A presentation by Professor Stephan Krygsman. Delivered during a Transport Forum Special Interest Group 'Roads and the Economy' event in Johannesburg, South Africa on 14 February 2019.

1. Transport and the Economy
Understanding the relationship … and the dangers
Stephan Krygsman, Melrick October
February 2019
© The content of this presentation is confidential.

2. Be wary of a presentation
without a paper …
Controversial
Direct
Leave out the models
Please no theory

3.  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

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. The original idea …
An efficient road system gives a country a competitive edge in moving goods
economically. Conversely, lack of accessibility or poor road conditions are barriers to
agriculture, industry and trade, and may hinder the entire development effort.
Nevertheless, the contributions of transport to national development may be difficult
to quantify in economic terms.(Queiroz, 1992)

6.  All governments aim to stimulate economic growth
o Except of course some despots and other strange and interesting
cases …
 What are the typical governmental objectives …
o Growth in national income and a fair division thereof.
o A rise in the amount and in the variety of final products and services
to the consumers, the industry and the government.
o The development of a national industrial structure that can earn
foreign exchange and can serve local markets.
o The establishment and maintenance of a high level of employment.
 Irony is that governments can really do very little…
o They do of course claim, particularly in election years, that they will
focus on achieving economic growth
 And sometimes they mention Economic Development
Economic Growth and Economic Development

7.  What are the tools Government can use…?
(* Ps Monetary and Fiscal policies)
o Education & Research
o Safety and security
o Social services
 Health, Education, …
o Competition & Regulation
o Long term planning and Policy
o Institutional, administrative and social order
o Invest in public infrastructure … Economic infrastructure
 Electricity
 Water
 Transport … Roads … Public Transport
 Etc.
What the Government can do …

8. 1. Political highly visible
o Politics … 5 year plan
 In your area …
2. Quick turn around (3 years)
o Planning, design and construction = 2 - 3 years
3. Funding
o Stable stream of income via a host of user levies
o Funding opportunities from international banks and
agencies
o Less expensive (capital costs)
4. Easy to build
o …really not that difficult …compared to …
5. Does not involve the state
o Consultants drive the process ….
o State assemble land and plan
Why are roads popular …

9. How does this process work …
Town
‘Origin’
Town
‘Destination’
 But….
1. Town Chiefs want to trade
2. The funds to build the roads are (cheaply) available
3. The costs of the road use does not erode the benefits
4. They have some advantage, either absolute or relative to trade

10. Roads may support economic growth…
 Good roads lowers cost of transport …
o Direct Effects – VOC and travel time
 Thus more time and money is available to produce / spend on goods
and services …
 JIT production and supply chains … less inventory costs …
o Leads to increase in Output or Productivity
o Indirect Effects - Wider Economic benefits
 Employment, spatial agglomeration benefits, innovation, etc.
 Poor roads has the opposite effect!
o Poor quality but also congested and expensive roads…
 All of this combine to increase productivity … called economic growth
Economic growth is the increase in the inflation-adjusted market value of the goods and services
produced by an economy over time. It is conventionally measured as the percent rate of increase
in real gross domestic product, or real GDP

13. South Africa’s road network

14. South Africa’s road network

15. United States, 6,586,610
India, 4,689,842
China, 4,106,387
Brazil, 1,580,964
Russia,1,283,387
South Africa, 747,014
Namibia,44,138
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
0 50 100 150 200 250
Kilometers
Cummulative no of countries
Total kilometers of paved and unpaved road network
Our road network …

16. San Marino, 1,263
United States, 797
Russia, 293
Brazil, 249
South Africa, 165
Namibia, 107
China, 83 India, 18
0
200
400
600
800
1,000
1,200
1,400
0 50 100 150 200 250
Vehiclesper1000population
Cummulativeno ofcountries
Vehicles per 1000 of the population
Our road network …

17.  Total road capital stock in the country (2010):
o +/- 750 000 km
 Value of Road network:
o R1 047 trillion (in 2010)
 R1 047 000 000 000 …
 R2 000 000 000 000
 So every km of road is worth R2,67 million
 Maybe we should measure the value of roads in
terms of what it does (access) or not … (congestion).
What is it worth?

