Presented by Professor Stephan Krygsman on 6 December 2018 at the Transport Forum Special Interest Group held in Pretoria, South Africa.

1. Road funding in South Africa:
The user pay principle: New wine in old bottles
Stephan Krygsman, Stellenbosch University
6 December 2018 © The content of this presentation is confidential.

2. ❑ 6 December 2018:
o “A history of road funding in SA”
▪ Were did it all start and where are we now and where are
we heading?
▪ What is the meaning with road user charges and the user
pay principle?”
❑ 14 February 2019:
o “The relationship between roads and economic
development”
❑ 14 March 2019:
o “Feedback on DRiVE: Distance-based Road user charge
Voluntary Experiment”
Three presentations

3. ❑ 2016 - SARF and SABITA funded a project on
Road funding in South Africa
Acknowledge SARF/SABITA

4. ❑ 2016 - SARF and SABITA funded a project on
Road funding in South Africa
❑ 2017 – Distance-based road user charging (DRIVE)
❑ 2017 – Namibia: Determining efficient road user charges
❑ 2017 – Producer benefit of rural road upgrading
❑ 2018 – Viability of a provincial fuel levy
❑ 2018 – Fuel levy sharing methodology
❑ 2018 – Congestion Charging
❑ 2018 – Impact of Electric Vehicles on Government Revenue
❑ 2018 – Forecasting vehicle ownership in South Africa
❑ 2018 - The relationship between roads and economic development
❑ Team of 6 working
Acknowledge SARF/SABITA

5. ❑ Road funding is not about Etolls
o Toll is one instrument to collect income from road users
❑ Roads are public infrastructure
o Large, chucky capital intensive infrastructure, indivisibility,
economy of scale in use and characteristics of natural monopoly
o There is a very well defined approach how much we should
charge people for using public infrastructure
o Cannot really deviate …
❑ Everyone has an opinion … and should have
o We are not talking about private goods here …
❑ South Africa is by no means unique
o Taxes on vehicle ownership and road use is an international
issue
Important to remember…

7. ➢ The user pay principle should be implemented…
➢ The fuel levy should be ring-fenced / is enough…
➢ All roads pay, or should pay, for themselves…
➢ Our roads are under-funded …
➢ Business as usual is ok…
Let us start with some myths ….

8. ❑ Before 1935
o Local and provincial government funded roads with local
tax
▪ Property taxes
▪ Tolls (bridges, gates)
▪ Loan funding
o National government looked after developing the national
rail network
o Provincial Governments played a very important role …
▪ Provinces struggled … high interest payments
▪ Loans only really work when you fund durable infrastructure
⚫ Roads had a shorter life – lower standard… not really durable…
⚫ High volumes ??
⚫ Not too much competition …
▪ PS. The ‘tolls’ did not really cover the costs …
Some history …

9. Toll Road: Sir Lowry Road
+/- 1800 first toll
roads in the
country

10. Urban “Congestion Tax”
At the junction of Searle street and Victoria road stood the old toll.
Introduced after the second British occupation, it was used to raise money
for the building and maintenance of roads. A charge was made for horse
and carts, ox wagons and sheep and cattle going into town. Today the bus
deport and offices retain the name toll gate

11. ❑ After 1935
o National Government took over responsibility for
national roads
▪ National Development and Unity
o Established National Road Fund (not ring-fenced)
o Funded with levy on fuel
▪ 3 pennies per gallon (or 13.5 cent) per liter
⚫ PS index to inflation = …
⚫ 3 – 6d and then to 8½d per gallon into National Road Fund
❑ 1935 – early 1960’s
o … shortage of funding …
▪ Choose projects which would improve the productivity of
the country / province
Some history …

12. Some history …
❑ After 1958
o 5.35 cents per gallon
o Fund distribution:
▪ 60% for construction or reconstruction of national roads and
bridges
▪ 12% building new urban freeways in metropolitan areas
▪ 12% reserved for assisting on special roads
▪ Only 8% would be spent on maintenance
❑ Income increased dramatically after 1960’s
o Income now available for building national roads created
spending euphoria
o Many ambitious projects were planned & commenced
▪ Ignored economic realties and maybe provided too much
capacity to fast ….

