Theoretical Framework REVENUE

1. Theoretical Framework REVENUE Stef Proost (KULeuven) Based on work Adpc, CERAS, IWW,TIS and KULeuven

2. 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)

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. CASE STUDY DATA (t=1…T) • - Calibration data for transport needs and • behaviour • - Cost data for operation and maintenance • Initial infrastructure stock (t=0) • Initial financial structure (t=0) POLICY INPUTS Regulation scheme (t=1…T): Pricing rules + Investment rules + Revenue use rules + + Types of Contracts Transport market model + Investment + Financial model running from t = 1 to t = T OUTCOMES Transport flows Prices, Capacity Welfare Financial structure The Key Features of MOLINO

16. Economics is extremely useful as …

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