by Ifeanyi Uddin

First, governments could opt to build the roads cheaply, deploying tax revenues for this purpose. In this case, tolling will be part of a cost-recovery scheme. Another option is to allow private developers to bear the demand risk from the roads without a revenue guarantee. This scenario does allow government to offer direct subsidies, where necessary. Finally, governments may provide guarantees to private developers.

The Federal government is apparently considering returning tolls to highways it maintains as a means of ensuring that these remain in good repair. The South African government, recently having introduced tolled-roads itself, argues that user-pays roads would help it offer improved transport infrastructure. Domestically, “We have been down this road before” has been the main opposing argument. “And, for added emphasis, it did not work!”

(The Jonathan) Government (in particular) has tried very hard to harm the reputation of its opponents by tarring them with the “critic” label. However, in this one case (as with most others), the “critics” do have a strong case. Pledges by governments past to ring-fence toll revenues from the highways (especially the Lagos – Ibadan Expressway), and to use the proceeds from this to maintain the roads, failed dismally to protect the said resources. At the end of the tolling, toll hypothecation did not result in greater transparency, accountability, or an increase in public trust. The ensuing disrepair of our highways is, ironically, the one reason why policy has come full circle.

Three challenges should be fore and centre of any new policy initiative in the road sector. Easiest of all is to try to keep the existing network of paved roads motorable all year round. More difficult and arguably more expensive is to grow the network. Finally, most important of all, is to ensure that the network of paved roads are built in a way that allows road traffic interface with rail, and (eventually) traffic on our inland waterways.

To the extent instead that the dedication of toll revenues by previous governments may have helped inflate the size (budget, staff, and bureaucracy) of the Federal Ministry of Works with little positive impact on the roads this ministry is supposed to maintain, past toll projects were a failure. Even worse, because the tolling arrangement may have helped conceal growth in government spending, it may have led to government forfeiting future public support for such projects.

Still government confronts two difficulties regarding public works today. First, is that (and this is largely the fault of successive governments), the structure of public expenditure may no longer support the levels of investment in infrastructure required by the economy. Second, the economy itself has changed. If nothing else, there are so much more people with unmet needs. For these reasons, government is turning to public-private partnerships (PPPs) to drive new infrastructure development. For the most part PPPs appear the perfect answer to the principle that risks should be borne by those most qualified to manage them. Thankfully, there is not much argument anymore around the private sector’s proven project management skills versus that of the public sector.

Recently, though, it has emerged that for new road projects, “demand risk” is a big problem. Consequently, in the United States, private operators of toll roads have sought government indemnities as lower than expected use of the tolled roads has resulted in huge shortfalls in revenues. In part, I guess this has to do with the presence of alternative routes. These government guarantees technically transfer the risks associated with such projects back unto taxpayers. In Lagos State, government has dispensed with the charade altogether, and taken control of the poster child of its infrastructure privatisation efforts.

In a 2007 tome (“Government Guarantees”) the World Bank concedes that “the use of government guarantees to help persuade private investors to finance new infrastructure is appealing because it can allow the government to get the infrastructure built without paying anything immediately and to benefit from the skill and enterprise of private firms”. However, given the growing difficulties with properly estimating the behaviour and trajectory of the sundry risk factors associated with infrastructure projects (in our case, political risk trumps all) over their lengthy lifetimes, the choices for building and managing toll-road projects distil into to three.

First, governments could opt to build the roads cheaply, deploying tax revenues for this purpose. In this case, tolling will be part of a cost-recovery scheme. Another option is to allow private developers to bear the demand risk from the roads without a revenue guarantee. This scenario does allow government to offer direct subsidies, where necessary. Finally, governments may provide guarantees to private developers.

Guarantees are a broad brush. According to the World Bank, they range from “exchange rate guarantees when investors borrow in foreign currencies”, through shielding “investors from exchange-rate risk by increasing the price of the service when the local currency depreciates”, and protecting “creditors from losses in the event that the project is terminated”, to compensating “investors for changes in government policy”.

Ultimately, because the process of estimating the cost of the guarantees needed to drive private investment in the provision of public infrastructure is as fraught as that of calculating toll-road project’s demand risk, road tolling is one procedure that government necessarily must approach with a lot more care than its boosters have exhibited thus far.

Process transparency will be essential for even partial success. Especially ensuring that the projected traffic numbers, toll size, and the cost of guarantees/subsidies (if any) to be provided to the private sector developers show up in government accounts.

 

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