13. Some history …
❑ 1970’s
o Difficulty experienced in the late seventies in financing
the programme of national road construction,
▪ Reasons:
1. Decline in fuel consumption
2. Rapid rise in construction costs due to inflation
3. High design standards
o Obvious solution … allocation of fuel tax to the
National Road Fund should be increased
▪ Central Government and other beneficiaries of the tax
were not willing to forego any of their revenue for that
purpose,
▪ Nor was the Government prepared to raise the tax on fuel
because of the probably effect on the already high rate of
inflation
o Commission began to seeks other sources of income
Sounds
familiar…?
Sounds
familiar…?

14. Some history …
❑ Government visited the Far East in 1980 … toll
roads created favourable impression
❑ Argument for toll roads:
o Less inflationary means of raising additional revenue
than a rise in the price of fuel
o Toll would have local effect on prices and would be
linked to the increase in productivity or savings in
operating costs
❑ After investigation by the National Transport
Commission, authority to charge tolls was
eventually granted

15. ❑ After 1983
o Toll roads … where an alternative exists
▪ First toll road was at Tsitsikamma
o Ring-fenced National Road Fund 1983
▪ Earmarking restriction removed 1988 … changed to general fuel levy
⚫ Fund roads, public transport and general expenditure
❑ After 1998
o Relatively little policy changes
1. Toll roads do not require an alternative route
2. Tolls are not ring-fenced.
❑ Today
o South Africa use fuel levy as main road use ‘tax’
o Fuel levy is determined on historical principles & fiscal need
▪ There is no calculation … not related to road user costs
o Other sources from road ownership and use
▪ Toll fees, license, permits, VAT on vehicle sales / parts, import duties
…
Some history …

16. Income is impressive …
❑ Fuel levy contributes 5% to the national tax revenue (4th
highest income source)
▪ Total R48.5 billion collected for the 2014 / 2015 financial year
▪ Represented 255 cents per litre of petrol and 240 cents per litre of
diesel sold (2014/2015)
▪ 337 cents & 322 cents
❑ Fuel levy is popular due to:
1. Its simplicity and ease with which the charge may be levied
2. This revenue source is difficult to evade,
3. The administration cost are very low
4. Readily accepted by the public.
5. Believed that the fuel levy is paid with every kilometre travelled
6. The amount paid varies with the nature of the vehicle
7. Varies with the speeds at which the vehicles travel and the manner in which
they are driven

17. And the World is responding …

18. Some fuel trends …

19. The fuel levy … efficiency …?
Is this trusted cost recovery method becoming
inefficient?
❑ Generating less income per vehicle per annum
per litre of fuel used / sold
o Year 2000 = 100
o Roughly 1.1% decrease per year (inflation could decrease this further by 5%)
o This graph does not even take into account the other fuel levies such as the Road
Accident Fund
o PS: Note that fuel efficiency is still dwarfed by inflation and specifically transport
construction inflation
❑ TRENDS:
o Technology: 1) due to improved vehicle fuel efficiency
2) introduction of electric and hybrid vehicles
o Socio-demographics: 1) people are buying less cars
2) shared ownership / rideshare
3) Social consciousness - alternative fuels / less travel
o Policy: 1) government under pressure to only charge for use
100%
87%
81%
73%
62%
52%
44%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2010 2015 2020 2030 2040 2050
Efficiency
Year

20. Most countries
use fuel as a tax
base:
In SA about
34% of retail
petrol price
• SA – $1.03/l
• USA – $0.83/l
• China – $1.11/l

