FINANCING ROAD INFRASTRUCTURE Presentation to Roads Funding Workshop Presenter: James Archer| Director: Transport and Human Settlements, National Treasury | 7th March 2018

Public sector revenue sources General Taxes Specific taxes User charges General taxes are collected with no link to whether the taxpayers are the beneficiaries of the relevant service Specific taxes/duties that is tied (loosely) to actual/perceived beneficiaries of the service or the source of the externalities. Specific taxes include sin taxes, fuel levy etc In the context of sales and use taxes, these are sales taxes confined to a particular commodity or a limited number of commodities, as distinguished from general sales taxes which apply to goods or commodities in general. Thus, sales tax imposed on cigarettes and tobacco products and gasoline and other petroleum products are selective taxes. User charges usually directly applied to beneficiaries of the service or producers of the negative externality Decision to finance is heavily influenced by about the burden of sharing and practicality If good/service is a pure public good, then funded through general taxes If there is an identifiable group that benefits or causes negative externalities, then the case for a specific tax or user charge is made

Considerations for selecting form of taxation for roads Compared to needs Stability of revenue over time Response to inflation Potential for needed increases Adequacy Fairness with respect to the ability to pay and benefits received Distribution of wealth, vertical equity to ensure that those with a greater ability to pay for services do so Equity in relation to geographic area Equity In relation to paying costs imposed on others Better decisions on travel and investment Creating disincentives for unnecessary travel Enabling economic growth Efficiency Administrative ease Compliance and enforcement costs, including evasion of cost potential Impact on investment Simplicity

1. Revenue adequacy Taxes should be just-enough to generate revenue required for provision of essential public services. Considerations: Elasticities of demand and revenue buoyancy Fuel levy revenue estimates for 2017/18 adjusted upwards to R71.3 billion, but was adjusted downwards in 2016/17 and 2015/16 Fuel tax revenue not buoyant Slow GDP growth and technology advances means growth in fuel sales are less Source: Department of Energy Budget estimates at main budget over the next 3 years Consolidated road infrastructure: R156.9 billion Buoyancy- how stable is the source of revenue? is it so volatile that in some years we have a surplus and other years a deficit compared to the need? Source: Budget Review, 2018

2. Equity considerations Geography Should all tax payers or road users pay for infrastructure improvements in a certain region, or only those that use it? Ability to pay Should we differentiate between high income and low income earners? Or based on vehicle type? Higher income road users drive new vehicles with fuel efficient technology Lower income road users drive older vehicles, use more fuel per kilometre travelled than new vehicles Heavy vehicles damage roads more the light vehicles Tax incidence and burden Eg: tax freight vehicles, consumers of end product pay…? Who pays? Who benefits?

3. Efficiency considerations- ito form and level of taxation The economic value of transport infrastructure Households and firms ability to access opportunity/ markets/activity Urban form is shaped by investments in transport infrastructure New road or a public transport corridor influences: Locations, intensities, types of developments Value of land We need to acknowledge that; Econ value- if the roads add value to society, there is an opportunity to charge for it Urban form- if there is a future benefit, capitalise on it to fund the project

3. Efficiency considerations- externalities Road usage has externalities Decision by road user to drive does not consider the impact on other road users (social costs): congestion, the environment, the likelihood of an accident If costs are not internalised, creates an incentive where the benefit of additional trips to user is lower than the additional costs to society; Distorts the choice of mode in favour of private cars Encourages excessive use of infrastructure Inadequate provisions for maintenance To change behavior, it is important for road users to internalise these externalities by pricing it in! Marginal benefit should be equal to marginal cost to society

3. Efficiency considerations – cost of urban sprawl When road usage not priced properly, investments in highways encourages private transport. This encourages urban sprawl Costs to municipalities and households for basic services Excessive cost of public transport Externalities arise- congestion, accidents and pollution inevitable So efficiency consideration on what type of tax and what level of tax to use must consider: The costs imposed on others Better decisions on travel and investment Creating disincentives for unnecessary travel Enabling economic growth Source: FFC, 2011

4. Simplicity Costs of administration for general taxes are the lowest Cost of administration are also low for some specific taxes, like the national fuel levy SARS collects at source e.g. the refinery Few sources to collect from makes tax evasion unlikely Transaction costs for tolls relatively high Each transaction is recorded and billed

Fuel levy or user charge General Tax Specific tax: Fuel levy User charge Adequate   Equitable Efficient Simple General tax- already provides funding through ES, CG’s etc.

Conclusion Whatever the type of taxation chosen, and efficient road pricing should; Level the playing field for public transport Allow for road users to internalise the externalities such as congestion and pollution Ensure that only those who benefit from the improved roads pay for it Ensure that those who cause the most damage on the road pays for it Allow for the exemption of some users such as public transport operators and the disabled

Thank you