Enhancing Road Usage Through Shadow Tolls
Faculty Contributor : V. Ranganathan, Professor
Student Contributors : Tuhin Chatterjee, Ajay Jain, Atishay Jain, Sudhaamshu MS and Abhijit Selukar
Over the last decade, India has successfully implemented the public private partnership (PPP) model in many road infrastructure projects. However, of late, some of the new projects are witnessing much lower levels of utilization of the roads than what was projected. Unsurprisingly, high tolls have been identified as the primary reason behind the low use of this public good thus frustrating the primary objective of roads, which is to foster economic development. Some illustrations of this problem are the Ahmedabad Vadodara Expressway in Gujarat and the Srikakulam Highway in Andhra Pradesh. The government is mulling over a proposal to decrease the toll prices by more than 35% of their current value. The move may solve the problem of low capacity utilization of these roads; however it is bound to create friction between the government and the concessionaires regarding the compensation for the lost toll revenue. In this article, a somewhat novel payment mechanism, highly successful in European countries like UK and Spain, is being proposed, viz. the shadow tolls.
Shadow toll is a payment structure where the road user does not pay any toll; instead the concessionaire collects revenue from the government in proportion to the number of vehicles using the road. While private operators have only the pricing tools to collect revenue, government additionally has the taxation tool as well which it can use to charge a higher road tax to its citizens. One way of doing this is imposing a cess on fuel.
The shadow tolling system effectively, makes the road services ‘free’ for the user. At the same time, the government need not bear the extra burden of paying the toll, because it collects the money through the cess on petrol or diesel. The proposed cess would be minimal (less than a rupee) as it will be spread over a huge base and hence the citizens would not feel the pinch of the increase i . The highway road traffic would not be hampered by high toll prices, and thus be closer to their capacity utilization, ensuring maximum economic and social benefit.
Functioning of PPPs in Indian Roadways Today
As current system stands, the concessionaire’s revenue might come either directly from the government through annuity or through the toll charged on the road as is the usual case. In the former, the government pays a fixed payment to the operator periodically, thus bearing all the traffic risk. The latter case lays the burden of traffic risk on the operator, who collects a toll payment from every vehicle that passes the road. But the defect in either case is that the toll itself is borne by the commuter and thus it acts as a barrier to capacity utilization.
The Shadow Toll Framework
A shadow toll has many benefits over the regular method of tolling users. Traffic risks are minimized by shadow toll, because the government pays for the traffic and for the users, usage of the road is virtually free. Thus, private investment partners are more confident of a regular flow of traffic on the road. The framework is summarised below in exhibit 1.
Exhibit 1 The Shadow Toll Framework
In the present scenario, if the actual traffic on the roads is less than the estimated or the projected traffic, the government simply extends the concession period. This only makes matters worse as the toll prices are not reduced. Hence the road remains underutilized for a larger period of time ii .
Shadow tolling would significantly bolster smooth flow of traffic on a toll road. It first attracts more users to the road due to the removal of explicit toll. It also removes the bottlenecks present on the road, i.e. the toll booths, resulting in a higher traffic flow as well as making the driving hassle-free for the user. It also reduces the operational cost of the concessionaire as now it need not run any toll booths. These costs are generally as high as 20% of the revenues iii ; in our case it was around Rs. 45 lacs per month. Also, the toll collections around the world are plagued by mafia presence. According to a survey, an average of 20% of all toll collections around the world is gobbled up by mafia gangs. The introduction of shadow tolls would free the collection system from this menace, as now the government pays through a direct channel, making the toll collection system leakage-free.
National Expressway 1 (NE1) & National Highway 8 (NH8): A Study
As a part of our study, we analyzed the traffic flow on the Ahmedabad - Vadodara expressway (NE1). It is India’s first expressway, and was opened to the public in 2001. The expressway is divided into three stretches divided by toll booths, viz. Ahmedabad – Nadiad – Anand – Vadodara. The case was particularly chosen as there is a national highway running parallel to it (Ref: Exhibit 2). While the NE1 is a 4-lane roadway all through, NH8 is 40% 4-lane and 60% 2-lane. As a result, the expressway saves about 1.5 hours of travel time between Ahmedabad and Vadodara when compared to the highway. The unique geography of the two parallel roads with different utility and different toll makes it feasible to carry out a comparative study of the effect of toll prices on road usage.
Exhibit 2 Geography of NE1 Expressway
As a part of the study, traffic and toll data (September 2007 to June 2009) were collected for the expressway as well as the highway from the National Highway Authority of India (NHAI). The toll pricing formula was found to be linearly dependent on the distance (km) and indexed to inflation.
The structure of partial shadow tolling could be used as a tool to control traffic on any given segment. As payments are pegged to the traffic for the duration of concession, the operator has an incentive to ensure that the road is of high quality and needs minimum disruptive repairs. Thus it transfers operating and maintenance risk to the concessionaire. Shadow toll might also remove the need for toll plazas, and have electronic monitoring of traffic. In the regular build-operate-transfer (BOT) or the build-own-operate-transfer (BOOT) model of tolling, toll roads face competition from toll free roads. However, in the case of shadow tolling, because the usage is ‘free’ to the travellers, traffic is easier to predict as the choice is based on time saving and not on the cost incurred. Furthermore, the government could also limit the payment of shadow tolls to a ceiling which would amount to a reasonable annuity.