18. 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
Brazil – India – China
– SA - Russia

20.  Where does South Africa fit in …?
o Overall: 47 - 55 (out of 144)
o Roads: 29 – 37
o Best of all our transport infrastructure
Global Competitiveness Index

21. The average South African Budget

22. And the Europeans …?

23.  Low income individuals spend between 10% to 40% of their
monthly salary on Transport
o Example of individual earning a minimum wage.
Income / Expenditure Income Cost Percentage
Monthly Salary (Gross) R3 500
Housing, Water, Electricity and other fuels R1 155 33%
Transport R805 23%
Food R490 14%
Clothing and Footwear R158 4,5%
Communication R105 3%
Recreation and culture R140 4%
Furnishings, Household equipment, Maintenance R193 5,5%
Education R105 3%
Miscellaneous goods R350 10%
Totals R3 500 R3 500 100%
Transport problems of the urban poor

24.  Finances
o Extensive road network
o Relatively few customers
o ?
 Transport costs
o South Africans paying a lot for transport
o Congested Cities
 Quality
o World does not seem to think our roads are the
problem..
Some very preliminary conclusions …

25. Some very preliminary research findings
Using cross-country data assembled from various
sources …
Year = 2016
World Bank, International Road Federation, United Nations, OECD,
etc.
Lets us forget about heteroscedasticity, etc.…
The relationship between roads and economic status

26. GDP per capita and roads
 If we fit a linear regression model of road length, per 1000000 of the
population, on GDP per capita we find that only 17% of the variation in
GDP per capita is explained by variation in road length (this is R2).
 The model implies that GDP per capita starts at $12 660 and increase by
69 US cents for each additional 1 km per million persons road length.
o The relationship is very approximate …
 Transformation …
o The average elasticity is 0. 57 <
1
o So for every 100% increase in
road stock … GDP per Capita
will increase with 57%
o Thus, if I invest R5 mil. on a
road, the added benefit is R5
mil. x 0.577
 R2.885 mil.
Brazil
China
India
South Africa
y = 0.5714x + 1.9512
R² = 0.3344
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0
GDP per Capita PPP vs Roads per 1000000 persons
GDPperCapitaPPP
Roads per Million Persons

27. GDP per capita and roads
 Best fitting curve is probably an inverted U
curve …
o A road infrastructure Kuznets curve …?
y = 0.6989x + 12660
R² = 0.1698
0
20000
40000
60000
80000
100000
120000
0 20000 40000 60000 80000 100000
GDPperCapitaPPP
Roads per person (1000000)
GDP per Capita PPP vs Roads per person (1000000)
Roads per person
(1000000)
South Africa
Linear (Roads per
person (1000000))

28. World Bank / EU Education Index
 If we fit a linear regression model of the Education index on GDP we
find that 50 % of the variation in GDP per capita is explained by
variations in Education (this is R2).
o For every 0.1 points increase in the EI, our GDP will increase with +/- US$ 7400
per capita (remember scale)
 Best fitting curve is probably some power / polynomial function …
Brazil
China
India
South Africa
United States
y = 37246x2.744
R² = 0.6047
0
20000
40000
60000
80000
100000
120000
0 0.2 0.4 0.6 0.8 1
GDP per Capita PPP vs UN Education Index
GDPperCapitaPPP
UN EducationIndex
Brazil
China
India
South Africa
United States
y = 74528x - 30617
R² = 0.503
0
20000
40000
60000
80000
100000
120000
0 0.2 0.4 0.6 0.8 1
GDP per Capita PPP vs UN Education Index
GDPperCapitaPPP
UN EducationIndex

29. And the Logistics Performance Index
 If we fit a linear regression model of LPI on GDP we find
that 51% of the variation in GDP per capita is explained by
variations in LPI
o For every 0.5 +/- points increase in the LPI, our GDP per capita
will increase with US$ 10 000
 Remember the scale
 Best fitting curve is probably some power / polynomial
function …
BrazilChina
India
South Africa
United States
y = 21464x - 44497
R² = 0.5086
0
20000
40000
60000
80000
100000
120000
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
GDP per Capita PPP vs LPI
GDPperCapitaPPP
LPI

30.  Governance consists of the traditions and institutions by which
authority in a country is exercised. This includes the process by
which governments are selected, monitored and replaced; the
capacity of the government to effectively formulate and implement
sound policies; and the respect of citizens and the state for the
institutions that govern economic and social interactions among
them.
 The Worldwide Governance Indicators report on six broad
dimensions of governance for over 200 countries and territories over
the period 1996-2016:
1. Voice and Accountability
2. Political Stability and Absence of Violence
3. Government Effectiveness
4. Regulatory Quality
5. Rule of Law
6. Control of Corruption
http://info.worldbank.org/governance/wgi/#doc
World Governance Index (WGI)

31. And World Governance Index …?
 If we fit a linear regression model of the WGI on GDP we
find that 63 % of the variation in GDP per capita is
explained by variations in WGI (this is R2).
o For every 0.5 points increase in the WGI, our GDP will increase
with +/- US$ 7500 per capita (remember scale)
 Best fitting curve is probably some power / polynomial
function …
BrazilChina
India
South Africa
United States
y = 3902.7x2
- 3409.5x + 5611.5
R² = 0.6726
0
20000
40000
60000
80000
100000
120000
0 1 2 3 4 5
GDP per Capita PPP vs WGI
GDPperCapitaPPP
WGI

