Theoretical Framework REVENUE

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Theoretical Framework REVENUE

• Stef Proost (KULeuven)
• Based on work Adpc, CERAS, IWW,TIS and KULeuven

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Objectives

• Give theoretical guidelines on
• Pricing and investment rules
• The associated rules for using transport charges
  revenues
• Pass these guidelines under two forms to case
  studies
• Written guidelines
• Small model (molino)

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Approach taken in Theory Work
Cost structure, pricing and deficits
MOLINO-model to compare alternative options in
the case studies
Public Finance aspects
Neo Classical theory
Infrastructure funds and Contract theory
EU wide orders of magnitude
Systems Dynamics model
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Cost structure, pricing and deficits

• Theory
• The self-financing theorem
• The optimal user charges (Marginal External
  Congestion Costs) finance the costs of
  infrastructure if marginal cost of capacity
  extension is constant and this is rather robust
  result-
• Empirical evidence
• For roads ok
• For Rail mixed evidence but optimal user charges
  can go some way to cover infrastructure costs

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Approach taken in Theory Work
Cost structure, pricing and deficits
MOLINO-model to compare alternative options in
the case studies
Public Finance aspects
Neo Classical theory
Infrastructure funds and Contract theory
EU wide orders of magnitude
Systems Dynamics model
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Some conclusions on public finance aspects 1

• Cost of Investment depends on the way it is
  financed because a Euro of public revenu comes
  mostly from labour taxes and they have a high
  efficiency cost this has 2 implications
• The CBA ratio of an investment depends on the way
  it is financed
• The optimal use of revenues may very well be to
  reduce existing labour taxes

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Some conclusions on public finance aspects 2

• Integration of equity and efficiency
  considerations in transport pricing and
  in-investment studies is possible but requires to
  know
• Who uses transport infrastructure
• Who pays for the subsidies to fund the investment

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Some conclusions on public finance aspects 3

• Multi-government problems
• Spillovers of benefits of investment projects
  into other regions are not such a big problem if
  user charging is possible
• Risk of monopoly charging is there is limited
  competition between routes or transport
  alternatives
• Vertical tax externalities may be important
  handicap for investment and pricing projects
• (gasoline taxes may go to the federal level and
  limit the pricing options for lower government
  levels)

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Some conclusions on public finance aspects 4

• Political economy models can help to explain
• The excessive demand (lobbying) for specific
  transport investments in some regions
• Earmarking (dedicating revenues) not good in
  theory, but may be a way to commit politicians to
  not waste the money

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Approach taken in Theory Work
Cost structure, pricing and deficits
MOLINO-model to compare alternative options in
the case studies
Public Finance aspects
Neo Classical theory
Infrastructure funds and Contract theory
EU wide orders of magnitude
Systems Dynamics model
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Contracting and role of Investment agency 1

• The choice between public and private management
  (and the balance between them) depends highly on
  
• divergence of objectives (externalities, market
  power)
• financial aspects (cost of public funds compared
  to the risk premium leverage, ratings,...)
• Experience with contrating out road, rail and air
  can to some extent be translated into guidelines
  and efficiency parameters contracting out can
  generate an efficiency gain of say 5 to 20 in
  some cases

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Contracting and role of Investment agency 2

• Discussion of investment agency advantages
•  independence  credibility of commitments,
  continuity of infrastructure development
•  skills in contract engineering
•  reduction of information asymmetries  may give
  precious help whatever the precise definition of
  the agency

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Objectives of MOLINO 1

• Model to support implementation of theoretical
  guidelines of Revenu-consortium
• Designed to compute impacts (short to long term)
  of alternative pricing, investment and revenu use
  strategies
• Implementable for all case studies

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Realisation MOLINO

• Simple multi-purpose model in Mathematica
• Dimensions of model
• Any 2 competing modes
• Passenger transport (poor rich) and freight
  transport (local, transit)
• Role for operator and infrastructure manager
• Dynamics of infrastructure funds
• Reduced form coefficients for contract
  efficiency, marginal cost of funds, equity
• An illustrative example for an investment in a
  tunnel in Antwerp was developed

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The Key Features of MOLINO
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• Economics is extremely useful as

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• Economics is extremely useful as
• a form of employment for economists
  (J.K.Galbraith)