From the perspective of the operator, in a toll road project, revenue derived is subject to the elasticity of demand. Shadow-tolls circumvent these issues and hence carry a lower risk which leads to lower cost of capital. Moreover, with the government making the payments, there could be financial incentives for performance, with measures like bonuses for reduced accidents, low downtimes for repair and high service levels.
Analysis of the Results
Both the models (normal and shadow tolling) are subject to general traffic risk; however shadow tolling makes it easier to estimate the traffic as there is no price effect, and the prediction can be made with a greater precision. Also, the traditional systems have an embedded risk in terms of the willingness of the user to pay the toll when an alternate route is available (albeit with a lower service level).
In the calculation of toll, although a higher toll increases the financial advantage, beyond a certain point the elasticity kicks in, and even revenue drops with further increase in price; as a result the economic viability is severely compromised. Thus to make road projects financially attractive, the government may consider shadow tolls to make up for uncertain cash flows.
The overall demand estimation was done by assuming a straight line demand curve (Ref: Exhibit 3). The two points used to estimate the curve were the road usage at a particular toll charge as being currently applied in the NH8 and NE1. For the lower price point (NH 8) the traffic volumes from both NH8 and NE1 were considered and for the higher price point (NE1) only the traffic volume at NE1 was considered. The following overall demand curve which thus emerged clearly shows a high price sensitivity of the toll on road usage.
Exhibit 3 The overall demand curve of tolled roads
To understand the price sensitivity better, price-elasticities were determined for the following classes of vehicles– cars, low capacity vehicles (LCVs), bus/trucks and multi-axle vehicles (MAVs). These are summarised in the following table. As was expected, cars had the lowest elasticity figure indicating their lower sensitivity to prices. The highest price sensitivity is for multi-axle vehicles which are typically used for transportation of goods and services.
This also corroborates the trend shown that it is mostly cars which have taken up the use of the NE1 given the higher toll. Currently, NE1 is operating at less than 25% volume-to-capacity (V/C) ratio whereas the desired V/C ratio is around 70%, signifying gross underutilization of the project. The tolls collected for different classes of vehicles on NE1 and NH8 are presented in exhibit 5.
Exhibit 4 Toll charged in NE1 and NH8
Clearly, the utilization of NE1 needs to be increased. This incremental utilization can reap huge economic returns because of the already high utilization of highways (Highways (2% of roadways) carry a large chunk (~40%) of the goods traffic).
Partial Shadow Tolling
As per the estimated demand curve, using zero explicit toll would lead to higher capacity utilization than desired. A method of partial tolling was considered, wherein a portion of the toll would be explicitly collected while the rest would be the shadow toll paid directly by the government. Exhibit 5 demonstrates the results of a linear programming problem formulated to find the optimum percentage of shadow toll, in such a case.
Exhibit 5 Results of LPP to get partial shadow toll structure
As demonstrated by the study of the Ahmedabad - Vadodara Expressway, the introduction of the shadow toll structure in India would improve the capacity utilization of major expressways and highways. It would result in a smoother traffic flow without any bottlenecks at the toll plaza, reduce the costs for the concessionaire and result in higher economic benefits due to an optimum road usage. At the same time, it will not lead to any loss of revenues for the government. The government should seriously consider introducing this new payment mechanism instead of reducing toll charges or increasing the concession period.
V. Ranganathan is a Professor in Economics & Social Sciences area at IIM Bangalore. He is also the Reserve Bank of India Chair Professor on Infrastructure. He can be reached at email@example.com .
Tuhin Chatterjee (PGP 2008-10) holds a B. Tech and Integrated M. Tech in Chemical Engineering from Indian Institute of Technology (IIT) Kharagpur. He can be reached at firstname.lastname@example.org .
Ajay Jain (PGP 2008-10) holds a B. Tech. in Electronics Engineering from Indian Institute of Technology (IIT) Roorkee. He can be reached at email@example.com .
Atishay Jain (PGP 2008-10) holds a B. Tech. in Civil Engineering from Indian Institute of Technology (IIT) Delhi. He can be reached at firstname.lastname@example.org .
Sudhaamshu M S (PGP 2008-10) holds a B.E in Electronics and Communication Engineering from National Institute of Technology Karnataka (NITK), Surathkal. He can be reached at email@example.com .
Abhijit Selukar (PGP 2008-10) holds a B.E in Electronics Engineering from Nagpur University. He can be reached at firstname.lastname@example.org .
Toll Roads, Shadow Toll, BOT, PPP, Indian Roadways
i PricewaterhouseCoopers, “ Infrastructure Development Action Plan for Chhattisgarh – Final Report , Annexure I.4 – Options for increasing returns on road projects”, http://cg.gov.in/opportunities/Annexure%201.4.pdf . Last accessed on: Feb 26, 2010
ii Standard and Poor’s, September 2002, “Report on: Traffic risk in start-up toll facilities”, http://www.people.hbs.edu/besty/projfinportal/S&P_Traffic_Report.pdf . Last accessed on: Feb 26, 2010
iii Bruno Faivre D’Arcier, 2003, “Can shadow toll pricing be an alternative to investment grants?”, Paper presented at the Association for European Transport 2003 – Conference Proceedings, http://hal.archives-ouvertes.fr/docs/00/09/22/42/PDF/BFA_AET_2003.pdf . Last accessed on: Feb 26, 2010