32. y = 0.6989x + 12660
R² = 0.1698
0
20000
40000
60000
80000
100000
120000
0 10000 20000 30000 40000 50000 60000 70000 80000 90000
GDPperCapitaPPP
Road lenght per person (1000000)
GDP per Capita PPP vs Roads per person (1000000)
Roads per person
(1000000)
South Africa
Linear (Roads per
person (1000000))
The wrong side of the fence …
y = 21464x - 44497
R² = 0.5086
0
20000
40000
60000
80000
100000
120000
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
GDPperCapitaPPP
LPI
GDP per Capita PPP vs LPI (aggregated score)
LPI (aggregated score)
South Africa
Linear (LPI
(aggregated score))
y = 14990x - 11795
R² = 0.6257
0
20000
40000
60000
80000
100000
120000
0 1 2 3 4 5
GDPperCapitaPPP
WGI
GDP per Capita PPP vs WGI (Adjusted)
WGI (Adjusted)
South Africa
Linear (WGI
(Adjusted))
 Countries on the left side of the regression line,
typically have a better GDP compared to the other
variable
 If you are on the right, it really mean you are
performing poorer than most on that indicator
o South Africa is in all instances, on the right
o Our GDP per capita lags the mean
 Maybe we are not living up to our potential …
BrazilChina
India
South Africa
United States
y = 74528x - 30617
R² = 0.503
0
20000
40000
60000
80000
100000
120000
0 0.2 0.4 0.6 0.8 1
GDP per Capita PPP vs UN Education Index
GDPperCapitaPPP
UN EducationIndex

33. BUT you need:
1. Positive economic externalities
o Skills, technology, entrpreneurship, that can use the benefits of access to
become competitive and reap the economy of scale / density and diversity
benefits and induce productivity increase
2. Investment factors
o Need capital and the cost of that capital is important
o Need the right infrastructure in the right place at the right price
o Expensive borrowing … can crowd out private investment via higher taxed
3. Political actors
o A political framework and institutional structure that is conducive to economic
growth and development
o Clear and specific policy
o Measureable outcomes
o Accountability
Of course roads are important…

34.  We find the same pattern for paved roads, with
the squared term in roads being negative, but
both interaction terms, between roads and the
other forms of capital, being positive.
 These results, for both kinds of infrastructure,
indicate that infrastructure investments are not
sufficient by themselves to induce large changes
in output.
 However, infrastructure can be a productive
investment in economies with high levels of
physical and human capital, and infrastructure
itself, in turn, raises the productivity of
investment in those other types of capital.
And the World Bank

35. Thank you
Any comments will be much appreciated:
Skrygsman@sun.ac.za

36. Financial Mail

37.  In this study, we have tested a dynamic growth model for sub-Saharan
African economies using three measures of trade openness. Our results
suggest that trade openness may impact growth favorably in the long run,
but the effect is not linear. Our results show the presence of a Laffer Trade
Curve (inverted U) and confirm that trade openness has a positive and
significant effect on economic growth only up to a threshold, above which the
effect declines. These results are robust to changes in trade openness
measures. The non-linear relation between trade openness and economic
growth suggests that the benefits of trade are not automatic. The growth
effects of trade openness may differ according to the level of trade openness.
Accordingly, sub-Saharan African countries must productively control trade
openness, particularly the import of consumption goods, in boosting their
economic growth through international trade. Our results suggest that trade
openness must be accompanied by complementary policies aimed at
encouraging the financing of new investment and enhancing the quality of
institutions and the ability to adjust and learn new skills. These policies would
then allow resources to be reallocated away from less productive activities
and toward more promising ones. Trade globalization should therefore not be
seen in isolation. Additional policies are needed to enhance its impact on
economic growth. Sub-Saharan countries should carry out relevant policy
reform to encourage investment, allow effective governance, and promote
human capital accumulation.
OK, our findings …

38.  Many findings confirm common-sense intuitions
of the effectiveness of transport policies. But
there are also important lessons for policy
makers, especially when it comes to choice of
appropriate instruments. Policy makers favor
highly visible physical investments, in particular
building roads. Sometimes roads are built or
upgraded even when demand hardly justifies it.
Less intuitively, investing in roads is also
sometimes the wrong intervention when
demand is high. Increasing the supply of roads
in high density areas will not reduce congestion
when it attracts additional users in the same or
even higher proportion.