22. ❑ How does it work…?
o National Government collect all taxes in SA
▪ Some exceptions…
o In terms of Public Finance Management Act all revenue
revert to National Revenue Fund
▪ 23% of fuel levy is shared back to the Metro’s (General Fuel Levy sharing)
❑ National Treasury is responsible for coordinating
the budget process.
o Roads compete with all the other funding priorities and demands
imposed on the National Revenue Fund
o The policy on the financing of roads, however, is also primarily the
responsibility of the Department of Transport
The SA budgeting process …

23. The SA budgeting process …

24. And this is how much is collected … from road
use and road users …
❑ Of the total Revenue (2014):
➢ 70% collected at National level (of which the fuel levy is 29%)
➢ 4% Provincial
➢ 6% Local
➢ 20% SOE
➢ Fuel levy is only 29% of what we collect …
▪ Even if the fuel levy completely disappears tomorrow, we will still have the 71% income …
# Road user revenue paid via: 2010 2011 2012 2013 2014 Collected by
1 Fuel levy 34,417,577 36,602,263 40,410,389 43,300,000 47,516,564 National government
2 Road Accident Fund 14,474,058 16,989,071 17,380,217 20,352,981 22,457,948 SOC
3 Custom and excise levy 817,000 847,000 875,000 922,000 981,000 National government
4 Demand Side Management Levy 51,000 53,000 152,000 140,000 170,000 National government
5 IP Marker levy 1,000 1,000 1,000 1,000 1,000 National government
6 Petroleum Products Levy (Pipeline) 31,000 32,000 33,000 35,000 37,000 National government
7 VAT on vehicle sales 28,197,380 31,099,740 34,993,000 37,154,040 37,893,660 National government
8 VAT on vehicle part sales / car repair services 3,909,640 4,126,080 4,496,380 4,788,700 5,009,760 National government
9 Import duties on vehicle / parts 10,442,000 14,348,000 18,702,000 21,635,000 22,567,000 National government
10 License fees 5,057,977 5,953,006 6,530,434 6,765,016 7,349,077 Provincial government
12 Fines / fees and permits 9,011,537 10,988,624 12,933,722 10,853,033 10,678,864 SOC and municipalities
13 Toll fees 2,073,060 1,987,379 2,199,090 2,759,839 4,221,433 SOC
14 Toll fees consessions - minimum income* 3,987,937 4,605,700 5,029,190 5,420,129 5,846,819 SOC
15 Co2 emmisions 625,891 1,617,353 1,567,382 1,636,848 1,684,160 National government
TOTAL REVENUE 113,097,057 129,250,216 145,302,804 155,763,586 166,414,285
* This is an estimate based on AADT and tariff
Direct Road User Generated income 69,731,037 78,829,396 86,236,424 91,263,846 99,962,865
Indirect Road User Generated Income 43,366,020 50,420,820 59,066,380 64,499,740 66,451,420
Road Infrastructure and Road Use Generated Revenue (R thousand)

25. Co₂ emission tax (1.6%) Vehicle license fees (7.4%)
Fuel tax (47.7%) Fines / fees and permits (10.7%)
RAF levy (22.5%)
Toll fees (10.1%)
Infrastructure expenditure Infrastructure expenditure
Operational expenditure Operational expenditure
Infrastructure expenditure
Infrastructure 41%
Operational 59% Operational expenditure
* Income collected on 746 835 kms of roads by a vehicle fleet of 10 350 835 travelling a distance of 162 405 499 396 kms in 2014
** R 0.30 spend on road infrastructure per vehicle km
R 0.44 spend on road operations per vehicle km
R 70,244,237,000
Expenditure
R 1,684,160,000
R 47,724,564,000
R 22,457,948,000
R 10,068,251,816
R 14,584,260,052
R 35,744,274,000 R 12,000,031,000
R 14,507,056,000
State-owned Entities
R 99,962,864,816
(R 0.62 per km)
THE FUNDING OF SOUTH AFRICAN ROADS UNPACKED (2014)
National Government
Provincial Government
Municipal Government
Expenses on the road network and to ensure an regulated road user**:
R 119,505,355,052
(R 0.74 per km)
R 22,499,932,000
Provincial Government
Municipal Government
State-owned Entities
Income from road use and road users*:
R 49,261,118,052
R 7,349,077,000
R 10,678,864,000
R 20,169,802,000
• Developer contributions (?)
• Parking income (?)
• Tyre levy (R500 000 000)

