Tuesday, October 29, 2013

For whom the roads are tolled.

Why the user-pays argument for e-tolls is invalid.

There was more than a touch of unintended satire in Agriculture Minister Dipuo Peters’ comparison between paying a toll for the use of roads and depositing a coin in a facility where you want to deposit something else.

Many jesters have had a field day with that postulate, which no doubt must have attracted a snigger or two from the august gathering of the country’s top business practitioners that she was addressing. It revived a vague memory of some graffiti I saw on the door of such a facility many decades ago that read: “Here I sit, sick and dishearted (sic); I paid a penny, and I only farted.”

Another dating to the same era when pennies still had value, I adopted as a childish chant: “If you want a wet surprise, pull the chain before you rise.” That only makes sense if you can remember the days when you were forced to sit under the threatening weight of a huge cast-iron cistern, from which a long chain was suspended to perform a very loud thumping flush. In those days they were mostly consigned to outhouses as a step-up from long drops. The reason was simple: if you had one in your home and someone in the household was having a metabolic nightmare, the entire extended family would have a sleepless night.

I’ve always studiously avoided taking issue with many of the ludicrous utterances on matters economic of our politicians from all persuasions. There are just too many of them and mostly their dripping irony and risibility needs no highlighting. It’s only when they are uttered in defence of official policy and represent a terrible twisting of basic economic logic, that it becomes much more than some fertile material for a verbal cartoon.

For one thing, and this purely as an aside, it does not take an accounting genius to know that the coins used for relief in a public loo can never cover the cost of building and maintaining those facilities. The charges were intended purely to keep layabouts from misusing the cubicles for other purposes such as a night of peaceful repose. It’s a bit surprising that someone has not taken this issue up with the Constitutional Court after not being able to hold it in any longer following a desperate but fruitless search for an appropriate coin.

Perhaps it is time that someone rescues the e-toll debate from heading for the toilet and the quagmire of complexities covering its accounting, fiscal and legal parameters. They have all been well-documented and debated in the public domain. What has not been challenged sufficiently and is the cornerstone of its defence such as Minister Peters has again done is the validity of the user-pays principle itself and its relevance to toll roads.

It’s a very seductive argument, seemingly paying homage to free market principles; holding people to account only for those services they directly use; avoiding inefficient cross-subsidisation of government costs; allowing price to dictate allocation of resources, and avoiding the dirty word “tax”.

That’s the first sleight of hand that must be unmasked. A toll is a tax. It is not a price. In principle it is not very different from VAT, where you are forced to pay if you purchase. A road toll is just more specific, confining that tax to a more specific purpose. But it is still coerced, unilaterally and bureaucratically set and not free-moving according to supply and demand. I suspect the whole hullabaloo around e-tolling would have assumed a very different colour had the toll simply been called a “road tax”.

In theory, there’s not much wrong with that. A tax applied for a very specific purpose is arguably much better than where its costs are covered from a massive central account that can hide all kinds of corruption, misappropriation, and inefficiencies. Already our fiscal affairs, controls, allocations and accountabilities are in a mess. The government’s inability to be prudent with general expenditure naturally questions its ability to be so with targeted revenue and expenditure. That’s one of the key issues of the current debate and needs no repeating here.

The principle of user-pays means that the cost of those facilities is covered by the user of those facilities. Investec strategist, Professor Brian Kantor pointed out in Business Report this week that Sanral’s toll structure is not based on cost recovery, but on traffic volumes, implying cross subsidisation of low volume roads by those with higher volumes. He accuses Sanral of blundering by seeing commuters as cash cows.

The deliberate paralleling of the road toll with a legitimate price is highly disingenuous if not deliberating misleading. Pricing is one of the most important principles in economics. It stands on an unassailable and self-evident logic that we all instinctively learn from the day we start swopping marbles. Its primary and vital purpose is to balance supply and demand and move resources to where they are most needed. It underscores the need to keep resource allocation as much as possible in a free environment and out of bureaucratic controls. This does not imply the unbridled reliance on market forces. Markets do not fail; behaviour fails markets, driven by a flawed construct of the role of business, profits, motives, incentives and others, and in turn inviting interventions and social dictates.

Despite the many calamitous economic lessons of the past and present, free moving prices are the one principle that societies flout the most, not only through misguided controls and a contamination of money as a denominator of value, but also through distortions caused by protected monopolies, collusion and other forms of misbehaviour.

Free moving prices are at the heart of legitimate transaction and transactional fairness, of which other pillars are maximum choice and optimum number of alternative suppliers, as well as broad consumer awareness.

At various levels, toll roads simply do not meet the conditions of legitimate transaction.

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