39.  Components of Marginal Social Cost
1. Infrastructure Cost: Maintenance and Administratio
2. Noise Cost
3. Pollution Cost
4. Accident Cost
5. Congestion Cost
o Marginal simply mean the additional (or the individual)
road user
 Requires very accurate records
o South Africa has not done any work on these costs
o Fortunately the EU, the USA and Asia has worked on
this extensively
What is included in MSC?

40. 1. Gain general acceptance of the road funding problem
o Involve the stakeholders in understanding the dilemma.
o We understand that we should pay
2. Get the policy right
o Who should pay, how much, and how
o Private sector involvement
3. Get the Prices right
o How much show we pay
o Strategic Transport Economic Regulator
4. Get the “How” right
o Road distance, congestion, toll road,
o Road ownership, etc.
A possibly way forward

41.  The ‘market’ does not always work …
 Roads not always excludable
o Access to it cannot be controlled and it has the nature of a public good characteristic
 Is non-rivalrous
o A single user will not significantly reduce the availability of infrastructure to another user, unless of
course the infrastructure is close to capacity. The additional cost of an extra user on the infrastructure
is close to zero. This is another public good characteristic.
 Is capital intensive
o Relatively large investments are necessary to build it.
 Creates externalities:
o These arise whenever an activity, which affects other parties, is not reflected in market prices.
o If the production of such activities is left to the market, it will produce too much of what is bad for
social welfare and too little of what is good. An environmental externality, for example, is air pollution.
Social externalities arise in relation to the allocation of infrastructure cost to different social groups.
 Is a sunk investment:
o Decisions to build infrastructure are irreversible from an investment point of view. Infrastructure has
no intrinsic market value.
o A road cannot be dug out and sold on, on the market. When there is something to sell, we can only
recover a fraction of the initial investment.
 Is long-lived:
o The high initial investment means that the cost will need to be recovered over a long time.
o As such, investment decisions and cost recovery will be subject to long-term uncertainty due to
business, political or technological changes.
 Can affect market power:
o When the technology of a service or product involves large capex assets and there is a mass of
consumers on the receiving end, there will be economies of scale and potentially scope.
o These characteristics can make it more economical for a single firm to supply services rather than
having more firms competing”
Why paying for roads is difficult …

42. How is our performance … (1)

43. 1. Transport today is seen as necessary but not sufficient for
development. An improvement in the transport system can help
overcome bottlenecks in production and thus foster economic
expansion.
 What is clear, however, is that a country or region that has an inefficient
and ineffective transport sector, will find it difficult to trade competitively
and thus grow its economy and the wealth of its citizens.
2. Indirect transport benefits stem from the creation of jobs in the
process of managing a transport system, as well as creating new
infrastructure and the manufacturing of transport related equipment.
 Other benefits arise from social integration, the ability to live and work in
different places, increasing the lifestyle options open to people, the staging
of events such as conferences, international sporting events, exhibitions,
concerts and supporting tourism.
3. Transport should be viewed as an enabling industry as it has a
major role to play in economic growth, improved standards of living,
increased trade, improved access to employment opportunities and
increased social integration.
4. For a transport system to deliver fully on the potential direct and
indirect benefits that can be derived from it, it should be well-
managed. The transport system, and the way it develops, is affected
and influenced by a number of role players.
o The government creates the enabling environment within which the role
players in the system view their roles with respect to infrastructure
investments and operations.
Transport and Economic
Development …?

44.  Conclusions:
1. The general decrease in transport costs leads to greater
product differentials:
 Developing countries will find it tough to compete … unless they have an
absolute advantage.
2. Improvement in transport … can lead to a cost
advantage for the region … certain regions can then
acquire markets:
 Example: Rise of Asia … partly due to improved international transport:
 Now the internet … rural areas are achieving cost advantages.
 Of course you can also improve your region …
3. Transport improvements should however not be
overestimated:
 India cannot compete with EU in all areas ... products with a high
transport component.
4. Transport advantage not always due to infrastructure
improvements:
 Technology, tariff policy, etc.
5. A transport network channels the flow of goods and
services in two directions:
 Can be positive and / or negative.

45.  We still need transport infrastructure
o Cities
 Pubic Transport
o Inter-regional trade
 Ports, rail, road corridors
 Transfer and hubs and border one stop
o Maintaining city hinterlands
o Expanding agriculture markets
 But roads for the sake of roads … is like a saving
movey when buying goods on a sales….
o .
Some conclusions

46.  In all case South Africa is below the line
o Or stated differently, we are located

47.  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
o We call this Short Run Marginal Cost (SRMC)…
 However SRMC is the starting point
o Very difficult to measure and implement,
o This is what the Europeans, the Americans, the Asians,
etc. are busy with,
 Other options include
o Long Run Marginal Cost
o Average costs
How much should the user pay…