unfair. Perhaps it was; it was certainly unanalytical, so let’s have a bit more analysis now.

The argument goes that the private sector struggles to raise long-term investment capital and so the public sector has to help. If one looks at the history of the railways, the roads in many countries, the development of electricity, telecommunications and the internet, I don’t think that argument is true. There is a brilliant discussion of this in one of the IEA’s unsung but still excellent publications railway.com.

What probably happens is that we see things that we (as intelligent individuals, journalists, academics, politicians and civil servants) think should be done, the private sector does not do them and so we think there is a market failure. The market failing to provide is not a market failure, however. It may simply be the case that the risks are so great that the private sector is not willing to put its capital to work on such projects because the distribution of potential payoffs does not justify the risks. Capital is scarce, it has other uses: interest rates and capital markets are pretty good at coordinating preferences and directing capital to its best home. Just because it does not go where clever people think it should go does not mean the market has failed.

But let us assume that there is a problem here. Can it be resolved by an investment bank with the government in partnership? I would argue “no”. This new bank will put at risk the capital of people who have not freely chosen to put their capital at risk (taxpayers in general). Decisions as to where that capital will be directed will be taken (or at least influenced) by civil servants and politicians. Anthony Hilton argues that the risks are shared and therefore diminished by state involvement. In fact, the risks are not diminished, they are transferred to a group of people who are forced to carry them: risks are already well shared in capital markets, potentially around hundreds of millions of people on an international basis.

In fact, state involvement will make the risks even greater. The history of state sponsorship for capital-intensive projects is a disaster. Two things go wrong when the state is involved. Projects are determined by what economists call “public choice” (that is the decisions of politicians and bureaucrats courting public opinion and furthering their own interests and prejudices) with only the discipline of a quinquennial election fought on a huge range of issues to keep them in line. Not only will the wrong projects be chosen but they will also be inefficiently executed because market disciplines (represented by people choosing to put their own capital at risk and buying and selling securities according to their beliefs about value) will be diluted. The fact that the early projects involve windmills and so on, when almost all economists suggest that more carbon could be saved much more efficiently through home insulation (encouraged by VAT on domestic fuel), does not bode well.

But what of Anthony Hilton’s suggestion that the industry wants it? This makes me even more worried. What did Anthony Hilton make of the banking industry in the US wanting the risks of the mortgage industry to be partially underwritten by taxpayers and wanting the state to provide capital for the troubled banks? From my reading of his columns, he wants this situation to come to an end as soon as possible. This is not because the market is always right but because state intervention will make it more likely that the market will get it wrong – as happened in banking. The history of state-sponsored long-term investment projects is no better than that of state-underwritten mortgage markets.

I should add as a coda that the identification (ex post) of particular government projects that have worked is not evidence that a general stategy of government direction of investment capital will work. If we have enough state backed projects, the odd one is bound to pay off. The question is, a priori, does the market (with all its incentives for efficiency and the use of dispersed information) or the state allocate scarce capital best? In my view, it is no contest. What the state should do, in my view, is provide a proper stable framework of law and regulation so that long-term investment projects can be made by the private sector with less political risk. I am afraid that recent interventions by politicians in the regulation of the privatised utilities have undermined private sector confidence in the long term. This does not bode well for the operation of this new interventionist mechanism.

Around 235 million passengers passed through Britain’s airports in 2009. Most of those – both arriving and departing – will have experienced significant delays due to security checks. While estimating the value of travellers’ time is an inexact science, the cost is likely to run into several billion pounds annually, particularly given the disproportionate number of high-earners who fly frequently.

There are also other costs, even more difficult to quantify. The high level of hassle and perceived unfriendliness may damage the reputation of the UK as a good place to do business or a welcoming holiday destination.Yet delays are likely to increase further with the introduction of controversial full-body scanners following the recent terrorist incident on a plane bound for Detroit.

The current approach would appear to be based on the politicians’ mantra of ‘something must be done’ rather than any sensible assessment of transport risks. Terrorism is insignificant in terms of death and injury. In the UK alone, for example, close to 3,000 people die on the roads every year. Low-cost road safety measures could be a far better use of resources than extra airport security. (Indeed, at the margin, longer airport delays may incentivise travellers to use their cars instead – actually costing lives.) There is also inconsistency in the policy towards different modes of transport, with next to no security on the trains or London Underground despite a similar risk of terrorist carnage (this is not an argument for stricter security controls on land transport).

A better long-term approach might be to give primary responsibility for air security to the airlines and airports. These firms would have a direct financial interest in improving the travel experience of their customers. Passengers could choose between high-delay, lower-risk and low-delay, higher-risk companies, according to their own subjective preferences. Airlines should also be free to set up ‘trusted flyer’ schemes to allow certain passengers to circumvent time-consuming and humiliating checks.

