The user-pay principle: it’s policy

By Anthony Julies

There has been much controversy surrounding the user-pay principle recently but the reasons for using it as the funding model for the Gauteng Freeway Improvement Project (GFIP) are sound and need to be underscored at this time when there is so much confusion on the subject in the public domain.

The user-pay principle – when it comes to the financing of roads through tolling – remains government policy. This decision is in alignment with government objectives to support public over private transport, find the right balance between socio- economic development and economic infrastructure, ensure equity in the allocation of resources, reduce inefficiencies arising from congestion and ensure long-term efficiency in spatial planning.

The vast majority of national roads (85% of the 21 403 km national road network) are in fact funded through the fiscus and the balance (15%) is funded through tolling.

However, it is accepted good fiscal practice that tax revenues should not be earmarked for specific purposes as this reduces the integrity of the budget process due to reduced transparency and accountability. As such, South Africa currently enjoys the reputation of being second on the Open Budget Index of the International Budget Partnership.

Cash raised by the fuel levy, often punted as an alternative to tolling, accrues to the national revenue account and is distributed through the normal budget process for government expenditure, which may (or may not) be used for road infrastructure and maintenance. It is not earmarked specifically for roads and to do so would not be prudent fiscal policy.

In fact, government’s allocation to transport and roads exceeds what is collected through the fuel levy. Research from the Development Bank of Southern Africa (DBSA) titled The State of South Africa’s Economic Infrastructure: Opportunities and Challenges 2012, categorically states this as a fact.

In order for the fuel levy to cover all costs of South Africa’s road network it would have to increase significantly.

The use of selective tolling, on the other hand, offers many advantages and e-tolling, where the process is fully automated, especially so. And it is not as if the tolls collected from motorists will flow directly into the pockets of foreign businessmen. SANRAL has a contract with ETC which designed, built and operates e-tolls in Gauteng, which stipulates that it will be paid for services rendered – not a retainer or a fixed contract fee.

All tolls go to SANRAL. ETC is paid for services on a monthly basis and the payment is strictly according to a bill of quantities as specified in the tender contract. Only dividends declared may be paid to the foreign companies involved – that is, after tax is paid in South Africa. And the Reserve Bank is satisfied that all foreign currency control regulations have been met.

Of every rand paid in tolls, only 17c goes to collection while 83 cent goes to a variety of needs – debt repayment, maintenance, operating the system plus value-added services such as the provision of tow trucks, improved lighting and stand-by medical assistance.

Add in the normal internal administrative costs, payment to service providers, plus salaries and only then can ETC declare a profit – if it makes one – part of which will go to the foreign partners.

Toll fees are calculated based on the cost of providing, maintaining and refurbishing that particular road. And don’t forget, almost the entire ETC workforce is South African and local service providers are used.

To disparage foreign investment as has been done, sends the wrong message – South Africa needs foreign investment, has to do its best to attract and keep it. Any other approach is beyond a disservice to the unemployed in the country.

The user-pay principle is also a much fairer system, because only those who choose to enjoy the benefits of the toll road pay for it, while those who do not, make no contribution. And it is to be noted that registered public transport, including busses and taxis, is exempted.

The model makes it possible to mobilise substantial capital resources upfront, usually through debt or public private partnership (PPP) arrangements.

In the case of debt, the government or its road implementing agency, raises a loan from domestic or international capital markets and builds the required road infrastructure. Depending on the ratings of the implementing agency and/or its government, the interest rate charged could be higher or lower. For example, if the country or agency borrowing has been downgraded, the interest rate is likely to be higher.

In the case of a PPP, capital is mobilised from the private sector, for a reasonable return on investment. The private sector is generally not enthusiastic about investing in infrastructure assets because of the inherent risk given the large upfront costs, political/policy uncertainties and long lead times from conception to delivery and revenue generation.

In South Africa, and with specific reference to a few select national roads, the private sector has demonstrated its willingness to share some of the financial burden of road infrastructure investment with government, for the right to collect toll fees for a specified period of time.

This has relieved the fiscus, as it makes resources that would otherwise have gone to roads, available for other needs consistent with government priorities. The overarching strategic themes of the current administration, as reflected in the 2014-19 Medium-Term Strategic Framework (MTSF), are radical economic transformation and improving service delivery.

Given the limitations on government’s fiscus, and this is not unique to our country, South Africa does not have the luxury to shun private sector capital. Also, toll financing has the distinct advantage of providing infrastructure earlier than would have been possible with financing through general taxation. As a result, the benefit of increased roadway capacity is available to the public much sooner

Internationally, the user- pay principle is well-accepted and has been introduced in many jurisdictions, reflecting a simple philosophy that consumers must pay for the costs of the goods and services they consume. Monthly municipal bills for water and electricity have been based on the user-pay principle for decades. The more you consume the higher the tariff.

There are other tangible benefits that are a reality because of the improvements flowing from the GFIP. For businesses there is the improved level of access and the reduction in transport times. Motorists will experience lower wear and tear on their vehicles because the world-class road surface and improvements in productivity will help to grow the provincial economy with a knock-on effect into the region. A reduction in traffic congestion will also result in reduced occurrences of vehicle accidents and thereby further alleviating pressures on the health budget.

When implementing the user- pay principle these are the things government took into consideration. Those who accuse us of being careless and not considering all the options will do well to examine international best practice when it comes to funding roads. We remain convinced that the user- pay principle remains the most equitable and sustainable way of funding projects such as the Gauteng Freeway Improvement Project. Selectively and carefully applied in a manner that cushions the economically vulnerable, it can speed up the delivery of infrastructure and contribute meaningfully toward placing our economy on a higher growth trajectory.

Anthony Julies works for Treasury and is a member of SANRAL’s Board of Directors.

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SANRAL

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