26. Some policy statements …
❑ National Land Transport Act (NLTA, No. 5 of
2009)
o functions of the Minister of Transport and MEC’s to,
c) ensure that the money available for land transport matters is
applied in an efficient, economic, equitable and transparent
manner;
❑ Provincial Land Transport Framework
o Objectives:
▪ to invest in transport infrastructure or systems in ways
which will promote growth in the economy;
▪ to minimise the negative side effects which transport may
have;
▪ to improve transport infrastructure and services through
greater effectiveness and efficiency;
▪ to democratise decision-making

27. How much should the user pay?
The obvious questions …

28. Some basic principles …
Final ‘price’
The users
The charge
Road User
Charge
Freight
Social Marginal
Costs (SMC)
Road
Damage Congestion Environment
Accident
Final consumers
Non-toll
SMC +
pure tax
Toll
Alternative
Willingness to
pay
No
alternative
Willingness
to pay –
price
regulation

29. ❑ The Theory of the User Pay Principle
o Consumers and users must carry the full and real cost of their consumption or
utilisation to ensure that scarce resources are allocated fairly to users
▪ We call this Short Run Marginal Cost (SRMC)…
❑ Components of User Charge
1. Infrastructure Cost: Maintenance and Administration
2. Environmental Cost (pollution, noise, etc.)
3. Accident Cost
4. Congestion Cost
o Only those cost that can be attributable to the users …
❑ This is the user pay principle
❑ However SRMC is the starting point
o Very difficult to measure and implement,
o Does not guarantee enough money
o Require strong institutional structure and framework
❑ Other easier options include
o Long Run (Marginal) Cost
o Average costs
What is the costs …

32. Applying EU MSC to South Africa
Some background
❑ Road user are paying 62 c / km
❑ Government is spending 74c / km
❑ Tot sustain our road network we
need R1.27

33. So what is the rest of the world doing about this ?
❑ New road user charging recovery methods are being
designed and piloted
▪ Move closer to implementing road user charges (MSC) based
on actual cost …
▪ Citizens are demanding insight and participation
▪ Other countries have embraced and adopted technology
▪ South Africa lags these trends for various reasons ...
⚫ Technology is not one of them …

35. ❑ Three proposals…
o Establish Road Users Authority
▪ road users & civil society stakeholders
▪ to encourage better management, demand for efficiency,
oversight and agree on the problem
▪ Assign responsibility
o Establish Road Fund and Financing Guidelines
▪ NOT RINGFENCED
▪ Stable and predictable road financing through road users
charges
▪ Legislation, etc.
o Establish a Transport (Economic) Regulator
▪ Simply to take care of the current conflicts and multiple
demands on road funding.
Finally …

36. ❑ A policy is the outcome of fact finding
o Cost of congestion, environmental, accident, maintenance costs
o Funding streams and system of accounting
o Charging should be clear for business and people
❑ Remember that one tax or charge “crowd out” other
charges
o Fuel tax with congestion tax with toll with a licence …
❑ Road user charges involves a transfer of income
o From one sector to another and from one region to another and
from one Government level to another …
❑ A normal good
o The better the service … the higher the price …
▪ With roads it is the other way if taxed via the fuel levy
▪ Better roads lead to less income …
Some final thoughts….

37. There is no technical solution to the transport problem ….
Thank you
Any comments will be much
appreciated:
Skrygsman@sun.ac.za