The current cold snap has led to widespread disruption on Britain’s roads. Much of the network has been left untreated as local authorities have struggled to cope and many routes have been blocked by uncleared snow or abandoned vehicles.

Is there a solution to the transport chaos that descends on the UK whenever temperatures drop below freezing and a few inches of snow fall? There are good reasons to believe that privatising the road network would produce far stronger incentives to keep traffic flowing.

Under current arrangements trunk roads and motorways are managed by the Highways Agency and the rest of the network by local authorities. While their staff undoubtedly work hard to respond to disruption as it happens, the financial incentives for these organisations to resolve this recurring problem in the long term are very weak. Taxpayers fund their activities whether or not they perform well.

By contrast, profit-seeking private road owners – heavily dependent on tolls for their income – would have very strong incentives to keep the roads clear. Nightmare scenarios, such as motorists being stuck overnight in their cars in freezing weather, could do immense damage to the reputation of private road companies and their brand names. Moreover, the possibility of costly insurance claims from accidents caused by poor road conditions would provide a further incentive for owners to ensure their infrastructure was adequately cleared and gritted.

British households have received more than 180 million free or subsidised light bulbs in the last eighteen months from energy companies. Many if not most of these are lying idle, as the government has admitted – a waste of money and resources.

The energy companies did this because they are obliged to cut energy use, and thus carbon emissions, in line with regulators’ targets. According to government calculations each low-energy bulb saves 0.04 tonnes of carbon over its lifetime. Money spent on bulbs – assuming they are used, of course – saves more carbon per £ than, say, wall insulation. Thus the energy companies have adopted the ostensibly least-cost way of meeting quantitative targets, as might be expected.

What a pity that the public haven’t responded in the way the government hoped – we still go on using our old inefficient tungsten bulbs as long as we can while many of the freebies have been dumped, causing a potential health hazard as they use significant amounts of mercury and need careful disposal.

But how predictable. All those years of state planning failures have not weaned our rulers off the use of quantitative targets even though they always lead to unintended consequences and often gross inefficiencies.

And how easily regulatory powers for one purpose transmogrify into something else entirely. We started out regulating energy companies, following privatisation, to prevent misuse of monopoly powers. But then we extend powers to enforce energy cuts – a bizarre requirement for companies that exist to sell energy. But perhaps not as bizarre as another obligation they face – that of reducing something called “fuel poverty”.

This notion makes no more sense than talking about “grocery poverty” or “transport poverty” or “iPod poverty” for that matter. If people’s incomes are low they may choose to economise on use of fuel rather than on food. Is this irrational?

If governments want to reduce poverty, raise social security benefits rather than subsidise one part of their consumption. And if they want to reduce carbon emissions, let us have a carbon tax. We may or may not like these policies, but at least they are explicit, in the open and subject to known strengths and weaknesses. Piling obligations on private businesses to do the government’s work is tempting in a time of fiscal stringency, but totally misguided.

Faced with ambitious climate change targets, the government has decided that nuclear power will play a leading role in supplying the UK’s future electricity needs. Ten new plants will be built in the next decade or so, which should provide about a quarter of total supply.

The nuclear option appears to be far more sensible than an equivalent expansion of wind power. Indeed, the unreliability of wind energy means that it must be backed up with conventional capacity, while its dispersed geographical distribution imposes additional costs on the network infrastructure.

Yet nuclear has its own problems. If the new plants are built on schedule and on budget then the impact on electricity prices is likely to be relatively small. Historical experience, however, does not support such optimism.  

Britain’s previous nuclear programmes were economically disastrous. They were plagued by delays, cost overruns, and design flaws. In today’s prices development losses amounted to at least £20 billion, while decommissioning may end up costing another £75 billion.

It is quite plausible that the latest plans will face similar problems. If capital costs rise significantly there will be upward pressure on bills. As a result of political obstacles to new fossil-fuel plants, there is also a severe danger that electricity prices will be pushed higher still by an artificial shortage of capacity if there are delays to the nuclear plant coming onstream.

Then there is the risk borne by the taxpayer if nuclear consortia run into financial difficulties. Given the centrality of the programme to environmental policy, the government will be obliged to ensure construction is completed at almost any cost. And, of course, the difficult-to-price long-term burdens of decommissioning and waste-storage will be loaded on to the taxpayer or electricity consumer.

If the government is determined to reduce carbon emissions then it would surely be more cost effective to set a general framework within which energy companies would be free to choose the most efficient methods of generation. The well-known economic calculation problems facing central planners and the powerful role of special interest groups mean that policies based on micro-management and picking winners are almost always unsuccessful.